Saturday, November 29, 2008

S&P yield > 10year Treasury

Source: Bloomberg Apparently this hasn't happened since the 50's. While many analysts would recommend this a signal to buy, investors should keep in mind that the economics still suggest things will not likely get better in the near term future.

Some coming problems yet to unfold include but are not limited to:

1) Commercial real estate bubble
2) Credit Default Swap liabilities
3) Lehman Brothers' victims on the verge of collapse
4) Consumer debt bubble
5) Unprecedented national debt levels for the USA and England

Friday, November 21, 2008

A century of returns

One of the books I'm working through this moment, Quantitative Financial Economics, has a chapter (4) on stock returns. It starts off with a distribution of S&P500 monthly returns for the period from Feb. 1915 to Apr. 2004.

I can't post the graph here since I only have the physical book, but I will state the obvious points suggested by the century long return distribution.

Returns have a negative skew- Heteroscedasticity (volatility) usually increases as prices decline. The left side reashs -0.15 while the right hand side dies off at roughly 0.13.

Volatility is conditionally autoregressive- When volatility is high, it tends to stay high for some time, and simlary for low volatility periods.

Now we can see how the market functions to extract wealth from the uninformed investors. The slow and minimal upside returns lure them in, then the sharp corrections blow their accounts and transfer their wealth to those on the other side of the trades. It's a good system, as long as you're not the patsy.

Wednesday, November 19, 2008

About Warren Buffet

Warren Buffet does not run charity organizations, therefore he would not reveal his core investments intentionally. The buying action with Berkshire Hathaway, all talked about throughout financial media, were meant to bring in some optimism amongst public investors.

It is possible that the US government had influenced his purchases. No seasoned trader/investor would make upside bets with this economy except for very good reasons. The repercussions have begun to surface, CDS (Credit Default Swap) values insuring the $40B BRK credit risk has increased to the point of implying just above junk status rating.

Source: Bloomberg media

Thursday, November 13, 2008

About critical thinking

Intelligence defined today has become irrelevant with the ability to think critically. This is tragically unfortunate. I spent the afternoon discussing this with Darryl, a friend from University of Auckland. He’s probably what some would call a modern day philosopher, and at times makes some very good points, and questions.


Why do people knowingly make self-sabotaging decisions? Spending beyond ones’ means, making upside bets having learned business/economic cycles, or stuffing themselves brownies understanding potential health/appearance challenges come to mind. Even the supposed “intelligent” and educated men fall for these scenarios, so what is going on?

The lazy mind

Sure, thinking takes energy, especially when digging for rare and practical information. The negative consequence of an idle mind i.e. allowing external influences, delusions operate effectively, could easily destroy everything built over a life time.

A few acquaintances had lost life savings from little-understood investments. I remembering having suggested they do some research and not risk any money until the potential risks/rewards are figured out, and they simply brushed it off. Expectedly, to this day they blame it on luck to avoid personal responsibility.

The simple cure

A bit of research alongside logical, objective thinking could make one practically immune to many of today’s living denials and misconceptions, and have odds swing in favor of desirable solutions. I suppose sometimes thinking simply leads to more questions, but at least it gives you a shot at finding some real answers.

Why do stock brokers avoid the subject of credit risk? Why do people study majors knowing they eventually must compete with third world nationals who do the same work for literally cents on the dollar? Why do so many people choose to live as mindless drones?

Wednesday, November 12, 2008

IOUSA concise version

This presents a pretty clear picture of America today, sadly not many Americans wish to understand it.

Saturday, November 8, 2008

US banks deeper in red

This is getting quite serious. For the first time, US banks' Nonborrowed reserves dipped below 0 since January 08.

US Bank Nonborrowed reserves (Sept. 08)

-$187.305 Billion

Then the $700B bailout (actually $850Billion, but who's counting?)

Today (Nov.) it's at
-$259.385 Billion

while the Fed based requirement sits at $52.272 Billion

Source: The US Federal Reserve

The tax payer Wall Street handout didn't seem to "rescue" much, or am I missing something?

Friday, November 7, 2008

US retirement accounts risk confiscation

Dems Target Private Retirement Accounts

This is simply horrifying. The US government looks to take (by force) private 401k and IRA funds and turn them over to the management of the good old social security people.

The artificial incentive would come out as "saving" the Americans from losing retirement accounts from further losses. Of course it has to sound noble, for the US government would never want to exhibit an image of tyranny.

The US national debt has become so incredible, yet nobody wants to honker down and pay the bills. Well sooner or later, something's gotta give. The intelligent Americans are fighting this, imploring the government to cut spending and start paying off debt, yet the uninformed ignorants still make up the majority. Was any of this unexpected, I think not.

Tuesday, November 4, 2008

Stock survival rate

I've been going through NNT's The Black Swan again, found something worth mentioning here.

Out of all companies making up the S&P500 since the 60's, only 75~ remain in the index in 2007. The rest (425, or 80%ish) had either withered incredibly or gone belly up. Why did the index keep rising? Inflation, and constant replacement by better performing businesses.

What does that suggest about taking upside bets in the stock market? Didn't we all learn about the business or economic cycles? I define gamblers as those who participate in a losing game. The edge sits against the uninformed, upside investors. Therefore, if you buy & hold (& hope), you're simply gambling.