Wednesday, September 30, 2009

Brits selling kidneys to pay off debt

Whoa, this kind of stuff used to happen in third world regions, exclusively. Nice to see that Times Online still has the courage to tell stories as they are, against Bernanke's late message of "recovery".

British victims of the credit crunch are offering to sell their kidneys for £25,000 or more to help pay debts... One person willing to sell a kidney is a 26-year-old mental health nurse who said he needed the money to pay debts after a business he set up went bankrupt. Another is a 43-year-old taxi driver from Lancashire, who wants to raise cash to pay off some of his mortgage and buy a new kitchen.

Of course, some of these folks got into so much debt due to reckless borrowing and spending. Past mistakes do not just go away, decisions result in consequences. What happened to the contingency plans? Or did they all have the same standpoint, "K, I'll just sell a kidney to pay it off some day, how bad could it be?" It's bad.

Monday, September 28, 2009

Global shipping decline 2009

The Canadians have the courage to uphold truth, instead of the "recession is over" rhetoric from American and New Zealand central banks. The credit contraction phase has not eased in any means, reality bites.

Sunday, September 27, 2009

More bank loan losses coming

US bank large-loan (>$20Million) losses have reached $53Billion USD in 2009, according to Yahoo Finance AP.

The report said total identified losses of $53.3 billion in 2009 surpassed last year's total of $2.6 billion, and nearly tripled the previous peak in 2002, when losses totaled $19.1 billion...

While the economic downturn was first pegged to residential mortgage loans, banks and lenders are now having problems with commercial real estate...

So... what about the derivatives like CDOs and CDSs riding on these loans? If a paltry $2.6Billion loss wrecked such havoc in 08, what the heck will $53Billion unleash, eternal damnation?!

Keep in mind the S&P500 remains quite over valued, PE ratio at Aug 31st 09: 129.19

Friday, September 25, 2009

NZ Recession over! (sarcasm)

Apparently, the same day that he declared the recession "technically" over, New Zealand bankers paraphrased it within the hour. I suppose this means that the escalating GDP decline is "technically" a sign of Happy Days returning.

... and that the unemployed folks are "technically" all just dirty liars.

Even the part time jobs have diminished. The question is then, why do the central banks want average folks to believe in a come back? More likely than not, the banks are preparing to take large short positions, and need liquidity from the "mom & pop" investors stupid enough to repeat the finance company mistakes.

Monday, September 21, 2009

Prime credit score= 50% more likely to default

Conventional thought concludes that folks with good credit score will likely struggle to keep making payments, and then reality hits creditors with "strategic defaults". It makes sense, those with adequate understanding of finance and discipline would find it desirable to transfer losses to lenders while sacrificing "credit".

The LA Times agrees with the below,

Research using a massive sample of 24 million individual credit files has found that homeowners with high scores when they apply for a loan are 50% more likely to "strategically default" -- abruptly and intentionally pull the plug and abandon the mortgage -- compared with lower-scoring borrowers.

* Homeowners with large mortgage balances generally are more likely to pull the plug than those with lower balances. Similarly, people with credit ratings in the two highest categories measured by VantageScore -- a joint scoring venture created by Experian and the two other national credit bureaus, Equifax and TransUnion -- are far more likely to default strategically than people in lower score categories.

* People who default strategically and lose their houses appear to understand the consequences of what they're doing. Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters 'are clearly sophisticated,' based on the patterns of selective payments observable in their credit files. For example, they tend not to default on home equity lines of credit until after they bail out on their main mortgages, sometimes to draw down more cash on the equity line.

Sunday, September 20, 2009

Smaller class advantages

Sometimes higher rated schools do not necessary guarantee satisfying college/university lives. Due to smaller classes, the administration folks at School of Computing & Mathematical Sciences, AUT, have provided personalized and productive experiences for everyone.

Interaction and enthusiasm

It allows students to interact much more freely and timely with each other, and the professors. This means more active participation, no more one-sided lecture and furious note taking drills. Reducing boredom, the whole learning thing becomes that much easier.

Social perks

Due to the frequent dialogues between students and professors, everyone has a better chance at making new friends and connections. Having friends in the school administration means timely scholarship application information, potential course changes, and maybe even casual campus or outside job offers. It is all quite rewarding.

Higher marketing spending does not mean better experience

I have met some people who had attended Auckland University, and found the experience unsatisfying, largely due to packed classrooms, tedious lectures, having little direct contact with professors, and etc. Sure, some schools have awesome reputation and it means little if they offer nothing but dry, mind-numbing talks.

Unconventional as it sounds, schools with smaller enrollees could present better learning experiences because the management (potentially caring) folks are capable of taking things from a ground up level. Instead of some statistic at a massive university, it feels nice to study at a smaller campus, and treated as a unique individual.

Saturday, September 19, 2009

Credit crisis humour

Yep, gotta put on that smile!

Tuesday, September 15, 2009

Nassim Talen on quantitative risk

Author of the very informative. The Black Swan, comments on the banking industry.

Basic summary: Value at Risk, known by many professional traders, utterly ignored by large banks due to consequential socialist, bail out efforts.

More comments on stimulus packages and free markets.

Friday, September 11, 2009

Corporate insider selling climbs

CNN Money mentioned this today.

'It's not a very complicated story,' said Charles Biderman, who runs market research firm Trim Tabs. 'Insiders know better than you and me. If prices are too high, they sell.'
Interesting how mainstream news hasn't stressed this little noteworthy detail. Sooner or later, volatility will jump again.

Tuesday, September 8, 2009

Slight-Edge Butterfly Effect

Roulette, with a paltry 1/37, or 2.7% edge, makes casinos serious profit over time, financial trading sits on very similar ground. Having a statistical edge does not necessarily result with positive expectancy, though it definitely helps. This calls for an empirical test.

Empirical analysis

Forecast Model- Multilayer Perceptron Neural Network

Input/Predictive Variables- Various commodity and Dow Jones indexes

Output/Dependent Variable- Next Day Return of the S&P500 Index (Next Day Open price – Next Day closing price)

Training Period- from Jan. 2002 to Jan 2005

Test Period- from Jan 2005 to Aug. 2009

Focused only on next-day direction, the predicted values offered a winning rate of just about 54%. Keep in mind this stands quite superior to the roulette casino edge. Then out of curiosity, I wanted to see how hypothetical trades off these forecasts would have resulted, basically buying/shorting at the open and liquidating positions at the NYSE close. Virtual trading equity starts at 1, or 100%, and would compound daily, winning or losing. See chart below.

I know- it’s pretty cool, 400% plus return in roughly 4.5 years. It also appeared that the mid 2007 volatility jump pushed performance up tremendously. This brings the thought that maybe with volatility based position size adjustments; return over time could become smoother and even higher. Imagine what a higher hit rate could achieve…

Credit ratings incentive-based. Surprised?

It has been pretty obvious that subjective credit ratings offer little real confidence, they simply lag behind markets. Now the plot has thickened, and appears more than simply utter incompetence.

Washington's Blog pointed out some interesting details,

Employees at Moody's Investors Service told executives that issuing dubious creditworthy ratings to mortgage-backed securities made it appear they were incompetent or "sold our soul to the devil for revenue,'' according to e-mails obtained by U.S. House investigators.

This instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal ... :

Official #1: Btw (by the way) that deal is ridiculous.

Official #2: I know right...model def (definitely) does not capture half the risk.

Official #1: We should not be rating it.

Official #2: We rate every deal. It could be structured by cows and we would rate it.

Issuers will would pay more money for a good rating than a bad one, and issuers are very clear what kind of ratings they want. This is a straight-forward way to pay bribes without ever violating the law


Oh and as a bonus,
One of the untold scandals of this country is that our museums are stuffed with fake old masters because the people who authenticated paintings for the Mellons and Morgans of this world were paid a percentage of the price for the authentication.

Moral of the story- "Fair" games do not exist in real life.

Saturday, September 5, 2009

Innovation investments hold more risk

According to Warren Buffet (The Snowball), while technological novelty has advanced mankind in general, its investments usually end badly. He mentioned some empirical evidence of this at a private talk, from cars to airplanes.

Cars and planes

They are no doubt a couple of seriously significant inventions from the last century. Around 2,000 car companies existed at one time, and out of those, only a handful (Ford and sort of GM?) stands today. The rest have pretty much all gone belly up, taking shareholders down (enriching short sellers).

No single air travel business has generated greater-than-actual-rate-of-inflation returns for its investors, notably the ones who have gone bankrupt. Given that business schools, parents, and TV preach creativity, industrial revolutions and stuff, naturally the question comes, “what gives?”

Good ideas still have limits

Management conflict of interest, miscommunications, competition, idealistic albeit inadequate budgeting, are but some profit making hurdles an innovative product/service idea itself can not overcome. Another point from Buffet, as these “new technology” firms push for esoteric products/services, the complexity in estimating their actual, intrinsic value does nothing but increase UNCERTAINTY.

The negative correlation between VIX and major stock indexes advocates that uncertainty leads to price drops. It is pretty clear cut, and again mainstream belief took the wrong side.

Wednesday, September 2, 2009

More physicists getting on the financial engineering ride

Physicists successfully predict stock exchange plunge

Their model, which employs concepts from the physics of complex atomic systems, was developed by Didier Sornette of the Financial Crisis Observatory in Zurich, Switzerland, and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai. The idea is that if a plot of the logarithm of the market's value over time deviates upwards from a straight line, it's a clear warning that people are investing simply because the market is rising rather than paying heed to the intrinsic worth of companies. By projecting the trend, the team can predict when growth will become unsustainable and the market will crash.

A "logarithm of the market's value..."? What the hell does that mean?

It's old news. The books My Life as A Quant and The Predictors (1999) had already given us a glimpse of how advanced mathematics, paired with the right brain, could result in very profitable market inefficiency exploitations. In fact I do research in the same field, hmm...