Wednesday, April 23, 2014

Each $4,000 of Additional Mid-career Income Correlates With an Extra Year of Life After 55

From The Atlantic:

The Rich Live Longer: So How Much Money 'Buys' 1 More Year of Life?
 Climbing America's income ladder today is truly a game of life and delayed death—and thousands of dollars are separating the rungs. 

Richer people live longer lives.

It's true for both men and women. It's true at virtually every income level. And it was the backbone of one of the most striking charts I've seen this year in the Wall Street Journal, based on research by Brookings scholar Barry Bosworth.
And it made me wonder: If more money "buys" more life, how much extra income buys one more year of living?

Yep, it's a cheeky question. Everybody knows that money doesn't literally buy life, or inoculate against disease, or prevent random car accidents. But if Bosworth's data showed that average lifespans grow with income, I wondered how much additional income was associated with exactly one more year of living after 55.

I contacted Brookings for the raw data, ran the numbers, and doubled-checked with Bosworth. For middle-class men now in their mid-60s and older, each $4,000 of extra mid-career income correlated with an extra year of life after 55. "You can’t say that making a certain amount of dollars guarantees more life,” Bosworth said. "What’s fine for you to say is that where the [per-earner] income goes up by about $4,000, that was generally associated with living another year."

This number might sound a little small to you: Is a $40,000 raise really associated with an extra decade of life? Well, hold on....MORE

Active Management Benefits Endowment Returns

With the same punchline as the Paratrooper/Jumpmaster joke: "A little".
From FT Alphaville:

Stock picking works! (sort of, maybe)
A white paper lands from Commonfund, a type of investment consultant and asset manager for US endowments. It asks the question: does active management benefit endowment returns?

Concerned people really would like to know. And the answer is a qualified maybe, in that Commonfund finds correlation between the amount of US stock holdings that an endowment chooses to actively manage, and the likelihood that the stock portfolio will outperform the market.

However to get there involves some fun with statistics. What Commonfund gets out of the way first is that it doesn’t have the data to answer the question definitively.
The evaluation of whether endowments’ active equity investments underperform, are not different from, or outperform their passive investments in U.S. markets requires knowing the returns earned and costs incurred by endowments pursuing both active and passive management strategies. This granular data is not readily available.
Fear not, instead the group can a broad sample of endowment managers about the realised cost, allocation and performance of their actual active and passive positions....MORE
Always keeping in mind that for an endowment the only quarter that should matter is the next quarter-century.

What Did QE Do For Us?

Two papers, remarkably similar conclusions.
First up, the Financial Times' Money Supply blog:

What did QE ever do for us?
More than five years after the start of the great QE experiment, agreement about what the asset buying scheme achieved is still thin on the ground. A new Bank of England paper from external MPC member Martin Weale released today tries to put a figure to how much QE boosted national output and inflation in the UK and the US. Its results are as follows:
“At the median, an asset purchase shock that results in an announcement worth 1% of nominal GDP, leads a rise of about .36% (.18%) of real GDP and .38% (.3%) in CPI in the US (UK). These findings are encouraging, because they suggest that asset purchases can be effective in stabilising output and prices”
Here is how it compares to previous studies:
As you can see the results are broadly in line with previous papers in the case of all variables, except for UK inflation....MORE
And from Real Time Economics:

Fed Bond-Buying Delivered ‘Significant’ Boost to U.S. Economy, IMF Researchers Say
How much of a punch did the Federal Reserve’s easy-money policies pack?

Former Fed Chairman Ben Bernanke famously quipped in his closing days that the problem with quantitative easing is that “it works in practice but it doesn’t work in theory.”

Not all central bankers and economists have agreed, spurring a debate over the effectiveness of the Fed’s policies. Part of the problem was that it was difficult to determine the impact of bond-buying on borrowing costs.

Some of the Fed’s own studies don’t find large gains from the central bank’s bond-buying programs. For example, San Francisco Fed researchers Vasco Curdia and Andrea Ferrero estimated the program that ran from late 2010 to early 2011 raised growth by just 0.13 percentage point. If accurate, all of the Fed’s bond programs together would have added less than a percentage point to economic output.

Others find more substantial effects. San Francisco Fed President John Williams in January estimated that $600 billion of Fed bond purchases lowered the yield on 10-year Treasuries by about 0.15 percentage point to 0.25 percentage point. That’s similar to the movement that would follow the Fed cutting short-term rates by 0.75 percentage point to a full percentage point – a relatively large rate cut, he said at the time.
In the paper published Friday, the duo backs Mr. Williams’s assessment....MORE

"Pseudo-Mathematics and Financial Charlatanism...."

From EurekAlert:

Pseudo-mathematics and financial charlatanism
Your financial advisor calls you up to suggest a new investment scheme. Drawing on 20 years of data, he has set his computer to work on this question: If you had invested according to this scheme in the past, which portfolio would have been the best? His computer assembled thousands of such simulated portfolios and calculated for each one an industry-standard measure of return on risk. Out of this gargantuan calculation, your advisor has chosen the optimal portfolio. After briefly reminding you of the oft-repeated slogan that "past performance is not an indicator of future results", the advisor enthusiastically recommends the portfolio, noting that it is based on sound mathematical methods. Should you invest?

The somewhat suprising answer is, probably not. Examining a huge number of sample past portfolios---known as "backtesting"---might seem like a good way to zero in on the best future portfolio. But if the number of portfolios in the backtest is so large as to be out of balance with the number of years of data in the backtest, the portfolios that look best are actually just those that target extremes in the dataset. When an investment strategy "overfits" a backtest in this way, the strategy is not capitalizing on any general financial structure but is simply highlighting vagaries in the data.

The perils of backtest overfitting are dissected in the article "Pseudo-Mathematics and Financial Charlatanism: The Effects of Backtest Overfitting on Out-of-Sample Performance", which will appear in the May 2014 issue of the NOTICES OF THE AMERICAN MATHEMATICAL SOCIETY. The authors are David H. Bailey, Jonathan M. Borwein, Marcos Lopez de Prado, and Qiji Jim Zhu.

"Recent computational advances allow investment managers to methodically search through thousands or even millions of potential options for a profitable investment strategy," the authors write. "In many instances, that search involves a pseudo-mathematical argument which is spuriously validated through a backtest."
Unfortunately, the overfitting of backtests is commonplace not only in the offerings of financial advisors but also in research papers in mathematical finance. One way to lessen the problems of backtest overfitting is to test how well the investment strategy performs on data outside of the original dataset on which the strategy is based; this is called "out-of-sample" testing. However, few investment companies and researchers do out-of-sample testing.

The design of an investment strategy usually starts with identifying a pattern that one believes will help to predict the future value of a financial variable. The next step is to construct a mathematical model of how that variable could change over time. The number of ways of configuring the model is enormous, and the aim is to identify the model configuration that maximizes the performance of the investment strategy. To do this, practitioners often backtest the model using historical data on the financial variable in question. They also rely on measures such as the "Sharpe ratio", which evaluates the performance of a strategy on the basis of a sample of past returns....MORE

HT: Ritholtz@Bloomberg

Previously on the Mountebank channel:
UPDATED--Are You a Recent Graduate Who Hasn't Found a Job? Consider Becoming a Charlatan
Follow-up: Choosing the Charlatan Career Path
Re-post: Peak Oil Stalwart to Shutter Forum/News Site, Persue Career as Astrologer
See also:
Technical analysis
Fundamental analysis
Divination for Dummies
Pitfalls in Prognostication: Fortune Magazine's August, 2000 "Ten Stocks to Last the Decade"

Robo-journalists: Beyond the Quakebot

From Knowledge@Wharton:

Robot Journalists: ‘Quakebot’ Is Just the Beginning
When an earthquake hit Los Angeles recently, Ken Schwencke, a journalist and programmer for the Los Angeles Times, was first to get the news out. Woken up by the tremors at 6:25 a.m. on Monday, March 17, he went to his computer and found a brief story already waiting, courtesy of a robot — an algorithm he developed and named Quakebot.

Quakebot’s role in the swift reporting of the earthquake story has industry observers talking about the role of robots in the future of journalism. Among those at the forefront of robot journalism is Noam Lemelshtrich Latar, dean of the Sammy Ofer School of Communications at the Interdisciplinary Center in Herzliya, Israel. Latar has written several papers on the topic, such as “The Future of Journalism: Artificial Intelligence and Digital Identities” and “Digital Identities and Journalism Content: How Artificial Intelligence and Journalism May Co-develop and Why Society Should Care.”

Latar has a master’s degree in engineering systems from Stanford and a Ph.D. in communications from MIT. His work has been concentrated in the area of touch-screen phones and allied devices. His paper, “Screen Feedback from Home Terminals,” was the first to explore this concept. Today, however, Latar is focusing on artificial intelligence and robot journalism. In this interview with Knowledge@Wharton conducted late last year, Latar discusses whether robots will one day replace human journalists.

An edited transcript of the conversation follows.
Knowledge@Wharton: What exactly is robot journalism?

Noam Latar: Computers have helped journalists to write, to find facts, since the middle of the last century. There was what we call data mining and analytics — data analytics — which helped journalists find the facts and do investigative journalism. So, this is not new. What is now developing is that the new programs — artificial intelligence (AI) programs — get the facts and write the story within a fraction of a second. Today, there are stories written in Forbes and other newsmagazines that are untouched by human journalists. The AI program writes the story, and the name of the journalist is really the name of a robot. There’s a company called Narrative Science in Illinois that is already doing it and has collected a lot of money from investors.

Knowledge@Wharton: Is this a new phenomenon, or has this been around for a while? Didn’t your research at MIT in the 1970s actually predict some of this?

Latar: No. My research predicted touch screens, which were later used by Steve Jobs. I did the first studies on interactive television. We studied how providing people in the television studio with devices to provide feedback would affect the group dynamics and the discussion dynamics. At that time, we did not predict robot journalism at all. Data mining has developed in the past 20 years.

Knowledge@Wharton: How pervasive is robot journalism?
Latar: It’s still in the initial stages because the programs really started in 2010. But they’re penetrating very quickly because the robot journalist has certain real advantages. First of all, it never forgets facts. It can do research very quickly. It never asks for a day off. And it can write the story within seconds. If you write the program correctly, [the robot is] not even biased. As you know, most journalists are biased about their stories. But the robot journalist, if you program it correctly, can be completely unbiased.

Knowledge@Wharton: So they don’t miss deadlines?...

See also:
Automating the Newsroom: The AP's Robot Copy Editor

An Equity Financed Banking System

Via the University of Chicago:

Toward a run-free financial system
John H. Cochrane 
April 16 2014
The financial crisis was a systemic run. Hence, the central regulatory response should be to eliminate run-prone securities from the financial system. By contrast, current regulation guarantees run-prone bank liabilities and instead tries to regulate bank assets and their values. I survey how a much simpler, rule-based, liability regulation could eliminate runs and crises, while allowing inevitable booms and busts. I show how modern communications, computation, and financial technology overcomes traditional arguments against narrow banking. I survey just how hopeless our current regulatory structure has become.I suggest that Pigouvian taxes provide a better structure to control debt issue than capital ratios;that banks should be 100% funded by equity, allowing downstream easy-to-fail intermediaries to tranche that equity to debt if needed. Fixed-value debt should be provided by or 100% backed by Treasury or Fed securities.
1.Introduction and overview
At its core, our financial crisis was a systemic run.The run started in the shadow banking system of overnight repurchase agreements, asset-backed securities, broker-dealer relationships,and investment banks. 
Arguably, it was about to spread to the large commercial banks when the Treasury Department and the Federal Reserve Board stepped in with a blanket debt guarantee and TARP (Troubled Asset Relief Program) recapitalization. But the basic economic structure of our financial crisis was the same as that of the panics and runs on demand deposits that we have seen many times before.
The run defines the event as a crisis. People lost a lot of money in the 2000 tech stock bust.
But there was no run, there was no crisis, and only a mild recession. Our financial system and economy could easily have handled the decline in home values and mortgage-backed security(MBS)values—which might also have been a lot smaller—had there not been a run.
The central task for a regulatory response, then,should be to eliminate runs. Runs are a pathology of specific contracts, such as deposits and overnight debt, issued by specific kinds of intermediaries. Among other features, run-prone contracts promise fixed values and first-come first-served payment....
...MUCH MORE (50 page PDF)

HT: Points and Figures blog:

It Wasn’t A Financial Crisis; It Was A Systemic Run

"Forgetful rats take more risks"

I was going to take the easy "banker" cheap-shot but then realized this little guy looked more buy side:

By studying the rats' behavior, researchers are examining the ways impulsivity, working memory, and cognitive flexibility may or may not interact. (Credit: Matt Baume/Flickr)

A new study finds that rats with impulsive tendencies tend to have poorer working memories. Scientists define working memory in people as the ability to hold details like a name or phone number in mind.

On the other hand, rats that avoided risky situations tend to have poor cognitive flexibility, which in this case means they were unable to learn a new way to get a food pellet after they had been trained to expect it from a different lever.

By studying the rats’ behavior, researchers are examining the ways impulsivity, working memory, and cognitive flexibility may or may not interact.

Published online in the journal Neurobiology of Learning and Memory, the study could provide animal models for people with certain mental disorders such as anorexia or addiction, says Kristy Shimp, a doctoral candidate at the University of Florida....MORE

Tuesday, April 22, 2014

Commodities--Why Did Tudor's Tensor Fund Close? (it's the AUM)

AUM and the timing of the inflows.
From All About Alpha, April 13, 2014:

What a Hedge Fund Failure Looks Like 
The Twittersphere couldn’t get enough of the news last week that hedge fund legend Paul Tudor Jones was shutting down one of his eponymous funds, the Tudor Tensor Fund (try saying Tudor Tensor 10 times fast).
And critics of hedge funds will jump to the conclusion that it’s a dangerous world out there among alternative investments, and investors need to be careful because even a legend like Paul Tudor Jones can’t make money, having to shut down his futures fund.  Some will throw around the term survivorship bias too, concluding that the indices composed of hedge fund returns won’t include this program moving forward as a way of saying the index over reports the performance of the asset class – never mind that the program is shutting down, that the Dow no longer includes buggy whip companies, either – or that the index still includes the past performance of the shuttered fund.

But just how bad was the Tensor performance that they decided to shut the fund down?  What does a hedge fund ‘failure’ actually look like? The answer is, not that bad… Here’s a snapshot of just how the Tensor Fund has performed since inception, having returned a total of 42% over that time after running up 77%, then drawing down -20% over the last three years.
(Vami growth of 1,000; Disclaimer: Past performance is not necessarily indicative of future results)
The relative performance wasn’t all that bad either, with Tensor outpacing their benchmark (managed futures) as well as the markets they track (commodities) as well as a few little known asset classes called Bonds and World Stocks.

The real story here isn’t really how this program performed or that Paul Tudor Jones can’t cut it in managed futures, the real story is the business side of the hedge fund business. I have no doubt that Tudor and their team believe this program will perform over the long-term and that this point likely marks a low for the model. But big hedge funds like Tudor know how the asset-gathering game works.

The Tensor Fund went from over $1 billion ($1.5 per our numbers) down to just $120 million over the last three years, and that is the reason the fund is closing, not anything to really do with performance, the skill of the manager, or expertise of the team. The closing of Tensor is more of a commentary on investors buying in at the top of a cycle and getting out at the bottom than anything else....MORE
Perhaps Monsieur et Madame would care to sample:

About time: "“US Nuclear Weapons Laboratory Discovers How to Suppress the Casimir Force“"

Wait. What?
Or a Saint?
Never mind.

From the Foresight Institute:
Physicists suppress 'stiction' force that bedevils microscale machinery
Whether or not MEMS (microelectromechanical systems) technology has use as a development path toward productive nanosystems, or atomically precise manufacturing, is unclear (see for example this series of posts on the Feynman Path by J. Storrs Hall), the problem of stiction in microscale mechanical systems has been used as a canard to criticize proposals for mechanical molecular machine systems. (For why this criticism is unfounded, see section 6.3.7 of Kinematic Self-Replicating Machines.) Nevertheless, MEMS is in its own right a very useful technology so it is gratifying to see that a solution to the stiction problem may be in sight. A hat tip to Dale Amon for pointing to this physics archive blog article “US Nuclear Weapons Laboratory Discovers How to Suppress the Casimir Force“:

The Casimir effect causes microscopic machines to stick fast. Now physicists have successfully tested a way to suppress this force

The Casimir effect is a strange and mysterious force that operates on the tiniest scales. It pushes together small metal objects when they are separated by a tiny distance.
That’s a problem because engineers are increasingly interested in building tiny machines with parts that move against each other on precisely the scale. For some years now, they’ve been thwarted by a problem called stiction in which the tiny cogs, gears and other parts in these machines stick together so tightly that the device stops working....MORE

"Sadly, The Picasso Ceramics Market Isn’t for the Entry-Level Collector Anymore"

For some reason I am reminded of a scene from some years ago.
I was at a circus, nice seats, near a woman shepherding two impeccably turned out scamps. One of the short people asked if they could ride the elephant and, as God is my witness, the woman said "Oh no, those elephants are for children who have never ridden an elephant."

From Art Market Monitor:
Artnet’s news service discovers the long-standing trend in Picasso’s ceramics. For the sake of the broader art market, it would be gratifying to see the Picasso Ceramics as an alternative to the very high prices in his painting and sculpture market that brings in a different set of collectors. Alas, that doesn’t seem to be the case:
“It is the most important masterpiece collectors in modern and contemporary art who are driving the higher prices you see,” Michelle McMullan, head of sales for Impressionist and modern art at Christie’s, told artnet News over email. “So many of the important collections we see now have ceramics. Someone who is into 1960s Picasso paintings will pair it with a few ceramics [the artist] made on the same day, even.” […]...MORE
 Well la-di-effin-da.

"Guess What? Pharma Got a Fever, and the Only Prescription is More Cowbell!"

On second thought, I may have misread this piece from Alphaville's The Closer post:
Deals fever grips pharmaceuticals industry....(Financial Times)...
 Anyhoo, it was 14 years ago this month:

We're So Proud: Our Second Most Popular Post Last Weekend Was "Bummer Kid, I'm the Ether Bunny"

Are folks coming to the blog for the incisive commentary?
The actionable markets discussion?
A breezy devil-may-care weltanschauung?

They visited for the  picture of the giant bunny, Darius.

A repost from Monday April 9, 2012:
From the Sunday Mail:

Easter Bunny arrested for drug possession after 'acting suspicious' while entertaining children
A mall Easter Bunny has been arrested after reported acting suspicious while on break - without any relation to hiding Easter eggs....MORE
Masked: Bolling was escorted into a dressing room during his arrest so that he could change out of his costume and the children would not see (file photo)
Masked: Bolling was escorted into a dressing room 
during his arrest so that he could change out of his 
costume and the children would not see (file photo)
Also from the Mail:
Meet the world's biggest Easter bunny, Darius the enormous Continental Giant, who weighs a whopping three-and-a-half stone and is 4ft 4in.
Darius, aged three, munches through an incredible 12 carrots a day to keep up his strength and fuel his amazing growth spurt.

He already held the title of world's biggest rabbit but has now smashed his own record after vets measured him a month ago and realised he had had grown another inch....MORE, including pics. 
Here's Birmingham's Sunday Mercury:

Georgia Hadley with her enormous rabbit Darius
IS this the real Easter bunny?

UBS: Gold Miners Aren't Minting It (GDX; GDXJ)

We're pretty negative on the group and probably will be until we see some juniors going bankrupt.
Front futures $1283.50 down $5.10,  Market Vectors Gold Miners ETF $23.73 Up 0.22.
From MoneyBeat:
Much has been said, little nice, about “cash costs”–the flimsy way gold miners tend to report how much it takes to dig an ounce of the precious metal out of the ground.

One reason for the skepticism about the much-maligned indicator is that it excludes everything from exploration and capital expenditure costs to overhead and other expenses that make up the day-to-day costs of running a mining business.

In a note to clients Monday, UBS estimated that industrywide cash costs for gold averaged $728 per ounce in the fourth quarter. With gold prices averaging about $1,271 per ounce in the quarter, that implies a margin of $543. Not bad, right?

But when UBS digs deeper, it finds the all-in cost was a much loftier $1,205, resulting in a much slimmer margin of $67 per ounce....MORE
Goldman Sachs on Australian Gold Miner Cash Costs
"Cash Costs A Better Indicator Of Pressure On Gold Mining: Citi" (GDX; GDXJ)
Gold Miners: A Fool And His Money (GDX; GDXJ; GLD)
Barclays: "If Gold Was "Just A Commodity" What Would Be Its Support Price?" (ABX; G; GLD; NEM)
UPDATED--Gold is Going Much Lower
Gold Collapses, Approaching Gold Miners Cost Threshold (Infographic)

Here's the 6 month chart of the ETF vs. the S&P:
Chart forMarket Vectors Gold Miners ETF (GDX)

Debt as Money--Roxana: The Fortunate Mistress

From Thoughts on Economics:

Daniel Defoe On Debt As Money 
In this passage, Roxana is preparing to move from Paris to Amsterdam. She liquidates her possessions, and uses jewelry and bills of exchange as money to carry with her.
"I could not but approve all his measures, seeing they were so well contrived, and in so friendly a manner, for my benefit; and as he seemed to be so very sincere, I resolved to put my life in his hands. Immediately I went to my lodgings, and sent away Amy with such bundles as I had prepared for my travelling. I also sent several parcels of my fine[Pg 181] furniture to the merchant's house to be laid up for me, and bringing the key of the lodgings with me, I came back to his house. Here we finished our matters of money, and I delivered into his hands seven thousand eight hundred pistoles in bills and money, a copy of an assignment on the townhouse of Paris for four thousand pistoles, at three per cent. interest, attested, and a procuration for receiving the interest half-yearly; but the original I kept myself.
I could have trusted all I had with him, for he was perfectly honest, and had not the least view of doing me any wrong. Indeed, after it was so apparent that he had, as it were, saved my life, or at least saved me from being exposed and ruined—I say, after this, how could I doubt him in anything?
When I came to him, he had everything ready as I wanted, and as he had proposed. As to my money, he gave me first of all an accepted bill, payable at Rotterdam, for four thousand pistoles, and drawn from Genoa upon a merchant at Rotterdam, payable to a merchant at Paris, and endorsed by him to my merchant; this, he assured me, would be punctually paid; and so it was, to a day. The rest I had in other bills of exchange, drawn by himself upon other merchants in Holland. Having secured my jewels too, as well as I could, he sent me away the same[Pg 182] evening in a friend's coach, which he had procured for me, to St. Germain, and the next morning to Rouen. He also sent a servant of his own on horseback with me, who provided everything for me, and who carried his orders to the captain of the ship, which lay about three miles below Rouen, in the river, and by his directions I went immediately on board. The third day after I was on board the ship went away, and we were out at sea the next day after that; and thus I took my leave of France, and got clear of an ugly business, which, had it gone on, might have ruined me, and sent me back as naked to England as I was a little before I left it." -- Daniel Defoe, Roxana: The Fortunate Mistress (1724).
Defoe's novel, Robinson Crusoe, is more well-known among economists. For example, one can read Stephen Hymer's "Robinson Crusoe and the secret of primitive accumulation" (Monthly Review, 1971).

How the Market Trades Under Threat of QE Wind-down

Correlation ≠ causation; Your mileage may vary; trend/friend/bend/end etc. etc.

From Afraid to Trade:

Are We Really Repeating this SP500 Pattern Again?
Could we be caught in the Twilight Zone again and doomed to repeat the same outcome in the market?
Let’s take a look at our broader S&P 500 chart and highlight a repeat bullish outcome pattern and chart where we are and how far we have to go at the moment to repeat it again.
S&P 500 Repeat Pattern Recognition
Each green rectangle above represents a strong impulsive or “bar-over-bar” non-stop upward price action as the uptrend continues.

Many of these bar-over-bar impulse swings have been fueled by a short-squeeze or capitulation of the bears, particularly after “Bear Traps” triggered (with breaks under the rising 50 day EMA)....

As we were saying, even in the depths (okay, 7% drawdown) of the January collapse, it's still a bull market.

"Pop-Up Investment Banks Are the Latest Trend"

Matt Levine at Bloomberg (come for the verbiage, stay for the footnotes.*):
James Stewart's New York Times article this weekend about Paul Taubman contains multitudes, but not multitudes of bankers. There's just one! It's Paul Taubman, formerly the head of mergers and acquisitions at Morgan Stanley and now the head of mergers and acquisitions in his kitchen.1 But his kitchen keeps busy; he's number 11 in the global M&A league table for the past year, with credits for Verizon's $130 billion acquisition of Vodafone's Verizon Wireless stake and Comcast's bid for Time Warner Cable.2
And he's apparently part of a micro-trend of micro-advisers that also includes the Zaoui brothers and all those guys named Simon. Stewart:
Bankers have already coined a new catchword for such small firms: “kiosks,” as opposed to the somewhat larger “boutiques,” like Moelis & Company, founded by Kenneth D. Moelis, which went public this week.

Such arrangements can be fabulously lucrative, since kiosks have little or no overhead but are still paid as a percentage of the total cost of a successful deal. Clients receive the benefit of the undiluted attention of a top merger and acquisition strategist.
Taubman's kiosk, PJT Capital, is in fact pretty lucrative; "he earned more than $10 million on the Verizon deal and may make at least that much if the Time Warner Cable acquisition succeeds," and you could spend all day thinking about what that $20 million revenue means. Let's!

First I guess you could talk about comp ratios. Banks typically pay their bankers some percentage of the revenue they bring in, ranging from around 32 percent at JPMorgan (a universal bank) through 37 percent at at Goldman Sachs (a full-service investment bank) to 64 percent at Moelis & Co. (an advisory boutique). I don't have PJT Capital's audited financial statements but I'm gonna guess that its comp ratio is right around 100 percent.3
So what, of course; Taubman also put up 100 percent of PJT's capital, so he's both the employee and the shareholder.4 But what if a(nother) bank wanted to hire him? If Taubman brings in, and executes, $20 million of business by himself, how much should a bank be willing to pay him? If they give him $19 million, isn't that a good deal for them? It's $1 million they didn't have before, anyway. Obviously banks have risk and overhead and other issues to worry about, but in this age of declining comp ratios Taubman perhaps offers a good contrarian argument. "Pay me more or I'll go start a kiosk," a senior rainmaker might say, now that "kiosk" is a thing....MORE
The SEC Explains Why It's Okay That SEC Employee Stock Trades Earn 4 to 8.5% Excess Returns
Following up on "Portfolios of SEC Employee Stock Picks Earn Excess returns of 4-8.5% Per Year".
Matt Levine at Bloomberg (footnotes baby, footnotes!)...
The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes)
In Case You Missed It, Matt Levine Has Left DealBreaker
Between Bess' headlines and Matt's footnotes they had the biz covered in inimitable (I've tried) fashion.
From DealBreaker:
Housekeeping: So Long To Matt

The Trouble With Soybeans: How China's Commodity-Financing Bubble Becomes Globally Contagious

From ZeroHedge:
"Marubeni [the world's largest soybean exporter to China] is deluded in thinking that payments will come once the cargoes have sailed," is the message from an increasing number of liquidity-strapped Chinese firms, "If they take these cargoes, some could go bankrupt. That's why they choose not to honor the contracts." As we explained in great detail here, this is the transmission mechanism by which China's commodity-financing catastrophe spreads contagiously to the rest of the world. A glance at the Baltic Dry is one indication of the global nature of the problem (and Genco Shipping's $1 billion bankruptcy), but as Reuters reports, "If buyers cannot resolve the issue, they may also cancel future shipments."

Reuters notes that China's soybean imports in the first quarter jumped 33.5 percent, a record for the quarter and industry sources see a rush of cargoes in the second quarter. The rise comes amid an increasing use of soybeans in financing trades to secure credit.
Traders estimate more than 10 million tonnes of soybeans, out of China's imports of 63.4 million tonnes last year, are imported for financing annually.
And the lack of liquidity and forced losses means China's buyers ain't paying...
Chinese buyers may default on a further 1.2 million metric tons (1.32 million tons) of soybeans worth about $900 million being shipped from the United States and South America, to avoid incurring huge losses in a depressed local market, the country's top soy buyer said....

Why We Suggested Buying Natural Gas Equities (FCG)

In February we reiterated a couple January 2014 posts, just to drive the point home.
Here's the equity-based First Trust ISE-Revere Natural Gas Index ETF via Yahoo Finance:
Chart forFirst Trust ISE-Revere Natural Gas Idx (FCG)

It took a while to get going but compared to the continuous front month futures from FinViz:
It did just fine.
The stocks still have room to run.

From our February 20, 2014 post "Natural Gas: Storage Report Comes In As Expected, Futures Drop":
...We have been so successful switching electrical generating plants from coal to natural gas, have built almost $100 Billion of chemical co. infrastructure to take advantage of natty and have had some (small as a percentage) uptake of natural gas powered transportation that we may have trouble building storage reserves for the 2014-2015 heating season.

Be careful what you wish for eh?

That is why you saw stuff like this on Jan. 22:
Back on Jan. 9 we suggested buying Exploration & Production companies for the first time in years just because the certainty level seemed higher with the equities than the futures, not out of any deep insight (bold highlighting done today):
Natural Gas: Price Collapses on EIA Numbers, Market Yawns at Next Week's Projected 300 Bcf Withdrawal Report
After hitting $4.4300 on Tuesday (from $4.2560 Friday, memento mori) the front futures have fallen to $4.0300, down $0.1860 just today and barely above the day's low of $3.9990.

And I'm thinking it may be time to look for some gas producer stocks.

The estimated withdrawal to be reported Jan. 16 report is far and away a record at the same time volume in storage is 10% below the five-year average and Tuesday's STEO says marketed production grows at an average rate of 2.1% in 2014 and 1.3% in 2015.

Production growth is slowing at the same time we've convinced utilities to switch wholeheartedly from coal and the government does by administrative orders what it can't do by parliamentary means (see this week's New Source rules from the EPA in the Federal register).

So, it's either equities or longer-dated futures, we just passed a turning point kids.
Here are some instruments to give you ideas should you not have a four-star, weekend special, single-stock  guaranteed lock on the tip of your tongue.

AMEX NATURAL GAS INDEX (XNG) 791.11 Down 11.57 (1.43%)
First Trust ISE Revere Natural Gas (FCG), $18.94-0.32 (-1.66%) which is the basis for the triple-levered Direxion Daily Natural Gas Related Bull 3x ETF (GASL), $30.82-1.73 (-5.31%), which is not something to buy til death do you part but which should hold its own while the inverse GASX, $27.81 +1.36 (+5.14%) collapses giving you a pair trade.
Do note the leverage in the last two....
So there you go....
Be that as it may, we're doing the picking up pennies in front of a steamroller thing, recommending a short in the face of all this just because the ascent was losing momentum. And as noted in one of the Tesla posts:....
So there you go.
FCG closed at $22.53 yesterday.
The index, XNG is at 894.88, GASL at $50.20 is the best performing (YTD) equity-based ETF and GASX at $15.44 may be the worst although I haven't checked.

See also:
Energy Is About to Get More Expensive (XLE; ERX)
Natural gas: Not Storing Nearly Enough to Avoid Calamity, Futures Jump 4%

Rising Global Ultra-Rich Are Outbidding Dealers for Art—and the Dealers Don’t Like It (Piketty cameo)

From Art Market Monitor:
Scott Reyburn latches on to the book of the moment, Thomas Piketty’s Capital in the 21st Century, and tries to apply some of its findings to the art market. Of course, the art market is a product of a the emergence of a global class of “ultra high net worth individuals” who congregate around, and communicate through, the world-wide cavalcade of the art market.

Piketty’s essential point is that as long as invested capital produces a greater rate of return than economic growth, wealth accrues to the owners of capital. Reyburn mistakenly tries to apply this idea to the art itself. But Piketty’s point isn’t that a few wealthy persons will make all the money from art:
Courtesy of the above-growth returns identified by Mr. Piketty, the rich are further increasing their wealth by buying art. Many millions have been made by a new breed of investor-collectors who buy Bacons, Warhols and Richters high, and sell even higher. Art by desirable investment-grade names makes the rich richer. And more and more wealthy individuals are now prepared to make bids of more than $100 million at auctions, while outside, beyond the shiny bubble of the art world, living standards in the rest of society stagnate or decline.
Although the trend, if Piketty is correct, will be toward an even greater concentration of wealth the numbers continue to enlarge the size of this global class from the current few hundred thousand to several millions. Even with this prospect of having a greater population of potential buyers, Reyburn quotes art dealers and their near-sighted frustrations:
“This is well beyond the norms of inflation,” said Ivor Braka, a London dealer who has been buying and selling high-value art since 1978. “The art market has become an excuse for banking in public. People are displaying wealth in the most ostentatious way possible. It’s luxury goods shopping gone wild.”
“People are spending millions on works by artists who have questionable long-term value,” Mr. Braka said.
“Do they have taste?” he added. “I don’t know. That’s capitalism. You can spend money on what you want.”
Can an Economist’s Theory Apply to Art? (NYTimes)

Monday, April 21, 2014

"McKinsey Gives “Dare to Be Great” Speech to Private Equity Investors as Returns Fall"

From naked capitalism:
McKinsey has issued a new report on the private equity industry that ought to give any investor cause for pause. The consulting firm, which just happens to have private equity firms as as major source of revenue, is a bit too obviously engaging in porcine maquillage. The report describes enthusiastically how private equity has been an even better investment strategy than most people thought. The white paper makes only passing allusion to the fact that returns in recent years haven’t been all that good; “many general partners are struggling to raise new funds on the heels of disappointing recession-era vintages.” Industry average returns have been lower than plain old stock indexes. Notice how McKinsey omits the recent crappy years from this chart:
Screen shot 2014-04-20 at 4.16.23 AM
I’m also curious as to how they constructed that levered equity return line. Intuitively it doesn’t look right, but I don’t have a way to check the data.
By calling lower returns “recession era,” the article implies that the economy is to blame. But a more probable culprit is too much capital chasing too few promising companies. Private equity has more than doubled relative to the size of global equity markets since 2000: it was 1.5% of global equity market cap (and remember, this was the peak of the dot com bubble) and rose to 3.9% as of 2012. The competition for deals is fierce; I’ve been told for more than 7 years that any middle market company that was auctioned would get at least 40 bids. If you have to pay a full price for companies, it’s a lot harder to make juicy returns. And that raises the specter that underwhelming performance will persist.

One rationale for investing in private equity has been that the top quartile funds (meaning the best 25%), showed persistent good performance. McKinsey has to admit that this justification for investing in private equity is also a thing of the past:
Other McKinsey analysis finds that the persistence of returns—in particular the tendency of top firms to replicate their performance across funds—is not nearly as strong as it once was. Until 2000 or so, private-equity firms that had delivered top-quartile returns in one fund were highly likely to do so again in subsequent funds. Knowing that yesterday’s winners were likely to excel again today enabled limited partners to focus their due diligence on identifying top-quartile funds.
Since the 2000 fund vintage, however, this persistence has fallen considerably.
Screen shot 2014-04-20 at 4.25.47 AM
Notice that McKinsey tacitly accepts that it was reasonable to believe that investors could identify and invest exclusively in these top-quartile funds. We pointed out that logical fallacy in a recent post....


A Beautiful Merger and Obscure Bloomberg Functions

Lifted from Victor Niederhoffer's Daily Speculations:

Nintendo + Interactive Brokers, If They Merged, from Alexander Good

 It always struck me that trading was a lot like a video game with the world's worst user interface (perhaps deliberately so according to some, who think that knowing obscure Bloomberg functions leads to job security).

With the advent of and potentially commission free equity trading, one of the major hurdles to gamification is removed (i.e. you bleed to death if you don't know what you're doing).

I wonder what would happen if you hired some very strong video game developers off Bioware or Nintendo (or even outright did a merger). Then mixed it with a trading platform.

I feel like you might hit an unexpected audience in Asia - see: Activision's Starcraft had near permanent cultural impact on South Korea.

Interactive Brokers is an awesome trading platform if you know what you're doing but the UI feels like it was made in 1995. In the meanwhile Nintendo is not adapting to the times. Totally impractical and probably would happen more as a start up than M&A but just a thought that could bring speculation to the masses....MORE

Wren-Lewis on House Prices and Secular Stagnation

From Mainly Macro:

This post starts off talking about the UK, but then goes global
We are all used to seeing graphs of house price to income ratios. Here is Nationwide’s first time buyer house price to earnings ratio for the UK and London.
UK First time buyer house prices relative to earnings: source Nationwide
Housing is becoming more and more unaffordable for first time buyers. Yet prices are currently booming (at least in London), and demand is so high estate agents are apparently now holding mass viewings to cope. In the UK the media now routinely call this a bubble, and the term ‘super bubble’ is now being used. London may be a bit unusual (see this extraordinary research), but it can also be a leading indicator for UK prices in general.

Bubbles are where prices move further and further away from their fundamental value, simply because everyone expects prices to continue to rise. One of the earliest and most famous bubbles involved tulip bulbs in the Netherlands in 1637. Yet that bubble lasted less than a year. The dot-com bubble lasted two or three years. If you think there should be some underlying constant value for the house price to income ratio, then this UK housing bubble has been going on for much longer than that. Instead of being pricked by the 2009 recession, it merely seems to have paused for breath. 

Yet does it make sense to compare house prices (the price of an asset) to average earnings or incomes? A more natural ratio would be the ratio of rents (the price of consuming housing) to earnings, and this has been relatively stable over this period. Or to put the same point another way, the ratio of house prices to rents has shown a similar pattern to the ratio of house prices to incomes shown above. (The Economist has a nice resource which shows this, and covers all the major countries besides the UK.)

If we think of housing as an asset, then the total return to this asset if you held it forever is the weighted sum of all future rents, where you value rents today more than rents in the future. Economists call this the discounted sum of rents. (If you are a homeowner, it is the rent that you are avoiding paying.) So why would house prices go up, if rents were roughly constant and were expected to remain so? The answer is that prices would go up if the rate at which you discounted the future fell. The relevant discount rate here is the real interest rate on alternative assets. That interest rate has indeed fallen over much the same time period as house prices have increased, as Chapter 3 of the IMF’s World Economic Outlook for March 2014 documents.

Think of it this way. You believe that the return you get from owning a house (the rent you get or save paying) will be roughly constant in real terms. However the return you get on other assets, measured by the real interest rate, is falling. So housing becomes more attractive as an asset. So more people buy houses, and arbitrage will mean its price will rise until the rate of return on housing assets adjusts down towards the lower rate of return on other assets. As Steve Nickell pointed out in 2004, if the expected risk free real interest rate permanently fell from, say, 4% to 2%, this could raise real house prices by 67%....MUCH MORE
HT: EconomistsView

"Before You Say You've Never Discriminated Against Someone, Listen To This Battlecry From A Model"

Clickbait from the Upworthy Generator!
Genius. I may never write another headline.
Here's another:
"Before You Say Things Are Better Than They Used To Be, 
Listen To These Five Nouns From A Converted Racist."
Think We're Not In A Housing Bubble? 
Maybe You Should Listen To This Angry Child Star.

HT: The American Reader's "Life Sentences: The Grammar of Clickbait!" which notes:
...An interesting thing about these complaints, besides the fact that they all read a little like Business Insider articles, is that they all address, even focus on, the titles of the clickbait articles. And I suppose that is the defining characteristic of clickbait as a genre: titles that manipulate or coerce readers into visiting the site....
See also: 

Piketty Til You Puke: "Ryan Avent Is Very Unhappy with Clive Crook’s Review of Piketty’s 'Capital in the Twenty-First Century'"

We've now gone all second -or is it third?- derivative (fourth?).
Brad DeLong at the Washington Center for Equitable Growth:

Ryan Avent: Inequality: “Capital” and its discontents: “Piketty’s magnum opus is certainly not without its weaknesses…
but the quality of the criticism it has attracted provides a sense of the strength of the argument he makes. Consider Clive Crook…. He writes:
There’s a persistent tension between the limits of the data he presents and the grandiosity of the conclusions he draws.
The line doubles as a pleasingly apt description of Mr Crook’s review. He is unhappy…. Why… doesn’t Mr Piketty say that r must be significantly above g to generate the expected divergence, Mr Crook complains…. You don’t even have to read hundreds of pages to get the qualification Mr Crook wants; you can start with the page on which r>g is first mentioned…. Mr Crook then goes on to present his evidence: “The trouble is… capital-to-output ratios in Britain and France in the 18th and 19th centuries… were stable”…. Piketty is not arguing that r>g means that rising inequality is inevitable. Indeed, that is close to the precise opposite of his argument, which is that r>g is a force for divergence… which has at times been countered… and which can and should be similarly countered in future. Presumably, if charts of stable capital-income ratios in the 19th century provided a devastating rebuttal to his story, Mr Piketty would not have included them so prominently in the book. I think he must have imagined that readers would look at the text around them as well…
DeLong highlighting Avent commenting on Crook's review of Piketty.

(Repost) Barron's Interview--Rob Arnott: Demographics Are the Markets' 800-Pound Gorilla

Not sure what happened but the post disappeared so here we go again.
From Barron's:
It's a big reason why the finance guru likes emerging markets long term.

Rob Arnott, chairman and CEO of money manager Research Affiliates in Newport Beach, Calif., has serious academic credentials. A summa cum laude graduate of the University of California, Santa Barbara, he has written more than 100 academic articles and was editor of the prestigious Financial Analysts Journal from 2002 to 2006. One of his talents is to bridge the worlds of academia and money management. For example, he is a big proponent of fundamental indexing, for which he received a patent and which emphasizes factors such as cash flow and book value, as opposed to stock-market capitalization. Arnott is also a contrarian, and it's often paid off for his investors. The PowerShares FTSE RAFI US 1000 fund (ticker: PRF), which is based on an index Arnott's firm developed, has a five-year annual return of nearly 22%, besting the S&P 500 by nearly three percentage points." 

When Barron's spoke with him during the financial crisis, he was bullish on stocks, and steered away from Treasuries. Nowadays, he tells us by telephone, he favors high-yield bonds, as well as emerging-market debt and stocks.

Arnott, 59, and his colleagues have lately been studying demographics. He cautions that the eventual impact of people in developed countries living longer—with fewer younger people to support them—is being underestimated, particularly its impact on growth in gross domestic product.
What are some other key issues with bonds?
The other illusion too many investors have is that, if rates go up, all bonds will perform badly. If you go back over the past quarter-century and look at all of the times when the Treasury yield rose over 100 basis points [one percentage point], it turns out that high-yield bonds and emerging-market bonds produced very respectable positive returns, while Treasury bonds had horrible negative returns. Inflation-linked bonds also fared OK.
So, not all bonds are alike. Of course, the same can be said for stocks.
That's right. For example, emerging market stocks, real estate investment trusts, and natural-resource stocks all behave differently. Last year, emerging-market stocks trailed U.S. blue-chip stocks by about 3,000 basis points, or 30 percentage points. REITs trailed the blue chips by a similar margin. So last year could be viewed as, "My goodness, if you weren't invested in the S&P, you were nowhere." Or it could be viewed as a beautiful gift from the markets—a chance to rebalance out of blue chips and into out-of-favor inflation hedges, including emerging markets stocks and REITs. The S&P is no bargain. But REITs are OK, and emerging-market stocks are downright cheap....MORE

"Gold Drops to Two-Week Low on Technical Indicator Signal"

Still patiently awaiting the arrival of $875.
First though, a third touch of the $1179 line:

From Bloomberg:
Gold retreated to the lowest level in more than two weeks as a technical indicator used by some traders signaled further declines. Silver also fell.

Bullion for June delivery fell as much as 0.9 percent to $1,281.80 an ounce, the lowest since April 2, and was at $1,287.10 an ounce at 7:12 a.m. on the Comex in New York. Prices lost 1.9 percent last week to $1,293.90, closing below the 200-day moving average.

The metal has pared this year’s advance to 7 percent as investors assessed prospects for further cuts to the Federal Reserve’s stimulus program amid signs of recovery in the world’s largest economy. While tension between Ukraine and Russia spurred gains in the past month, there has been little physical buying at current prices, according to Kate Harada, precious-metals general manager at Tanaka Kikinzoku Kogyo K.K. in Tokyo.

“Gold closed last week below its 200-day moving average, which is a bearish technical factor that may pressure the gold market,” said Liu Xu, a precious metals analyst at Capital Futures Co. in Beijing....MORE
June futures $1288.20 down $9.60.

Barclays to Exit (in large part) Commodities Trading

The FT has the scoop:

Barclays to wind down commodities trading
Barclays, one of the world’s biggest commodities traders, is planning to exit large parts of its metals, agricultural and energy business in a move expected to be announced this week.

The shake-up comes as commodity trading suffers a sharp slide in revenues and attracts greater scrutiny from regulators, which has already led to the withdrawal of several big banks from the area.

Chief executive Antony Jenkins is preparing a strategic update for investors on May 8 and is expected to slash several thousand jobs by cutting Barclays’ exposure to areas that do not generate returns above their cost of capital. These are likely to be moved into an internal “bad bank” and either sold or closed down.

But the retreat from parts of its commodities business is due to be announced on Tuesday. Barclays declined to comment.

Precious metals trading is likely to move into the bank’s foreign exchange trading business....MUCH MORE

Sunday, April 20, 2014

"Two centuries of trend following"

Because momentum is one of the very few equity market anomalies that holds up under scrutiny, trend following actually does work. And in the case of futures, trend following has become the default quasi-mystical survival strategy for midlevel Commodity Trading Advisors.
(default, dear Brutus, is not in our stars but in ourselves, that we are underlings)
From arXive:
We establish the existence of anomalous excess returns based on trend following strategies across four asset classes (commodities, currencies, stock indices, bonds) and over very long time scales. We use for our studies both futures time series, that exist since 1960, and spot time series that allow us to go back to 1800 on commodities and indices. The overall t-stat of the excess returns is 5 since 1960 and 10 since 1800, after accounting for the overall upward drift of these markets. The effect is very stable, both across time and asset classes. It makes the existence of trends one of the most statistically significant anomalies in financial markets. When analyzing the trend following signal further, we find a clear saturation effect for large signals, suggesting that fundamentalist traders do not attempt to resist "weak trends", but step in when their own signal becomes strong enough. Finally, we study the performance of trend following in the recent period. We find no sign of a statistical degradation of long trends, whereas shorter trends have significantly withered.
 ...MORE (17 page PDF)

HT: Abnormal Returns

Previously on the momo channel:
Momentum As The Only Reliable Market Anomaly
Whoa! Has The Small-Cap Premium Disappeared? That Would Leave Only Momentum in the Tried-and-True Anomaly File!
UPDATED--Cliff Asness' AQR Capital: A Century of Evidence on Trend-Following Investing; Since 1903
UPDATE--More on "A Century of Evidence on Trend-Following Investing"
AQR Capital's Cliff Asness on Market Efficiency
Attention All Mo-mo Mamas: The Huge Hidden Downside Risk in Momentum Trading
Alpha Persistence & A Simple Momentum System For Beating the Market
The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes)
Testing Small-batch Artisanal Portfolio Construction With Cliff Asness and Grantham, Mayo's James Montier
AQR--"Demystifying Managed Futures" (Returns and Anomalies)
Improving on the Four-factor (beta, size, value, momentum) Asset Pricing Model

Want to wager on Google Glass or Amazon drones? Ladbrokes Offers Odds On Various Technological Milestones

From Buzzfeed:

We Got Bookies To Predict The Future Of Tech
Want to wager on Google Glass or Amazon drones? These guys will be happy to place your bets.
Christina Lu/BuzzFeed
Over the past few months, tech news has been dominated by breathless reports about massively ambitious projects started by some of the biggest companies in Silicon Valley. These so-called “moonshots” represent the wildest dreams of extremely wealthy people whose success at the Internet has enabled them to reinvest their fortunes into technology previously considered only by science fiction. Cynics view these moonshots as marketing ploys or hubristic attempts by powerful CEOs to secure their legacies; others see them as laudable, even plausible efforts to alter the course of human history.

But are any of them actually going to, y’know, happen?

In the interest of getting a better idea of which of these projects could come to fruition, BuzzFeed decided to talk to people who actually know how to speculate: professional oddsmakers. While prediction markets are prohibited in America by the Commodity Futures Trading Commission, they’re perfectly legal in Great Britain. So we asked Alex Donohue, an oddsmaker at the proud English gaming house Ladbrokes, to come up with some wagers for ten of the most hyped moonshots. The method Donohue uses combines quantitative and qualitative factors and an all-important “gut feel”*.

Here’s what Ladbrokes came up with:
Google Glass
What is it? A headworn computer, displaying smartphone-like information, attached to a glasses frame.

The Bet: Google Glass to ship more units worldwide than the newest iPhone in any year running up to 2020.

The Odds: 100/1.
“Simply put, we don’t feel like this will catch on with the wider consumer base in remotely the same way as the iPhone since we feel the majority will still perceive it as something of a gimmick not relevant to their daily lives, especially for the cost. Therefore we are happy to make it a longshot that this item ever outsells the latest iPhone in any year until the end of the decade.”
Oculus Rift
What is it? A virtual reality, head-mounted display. The technology, designed originally for gamers, was acquired last month by Facebook.

The Bet: Oculus to become the dominant videogame display technology by 2020.

The Odds: 8/1.
“We see this as something which has a distinct possibility of happening, largely due to the popularity of and appetite for VR among the existing gaming community. We’d have offered shorter odds about any VR headset to become the dominant display, with the Oculus Rift odds being slightly longer due to rival devices competing in this space.”...

High Yield Debt Issuance As An Indicator Of Impending Credit Crashes

Having watched spreads for longer than some of our readers have been alive it pains me to admit to not keeping tabs on something as simple as gross issuance.
From House of Debt:

Are We Headed for a Credit Market Crash?
In a series of speeches, Federal Reserve Governor Jeremy Stein emphasized the importance of financial stability concerns in monetary policy-making. But how does one measure whether threats to financial stability are lurking?

Put differently, can we know that there is a credit bubble about to burst?

In his speeches, Stein cites the work of two Harvard Business School professors, Robin Greenwood and Samuel Hanson. Their research argues that a good indicator of credit market overheating is the share of all new corporate debt issues coming from low-grade issuers.

This measure is based on the quantity of credit issued, not just interest rates. Others focus exclusively on credit spreads, or the interest rate differentials between, say, junk and investment grade firms. Greenwood and Hanson argue that quantities of credit issued by low-grade versus high-grade firms add a lot of power when predicting credit market crashes.

So how big is the risk of a credit market crash today? Robin and Sam were nice enough to send us the updated data through 2013. This chart shows the high yield share of corporate debt issues. Or in other words, the fraction of all corporate debt issues by high yield (or junk) firms:


You can see right away that this variable predicts crashes pretty well. The high yield issue share peaks about two years before major meltdowns we’ve seen in credit markets. So when risky firms are issuing a ton of debt, bad things tend to happen.

The high yield share in 2012 and 2013 indicates elevated risk, but not an impending disaster. For example, the 2013 high yield share is still below the peaks seen prior to other credit crashes. This may be driven in part by the fact that investment grade firms are also issuing a ton of debt. So in some sense the denominator is rising so fast that the high yield bond issues cannot keep up with it....

Friday, April 18, 2014

"That Time An Imperial Russian Fabergé Egg With A Vacheron Constantin Watch Inside Was Discovered At A Midwestern Flea Market And Became The Most Expensive Timepiece On Earth"

From Hodinkee, Wristwatch News:
In one of those stunning stories only made possible by the Internet, in 2012 a man turned to Google to search for "Vacheron & Constantin" and "egg" to find that the jewel-encrusted gold egg housing a Vacheron watch he purchased for $13,302 in the early 2000s at a Midwestern flea market was in fact an 1887 birthday gift for Tsar Alexander III from Peter Carl Fabergé. It has now sold privately for millions, likely making it the most expensive timepiece on earth.

The unnamed individual stumbled on a 2011 Telegraph article entitled "Is this £20 million nest-egg on your mantelpiece?" The egg was the third of 54 Fabergé eggs owned by the Russian royal family and had been lost since 1922. It is recorded that in 1922 this egg was transferred from the Kremlin Armoury, which had confiscated the eggs in 1917 when the Tsar was overthrown, to the special plenipotentiary of the Council of People's Commissars, Ivan Gavrilovich Chinariov. Beyond the written records, a 1902 photograph of the egg on exhibition in St. Petersburg also survived....MORE
And from Wartski:

“Fabergé is the greatest genius of our time. I told him: ‘Vous etes un genie incomparable’”
-Empress Marie Feodorovna in a letter to her sister Queen Alexandra of England.

The Third Imperial Fabergé Easter Egg displayed among Marie Feodorovna's Fabergé treasures in the Von Dervis Mansion Exhibition, St. Petersburg, March 1902.