Education

Bear markets begin in good times. Bull markets begin in bad times.

by

By: Harvey Sax I haven’t been able to conclusively cite the origin of the above quote, ‘Bear markets begin in good times.  Bull markets begin in bad times’ but undoubtedly it was from an investor who survived the bear market.  The good news is that you can make money in any kind of market.  You can profit from the market rising or going down.  You can even make money in a market that doesn’t move at all. But what you can’t do is make money without a plan.  Ultimately you will only be successful by trading on your own ideas … Read more

CBOE – Index Option Strategies – Buying Index Puts to Hedge

by

Calculating Index Contracts to Hedge a Portfolio Stock prices tend to move in tandem in response to the overall stock market as measured by the S&P 500 Index (SPX). The 500 stocks that comprise the S&P 500 Index represent almost 85% of the stock market value in the United States. Therefore, the index is an excellent reflection of the overall stock market. If an investor owns a portfolio of stocks and is concerned about a near-term downward move in the overall market, purchasing the appropriate SPX put options could be a desirable alternative to hedging each stock individually. Determining the … Read more

Are you agressive or conservative?

by

A lot of that depends on the beta of your portfolio.  But before we get into all of that, let’s go over just what beta is. Stock Beta is a ratio that indicates how a stock fluctuates with relation to the market.  Beta is a indicator of market risk also called volatility.  When you research a stock, look at the beta to get an idea as to how choppy the returns on this stock will be with relation to the market.  If this doesn’t align with your risk tolerance, this stock may not be for you. Here are some guidelines … Read more

| ZeroHedge

by

James Turk Interview With Eric Sprott On, You Guessed It, Gold Submitted by Tyler Durden on 11/08/2011 21:11 -0500 Bond Central Banks Eric Sprott Gross Domestic Product Hyperinflation International Monetary Fund Meltdown Precious Metals Reserve Currency Sprott Asset Management Eric Sprott, Chairman of Sprott Asset Management, and James Turk, Director of the GoldMoney Foundation, meet in Munich and talk about the Munich Precious metals conference (Edelmetallmesse). They comment on Eric Sprott’s speech at the conference and how increasing interventions by central banks, from zero interest rates to money printing and bond buying have completely distorted the financial markets. Other discussion … Read more

Poll: 65% of Americans Support Balanced Budget Amendment – Hit & Run : Reason Magazine

by

A Sachs/Mason Dixon poll released today [PDF] has found that “65 percent of the public supports” a balanced budget amendment, “with 27 percent opposed, [and] 8 percent undecided.” By party affiliation, that breaks down as “81 percent of Republicans, 68 percent of independents and 45 percent of Democrats.” This jibes with the first-ever Reason-Rupe Poll, which found that 74 percent of Americans think that the federal government needs some kind of spending cap to keep expenditures in line with revenues. Percentage breakdown there among R/I/D: 85/76/64. Here, visualize it: via Poll: 65% of Americans Support Balanced Budget Amendment – Hit … Read more

Businomics Blog: Small Business in the Economic Doldrums

by

Small Business in the Economic Doldrums Small business is down in the dumps. Just compare the attitudes shown in NFIB’s survey of small business owners with the Business Roundtable’s survey of corporate CEOs: It’s always a little dangerous to compare one survey with another, but it sure seems that the corporate honchos are feeling better than they did before the recession, whereas small biz owners are up from the depths of the downturn, but not yet back to where they had been. Better understanding comes (as usual) from looking at the hard numbers in financial statements. Earnings of small business … Read more

‘s‬‏

by

Buffett is often quoted as saying he likes to buy a business good enough that any idiot can run because eventually one will.  As it turns out Buffett got that nugget from Peter Lynch and this is the proof of it.  Watch this interesting video of Buffett being Buffett. Warren Buffett – How to Identify a Good Investment In many ways you won’t find two dissimilar famous investors as Peter Lynch and Warren Buffett. Buffett invests in a concentrated way often saying things like the odds of your tenth best idea being as good as your first is low. Or … Read more

”s stock

by

Balkanization, or Balkanisation, is a geopolitical term originally used to describe the process of fragmentation or division of a region or state into smaller regions or states that are often hostile or non-cooperative with each other.. You need to look no further than a stock chart of Google or this unbelievably depressing Chart of the Day from the SAI Business Insider. Facebook’s Unbelievable Effect On The Rest Of The Web. Or for that matter the meteoric rise in price of LinkedIn’s IPO.  When I first started an Internet company in 1994, the web held the promise of making the world … Read more

Oh Mama can this really be the end?

by

Western civilization pretty much started with Greece. Can it be poetic justice that it could end there as  well?  The West as we refer to the United States and European countries has been on a decade long descent versus the East.  While our standard of living has fallen, theirs by all  measures has risen.    Our debt hobbled leveraged hedonistic society appears to be crumbling versus the  crawl out of the mud emerging markets.   There is a great transfer of wealth and the most important asset mankind has, hope itself.  While the West is sinking into that collective quiet state of desperation,  … Read more

Another Reason Insiders are So Good to follow: Short-Swing Profit Rule

by

Warren Buffett is fond of saying something like view stock market investing as if you had a ticket punch with only the ability to have ten punches.  You’d think long and hard about what you bought before you put that hole in your ticket.    He also is noted to say that your third and fourth best ideas are not likely to be as good as your first best idea.  When insiders buy stock in their companies they are subject to a very punishing rule known as  the Short-Swing Profit Rule.  What Does It Mean?   The Short Swing Rule is a Securities … Read more

Guggenheim ABCS Gives Us A-B-C But No Y

by

Guggenheim ABCS Gives Us A-B-C But No Y June 10, 2011 by Ron Rowland Filed under Commentary, ETF IPOs (New ETFs)   The ABC acronym stands for Australia, Brazil, and Canada.  The Guggenheim ABC High Dividend ETF (ABCS), launched earlier this week (6/8/11), packages the ten highest yielding stocks from each country into a convenient ETF format. The 30 securities consist of U.S. listed ADRs from all three countries and stocks from Australia and Canada listed in their home countries.  The underlying BNY Mellon ABC Index selects the top 10 stocks or ADRs with the highest yield for each country. … Read more

Warren Buffett’s Portfolio – Shocking Truth About How He Trades Options

by

By Kirk Du Plessis I’ve told people for years and years that Warren Buffett’s portfolio and Berkshire Hathaway company publicly discloses that they are naked put option sellers. More specifically they sell index put options, the exact same strategy we use here at Option Alpha. Why Is This So Shocking? Honestly I always get a weird response when I tell people this. Why is it so shocking to think that one of the best investors of all time my use the same strategy that I prefer. Well, I guess I’m using his strategy and not the other way around right? … Read more

Technical Analysis that Works

by

  “You see I can predict this stock went down!”   I’ve read a great deal on technical analysis and spent a great deal more time testing various indicators, programs, backtesting, and attending seminars on the subject.  At first I thought I would write a piece with a top down view and summarize the major indicators in use today.  I’ve hesitated and even anguished over doing that for a couple of reasons:  But first let’s set the discussion by quoting Wikipedia’s succinct definition: “Technical analysis is a financial term used to denote a security analysis discipline for forecasting the direction … Read more

Segmenting to Make Better Decisions

by

This post was stimulated by this academic research piece: When Smaller Menus Are Better: Variability in Menu-Setting Ability.  The truth is, we do best in choosing between a limited menu of options.  Let me give you an example.

For a while, my wife asked me if we could replace our living room furniture.  Trying to be frugal while starting up my business, I showed her some items from Ikea, and she said yes, but I could not replace the recliner at Ikea.

So, after a month, she asked about the recliner.  I did a little searching and went to La-Z-Boy.  (Note: she uses the recliner most.)  I looked around the place and had three thoughts:

  • Low price
  • Reclines the way she likes.
  • Fabrics/colors that I know she likes.

Those criteria enabled me to narrow down the field to two recliners, and a field of six or so “maybes.”  I know my wife pretty well; she trusts me in purchases that many wives would not let their husbands touch.  But for something she uses so much, I took her to the store, along with our youngest (who got a kick out of playing with the electronic recliners).  I took her to the two recliners.  She oohed over them and sat in both.  She liked the fabric better in one, and the comfort of the other.  She tentatively chose the latter, and went on to look at other recliners. As she went on, she said that she wasn’t finding anything that she really liked.  We ended up buying the second chair.  It’s at home now, and she likes it.  Score one more for the husband.

The key to my success was winnowing down the choices.  There were over 100 recliners at the store. But by eliminating options that I knew would not work, I came to solutions that would save my wife time, while

Read more

19 Famous Quotes From Great Investors That You Can Still Rely On Today

by

By Kirk Du Plessis I love reading trading books and learning from some of the great investors and traders. My personal preference is to learn from the “Old Guys” like Livermore, Buffett, Lynch and Graham. These guys laid the foundation for modern investing. They didn’t trade on technicals and always offer great insight. Here are 19 great quotes. Add your favorite quote via the Facebook Comments! “The first rule is not to lose. The second rule is not to forget the first rule.” “If past history was all there was to the game, the richest people would be librarians.” “Risk … Read more

‘s Road to IPO

by

Linkedin is a social network geared to the work world. The company has more than 1,000 employees and 100 million members in more than 200 countries. Now it will be one of the first major social media IPOs. Let’s take a look at the history behind Linkedin’s IPO… Source: The Credit Score Blog

On Longevity Derivatives

by

I am a firm believer in “you can’t get something for nothing.”  So it is when a new derivative is proposed.  Either there are natural counterparties to take up the exposure (reducing their risk), or speculators must be encouraged to take the risk (more likely).

So, with longevity derivatives, the risk is people living too long leading to more pension payments in future years.  The proposition is: find a party that is willing to make more payments if mortality is better than expected, and offer him a payment, or series of payments, as an inducement to enter the transaction.

Let’s think for a moment, what entities benefit from a rise in longevity?  I can think of one: life insurers.  But there is a problem: anti-selection.  People who buy life insurance tend to be sicker than those of the general population, who tend to be sicker than annuitants.  Annuitants live the longest, and their lifespans improve the most on average.  Life insurers would find taking on longevity risk to be a dirty hedge at best for their life insurance books.  In general there have been few reinsurance agreements for longevity risk for immediate annuity portfolios, but then, that would be a really small component of the life insurance industry at present.

Even when terminal funding was permitted (back in the 1980s to early 90s) — where plan sponsors could buy annuities from insurers to free themselves from their

Read more

U.S. Healthcare vs. The Rest Of The World

by

Healthcare is at the very core of the country’s current struggles. Many other developed nations have worked out sustainable models for health care, but in the US, that is not the case.  Americans spend $477 billion a year MORE on health care than other advanced countries, which amounts to $1,645 per person every year. Medical Billing and Coding put together two amazing infographics that show exactly why we pay so much for health care compared to other wealthy nations. Source: Medical Billing and Coding

How to Deal With Excessive Risk Concentration?

by
Jonathan Jacob of Forethought Risk, an independent risk advisory firm, sent me his Benefits Canada article, How to deal with excessive risk concentration:

In my previous column, Examining portfolio risk, we discussed ex-ante risk, ex-post risk and how both measures can provide greater understanding of portfolio risk. In this column I would like to discuss the options that are available to a pension fund manager that discovers excessive risk concentration in a fund through ex-ante risk reports.When a pension fund utilizes the services of multiple investment managers, there is potential for overlap of risk, causing excessive concentration of risk. Excessive risk concentration can be found in exposure to a single company, a sector of the economy, or a currency among others. If the pension fund manager receives ex-ante reports on risk which aggregate all investment manager portfolios, he or she may recognize an exposure as excessive prior to a potential blow-up.

One potential approach to the excessive risk is to ask one of the investment managers to trim risk to the asset with excess exposure. The investment manager will likely disapprove the request, justifiably claiming that the initial agreement did not include such restrictions and any future measurement of their performance will be tainted by this decision.

Read more

On Longevity Derivatives

by

I am a firm believer in “you can’t get something for nothing.”  So it is when a new derivative is proposed.  Either there are natural counterparties to take up the exposure (reducing their risk), or speculators must be encouraged to take the risk (more likely).

So, with longevity derivatives, the risk is people living too long leading to more pension payments in future years.  The proposition is: find a party that is willing to make more payments if mortality is better than expected, and offer him a payment, or series of payments, as an inducement to enter the transaction.

Let’s think for a moment, what entities benefit from a rise in longevity?  I can think of one: life insurers.  But there is a problem: anti-selection.  People who buy life insurance tend to be sicker than those of the general population, who tend to be sicker than annuitants.  Annuitants live the longest, and their lifespans improve the most on average.  Life insurers would find taking on longevity risk to be a dirty hedge at best for their life insurance books.  In general there have been few reinsurance agreements for longevity risk for immediate annuity portfolios, but then, that would be a really small component of the life insurance industry at present.

Even when terminal funding was permitted (back in the 1980s to early 90s) — where plan sponsors could buy annuities from insurers to

Read more

Rebalancing through wage increases

by

Is China currently rebalancing?  The currency has been appreciating, the PBoC has hiked interest rates four times, and wages have been surging.  Because of all of this I am often asked if China has finally begun the long-waited rebalancing process and whether we have yet seen an improvement in the underlying economy caused by a rising consumption share.

Those who were hoping the answer was yes will have been disappointed by the release Thursday of the World Bank’s China Quarterly Update – April 2011. Here is their summary:

China’s economic growth has remained resilient as the macro stance moved towards normalization. Both fiscal and monetary policy contributed to the normalization. Consumption growth slowed in early 2011. But overall domestic demand held up well, supported by still strong investment growth. Real estate investment has so far remained robust to measures to contain housing prices—a policy focus. Reducing inflation is the other policy priority, after inflation rose to 5.4%, largely on higher food prices.

So what is going on?  Isn’t China doing all the right things – raising wages, the exchange rate and interest rates – and, if so, why isn’t the economy rebalancing towards higher levels of household income and consumption?

The key, I think, is in distinguishing between real and nominal changes.  On a nominal basis, for example, it is clear that the currency is appreciating, interest

Read more

Kroszner and Shiller, Reforming U.S. Financial Markets

by
A slight but nonetheless thoughtful book,Reforming U.S. Financial Markets: Reflections Before and Beyond Dodd-Frank (MIT Press, 2011) grew out of the fifth Alvin Hansen Symposium on Public Policy held at Harvard in 2009. At this symposium Robert J. Shiller and Randall S. Kroszner presented papers, which were then commented on by Benjamin M. Friedman (the editor of this volume), George G. Kaufman, Robert C. Pozen, and Hal S. Scott. 

I assume those readers who watch CNBC are acquainted with Shiller and Kroszner, since both are frequent guests. Shiller, a professor of economics at Yale University, is probably best known for his bookIrrational Exuberance. He also developed, with Karl E. Case, the Case-Shiller home price indices that depress us month after month. Kroszner, a professor of economics at the University of Chicago’s Booth School of Business, is a former fed governor.

In this post I want to concentrate on a couple of points in Shiller’s more controversial paper, “Democratizing and Humanizing Finance,” described by Pozen as “almost philosophical.” (p. 102)

Read more

How Offshore Drilling & Oil Subsidies Impact The Price Of Gas

by

According to Ben Jervey, the Senate rejected a bill (last night) that would’ve cut about half of the $4 billion-a-year in tax breaks and subsidies to the five largest oil companies. Today, Republicans are advancing a bill to rapidly expand and speed up offshore drilling. In both instances, the relatively high current prices of gasoline are being used to make the case for making life easier on big oil companies. We’ve been spending a lot of time explaining why neither offshore drilling nor oil industry tax breaks have much of any impact on gas prices. Our friends at 350.org just released a great and … Read more

‘s a house worth?

by

By Harvey Sax

I was having a discussion with a  hedge fund manager friend of mine about what determines  house values and it dawned on me, this is really a complex question.  Having been a stock trader for so long, I was quick to jump to the conclusion that a house is worth what someone would be willing to pay for it in a reasonable period of time.  I’m not sure what reasonable means but perhaps a sixty to ninety day auction process would determine the real value.  Of course there are the various real estate appraisal methods of valuation but that doesn’t really interest me.  Instead what creates the value?

Read more

Economic Issues for the Telecom Industry: 2011-2012

by

By Dr. Bill Conerly

Economic uncertainty is only one significant issue facing the telecom industry now, but it intertwines with the technological changes and social changes that are causing so much turmoil in the industry. Once the path for consumer and business spending is defined, the other changes affecting the industry will fall into clearer focus.

Nutshell

Consumer spending is reviving and now exceeds its pre-recession peak. Consumers were slow to get going after the financial crisis and even now are being conservative. Key to the growth is the increase in consumer incomes. That’s surprising to many given the weak employment numbers, but there is solid explanation for rising incomes. First, hours worked per employee has risen since the depths of the recession. Second, those with jobs have earned pay raises averaging about two percent per year. Third, taxes as a share of consumer income have fallen in the past two years, partly for stimulus policy and partly because lower incomes are subject to lower tax rates. Finally, we’ve actually enjoyed job growth in recent months, with the employment count about one percent higher than a year ago. So consumers have more money than they used to.

Consumers are being prudent with their extra income. About 88 cents out of every additional dollar of take home pay is being spent, with 12 cents going into savings and paying down debt. The average savings rate is about six percent now, so the practice of saving 12 percent of additional earnings will raise the average savings rate over time. This is sound financial practice for most households. Although more money is going into savings, more money is also going into spending. That ensures that the current economic strength will continue.

Read more

On Systemic Risk

by

There are five factors for systemic risk.  Here they are:

  1. Asset size of the institution, including synthetic exposures.
  2. Degree of leverage of the institution, including synthetic exposures.
  3. Asset-Liability mismatch, particularly financing long assets with short liabilities (including derivatives and margin agreements — think of AIG, or mortgage REITs on repo).
  4. Degree to which the institutions owns financial companies equity or debt, or vice-versa, where other financial companies have claims on the institution in question.
  5. Riskiness of the assets owned by the institution in question.

Contributing to the risks include easy monetary policy, which can lead/has led  to the neglect of risk control.  Personally, if I were a regulator of systemic risk, I would throw my effort at companies that fit factors 1 and 2, and analyze them for the other three factors.

Systemic risk is layered levered credit risk. A lent to B, who lent to C, who lent to D, who financed a bunch of bad mortgages.

#5 is underwriting risk

#4 is connectedness risk

#3 is liquidity risk

Read more

Weekend Reading

by

Weekends are a great time to catch up on some of the good reads from the week… Goldman’s O’Neill Sees Investors Missing Stock Rally on ‘Black Swan’ Fears (Bloomberg) Facebook’s Stealth Attack on Google Exposes Its Own Privacy Problem (Wired) Lessons From The Flash Crash (Forbes) The People vs. Goldman Sachs (Rolling Stone) A Crude Guess About The Future (Freakonomics) Is College a Rotten Investment? (Slate) The World’s 26 Best Cities for Business, Life, and Innovation (The Atlantic) On the Floor Laughing: Traders Are Having a New Kind of Fun  (The Atlantic) Gloom and Doom, and How to Profit From … Read more

How to Shrink the Deficit

by

It annoys me that Republicans argue against elimination of special tax benefits for anyone, calling it a tax increase.  Let’s get things straight here: tax increases are things that affect everyone. The tax code needs to be cleaned up, as do subsidies.  It is not the proper place of government to be handing out special favors.  If the Republicans want to do what is right they need to trade — eliminate a subsidy/tax break that some of their constituents like in exchange for eliminating a subsidy/tax break that the Democrats like.  Rinse, lather, repeat, until we are back to something … Read more

Inflation Speculation

by

When currencies do not serve as a long-term store of value, economic actors search for ways to preserve future purchasing power, which often mean purchasing commodities. But most commodities are not cheaply storable over long periods, so actors get forced into the few that do: gold, silver, etc. There is a problem here, stemming from dumb money. When dumb money shows up for purchase of generic “commodities” distortions follow: backwardation, large storage demand, and warped market incentives.

Eventually overproduction catches up, but the volatility when it breaks can be huge and self-reinforcing, with c0unterparties raising margin to protect themselves.  Extreme volatility causes exchanges to raise margin requirements substantially, which reveals which side of the trade is inadequately financed, which typically is the side that was winning, which leads to a reversal in price action.  The dumb money is revealed.

Now after a washout, the dumb money often assumes that powerful entrenched interests colluded against them to deny them their long-deserved free ride to prosperity through speculation.  The exchanges are in cahoots with the other side.  Well, no, the exchanges have two interests, which are solvency and transaction volume, which drives their profits.  Solvency is a more primary goal for an exchange, because the second goal can’t exist without it, and exchanges are not thickly capitalized.

Many different types of financial systems are subject to these risks.  Think of AIG: they were rendered insolvent by rising margin requirements as their creditworthiness was downgraded, largely because the rating agencies concluded they were going to lose a lot of money off of their many bets on subprime residential credit.  Think of all of the mortgage REITs that got killed as repo haircuts rose on all manner of mortgage-backed securities at the time that values for the securities were depressed.  Alternatively, think of Buffett, who entered into derivative trades where he received money and bore the risk, but his agreements limited the margin that he would have to post.

Read more