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The only question is, which countries are likely to erupt first?" Did hated speculators lower oil prices? 11/20/08   link Markets "Whither the speculators? They were this summer's front-page news, the subject of congressional hearings, editorials and nightly newscasts. The claimed culprits of oil's price rise, everyone fell over themselves to be tougher on them." Hank, let me help you help this great country 11/20/08   link Fun "By giving money to bankers who have made many stupid loans you have made life harder for bankers who have never made stupid loans. By aiding the dumb banks you prevent the smart ones from replacing them. It may be that just now smart bankers are the last thing we need -- but one day they may come in handy, and so we should do what we can to keep them from getting discouraged. Here's where I come in: I'm not a banker of any kind, but a mere writer. My little literary enterprise can absorb many billions of taxpayer dollars without consequence to the banking industry, or even to U.S. gross domestic literary output. If anything, other writers would have an opportunity to write more, as I, busy managing my new pile of cash, will naturally have no time to write." Patient Capital Q3 11/20/08   link Value Investing "The next several quarters are likely to be quite difficult but out of these difficulties will emerge the opportunity to create portfolios of great businesses that will offer the potential for a substantial return over the next five years. For the first time in a long time we are starting to feel excited about the returns available to the prudent and patient investor!" It's time to buy 11/20/08   link Dreman "First, do not flee the market by selling your quality stocks. Yes, it's the worst bear market since 2000--02, and stocks are trading at valuations not seen in decades, but equities will come back. Second, because credit is subject to unpredictable crunches and it's impossible to guess when this bear will end, don't buy on margin. Third, don't hold shares of companies that will need cash to expand or refinance. There is a good chance they won't be able to borrow." Treasury yields drop to record lows 11/20/08   link Bonds "Treasury yields declined to record lows, with two-year notes dropping below 1 percent for the first time, as global stocks slumped and a deepening recession drove investors to the safest assets. Yields on two- and five-year notes and 30-year bonds dropped to the least since the Treasury began regular issuance of the securities. Ten-year note yields touched the lowest since 2003 after yesterday's release of the minutes of last month's Federal Reserve meeting showed policy makers expect the economy to contract through the middle of 2009 and more interest-rate cuts may be needed to counter deflation." A sea of unwanted imports 11/20/08   link World "Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times. For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property." The new order 11/20/08   link Bonds "That marginal buyer is gone, and isn't likely to come back any time in the foreseeable future. Admittedly, it isn't as though leverage is being pushed to zero in the fixed income markets, but haircuts (i.e., the amount of margin that must be posted) are now such that levered buyers cannot force efficiency. Take something simple like Fannie Mae 5-year bullet bonds. Should have a very small spread versus Treasuries given the government backing of the GSEs, but instead the spread is currently around 1.45%. It seems like an arbitrage. But in order for an actual arbitrager to realize a decent IRR on the trade, it probably needs to be leveraged 20x or so. Now maybe one can actually get that amount of leverage versus Agency collateral, but what happens if the trade initially goes against you? The potential margin calls would kill you. Its a difficult arbitrage to actually realize." Complex and pricey 11/19/08   link Indexing "The fund holds a motley collection of 21 ETFs and fully three make up less than 1% of the portfolio. Compare the complexity of this fund with the simplicity of the ING Streetwise Balanced Fund, which has 40% in bonds and 60% split equally among Canadian, U.S. and other developed markets." We're not dead yet 11/19/08   link Value Investing "In our opinion someone who says quant equity investing has no future is basically saying that value and momentum will no longer work to pick investments. As we noted above we can see where people get this idea. Many investors using these strategies have had poor recent performance, and it.s clear that these strategies are no longer a secret. Although we can't 'prove' that quant investing has a future, we can demonstrate that quant strategies have had a successful long-term past - and that their recent performance is not inconsistent with this track record." Just say no to Detroit 11/17/08   link Government "Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998." The perils of efficiency 11/17/08   link Markets "The logic behind these reforms was simple: the market would allocate resources more efficiently than government, leading to greater productivity. Farmers, instead of growing subsidized maize and wheat at high cost, could concentrate on cash crops, like cashews and chocolate, and use the money they made to buy staple foods. If a country couldn't compete in the global economy, production would migrate to countries that could. It was also assumed that, once governments stepped out of the way, private investment would flood into agriculture, boosting performance. And international aid seemed a more efficient way of relieving food crises than relying on countries to maintain surpluses and food-security programs, which are wasteful and costly." Joe investor, the markets are all yours 11/16/08   link Markets "This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price." You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing." Bill Miller Q3 2008 commentary 11/14/08   link Miller "There is little dispute among knowledgeable investors that U.S. (and global) equities are extraordinarily attractive on a wide variety of measures based on historical standards. The worry is they may go a lot lower before they eventually recover, as the current crisis unfolds and as the economy undoubtedly gets worse. This worry is legitimate. After all, to most of us, stocks seemed quite cheap at the end of September, and now they are a whole lot cheaper. So what to do? The data indicate there is now a mountain of cash on the sidelines, enough in money market funds to buy about half the market capitalization of the S&P 500." How AIG got Uncle Sam over a barrel 11/14/08   link Stocks "The Treasury has secured crowd-pleasing concessions; for example limits on executives. bonus payments. But the real question is whether the preference shares are safe. AIG has a trillion-dollar balance-sheet. There is now a thin buffer of core equity between the taxpayer.s preference shares and any further losses. The hope is still that as markets recover, AIG can sell the crown jewels of its insurance business at a premium to book value. That may well take years. Plenty of time to reflect on how an offer of a temporary loan, to a company that barely made the list of systemically vital firms, spiralled into one of the biggest corporate bail-outs ever." Wall street lays another egg 11/14/08   link Markets "Not so long ago, the dollar stood for a sum of gold, and bankers knew the people they lent to. The author charts the emergence of an abstract, even absurd world - call it Planet Finance - where mathematical models ignored both history and human nature, and value had no meaning." The end 11/13/08   link Markets "Eisman wasn't, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. 'You have to understand,' Eisman says in his defense, 'I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit what it sold.'" A conversation with Bill Ackman 11/12/08   link Markets "Charlie Rose: A conversation with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP." As trouble brews, banks turn the screws 11/12/08   link Markets "In Canada, Judge Morawetz, an experienced former insolvency lawyer, balked. According to affidavits and reports submitted to his court, Circuit City had landed the life-saving DIP loan by effectively allowing a cross-border raid on its profitable InterTan division. Before handing over a penny to Circuit City, a syndicate of banks led by Bank of America insisted that the Canadian subsidiary pledge as security all the assets and property owned by its chain of 772 stores, known as The Source by Circuit City. On top of that, Circuit City was given the right to demand cash advances from InterTan, while banks were given extraordinary powers to .sweep the cash. of the Canadian branch at their whim after only five days advance notice." Et in Arcadia Ego 11/12/08   link Education "In short, private education in America spends money like a drunken sailor with Warren Buffett's credit card." [Some harsh language.] Buy CBS shares 11/12/08   link McElvaine "CBS has $40-billion in assets and is trading at a price/earnings multiple of five times. Mr. McElvaine began nibbling away at the stock last Friday and bought more on Monday, when the Canadian stock market was closed for the Thanksgiving holiday. As he sees it, CBS is in a number of different businesses that, combined, are worth at least twice what the stock is trading at." A scientific revolution for economics 11/12/08   link Economics "If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful or mathematically convenient. So many accepted ideas have been proven wrong in the history of physics that physicists have grown to be critical and queasy about their own models. Unfortunately, such healthy scientific revolutions have not yet taken hold in economics, where ideas have solidified into dogmas" Everything you knew about bonds and equities 11/12/08   link Markets "The broader picture is that this is the reversal of a 50 year relationship, one in which bond yields have been above equity yields. That trend is now about to be undone, by Edward.s estimation." The corn isn't green 11/12/08   link Markets "H.L. Mencken once remarked that there is a "well-known solution to every human problem - neat, plausible, and wrong." That quote comes to mind when considering the vocal group of neoconservatives, agribusiness lobbyists, and politicians that claims that the best way to cut American oil imports, and thereby impoverish the petrostates (and, in theory, reduce terrorism), is to require automakers to manufacture "flex-fuel" cars that can burn motor fuel containing 85 percent ethanol or methanol." Beware of fees 11/12/08   link Brokers "Insult is about to be added to the injury done to your investment portfolios in the past year. With the value of your account falling, you may find yourself paying higher commissions to trade stocks, as well as miscellaneous fees from which you were previously exempt. Not convinced on the merits of putting money into the markets right now, with share prices knocked way off their peaks of last summer? Now you have the additional motivation of being able to avoid parasitic fees by reinflating your depleted account." Upside of the down dow 11/12/08   link Graham "The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment." The crisis and what to do about it 11/10/08   link Markets "The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact - that the defect was inherent in the system - contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work." Shipping floored 11/10/08   link Markets "An industry once plagued by insufficient capacity now sees ships stuck idle at port. Shipping is in crisis. The Baltic Dry Index which measures shipping costs in commodities sunk to its seventh weekly decline this week to 829 points, and is down more than 93 percent since hitting a record peak in May." Fuld solicited Buffett offer 11/10/08   link Management "Fuld's failure to save Lehman, after rescuing it three times before, is a story about how the most indomitable man on Wall Street became addicted to leverage and intoxicated with the power it brought. It is a tale about the inability to repair a financial model wrecked by a lack of limits and transparency, a story pieced together from interviews with former Lehman executives and outsiders familiar with the firm. Isolated, surrounded by acolytes and unaware of the rivalries tearing his firm apart, Fuld was too prideful to accept the fast-eroding value of the empire he had built, too slow to cut a deal." Bonus jackpot can be yours in 5 easy steps 11/10/08   link Fun "If even the steelworkers union can parse the Wall Street doublespeak, the doublespeak has lost its power to persuade. Too many people know too many things. The problem of how to get paid on Wall Street must be radically reframed." You pay a high price for a cheery consensus 11/10/08   link Buffett "There may well be some period in the near future when financial markets are demoralized and much better buys are available in equities; that possibility exists at all times. But you can be sure that at such a time the future will seem neither predictable nor pleasant. Those now awaiting a "better time" for equity investing are highly likely to maintain that posture until well into the next bull market." I.O.U.S.A. 30-minute movie 11/09/08   link Debt "Wake up, America! We're on the brink of a financial meltdown. I.O.U.S.A. boldly examines the rapidly growing national debt and its consequences for the United States and its citizens. Burdened with an ever-expanding government and military, increased international competition, overextended entitlement programs, and debts to foreign countries that are becoming impossible to honor, America must mend its spendthrift ways or face an economic disaster of epic proportions." Time to ditch the style box 11/08/08   link Funds "Looking over the last 15 years, the style box is very correlated with itself. The lowest correlation is 75%, between largecap value and smallcap growth. That is not a reason to categorize managers; the difference between the average largecap value and growth manger is teensy. It is even true between largecap value and smallcap growth. And in more recent years, the correlations have been tightening to nearly 90% at worst." Investors lick wounds from dividend cuts 11/08/08   link Dividends "Thirty-six companies listed on Standard & Poor's 500-stock index have cut or suspended dividends 46 times in 2008, sucking some $33.3 billion from investors' pockets, according to Standard & Poor's. From that sum, $30.8 billion came from financial companies, representing 37 individual actions." Disappointing diversification 11/08/08   link Markets "We argue that it is no accident that the age of restrictive capital accounts also saw remarkably low equity market correlations. Cross-border diversification opportunities identified by early papers (Grubel 1968) were indeed 'too good to be true.' Once investors can take advantage of low correlations elsewhere, they will rise. Initial investors may benefit since liberalisations tend to be followed by capital gains (Henry 2000). Yet risks will not fall anywhere near as much as initially hoped, as the covariance with other stock markets inevitably increases. In this sense, the gains from international diversification are akin - at least in part - to a Fata Morgana. Investors may chase it, only to discover that it perennially disappears in the distance." Long-term opportunities amidst the fear 11/05/08   link Markets "This short essay covers three topics. First is a little perspective on recent events. Second are some thoughts on where we might go from here. And finally, a comment on the behavioral finance issues around what we are going through, with an emphasis on why it.s so hard to act in this type of an environment." Everyone's watching 11/03/08   link Behaviour "Markets work best when investors are thinking for themselves, and tend to go awry when the obsession with what everyone else is doing becomes a dominant concern. Maybe what investors really need is to periodically take a market-information vacation." How AIG failed 11/03/08   link Stocks "The lesson, of course, is simple, but hard to learn: it's not the risks you measure which bring you down, it's the risks you don't measure. But protecting against those risks is very, very hard." Challenging the crowd in whispers 11/02/08   link Shiller "I clearly remember a taxi driver in Miami explaining to me years ago that the housing bubble there was getting crazy. With all the construction under way, which he pointed out as we drove along, he said that there would surely be a glut in the market and, eventually, a disaster. But why weren.t the experts at the Fed saying such things? And why didn.t a consensus of economists at universities and other institutions warn that a crisis was on the way?" Stocks below net current asset value 11/02/08   link Graham "One of Graham's investment fund strategies, as explained in his best-selling book The Intelligent Investor, was to buy stocks that are valued at a discount to their net current asset value. Graham called such stocks "bargain issues." In other words, Graham would look for stocks whose current assets less total liabilities was worth more than what the stock was trading at. This meant that any plant, property and equipment, goodwill and long-term investments were free." Ben Graham then and now 11/02/08   link Graham "In mid-1932, almost precisely at the bottom of the Great Crash, Benjamin Graham turned up as a freelance writer in the pages of FORBES. He was later to be known as the father of value investing and as a mentor to Warren Buffett. But at the time he was the manager of a fairly obscure hedge fund. That fund, which combined long and short positions but was mostly long, was hurting. It had tumbled 70% from its 1929 high. (The Dow was down 87%.) Stocks had got too cheap, Graham pleaded. The fact that profits were vanishing almost didn't matter. You could buy companies for less than their net liquidating value. You got the goodwill and the factories for nothing." Cheap Japanese markets 11/02/08   link Graham "The Japanese market has been hit so hard this fall that some of its corporate titans are trading at prices that value guru Benjamin Graham would find to be bargains." The other reason for Warren Buffett's success 11/02/08   link Buffett "Since the end of 1988, Berkshire's stock portfolio has grown from $3.56 billion to $69.51 billion. That is a spectacular average annual increase of 16.5%, far surpassing the 10.5% annualized return of the Standard & Poor's 500-stock index. Of course, this calculation is only a crude approximation, since it ignores the cash that Mr. Buffett added in -- and moved out -- along the way. Over the same period, the growth in Berkshire's book value per share, which reflects all of Mr. Buffett's activities, not just his stock-picking, was 19.9%. In other words, Mr. Buffett's skill at picking publicly traded stocks pales alongside the value he has added to the company through other means." 'Tax event' may be next for bruised PPNs 11/02/08   link Derivatives "For a supposedly safe investment, there sure are a lot of risks associated with principal-protected notes. Tax changes being considered by the Canada Revenue Agency could, in the words of one issuer of principal-protected notes (PPNs), "have a material adverse effect" on these investments. And then there's the experience of the U.S. investors who hold PPNs issued by the once illustrious but now bankrupt Lehman Brothers. They're waiting in line to get paid along with other creditors." Dig a grave for those wretched PPNs 11/02/08   link Derivatives "I've called them the worst of both worlds - bad for equity investors and inappropriate for those seeking a predictable flow of income. And professional money managers would never buy one; the odds are stacked against them. I'm talking about principal-protected notes, or PPNs." Good riddance 11/02/08   link Bogle "In Berkshire Hathaway's 2005 annual report Warren Buffett offered the parable of the fictional Gotrocks family. Sole owners of corporate America, this huge clan sits back and collects the generous rewards of investing. Until fast-talking helpers arrive and persuade some family members to pay the helpers to try to earn more at the expense of other family members. But in total the family ends up with less. Why? Because the Gotrocks are now paying the helpers, thus diminishing the total return earned by all the businesses in their portfolio. Worse, the Gotrocks are now forced to pay taxes on the capital gains incurred as the helpers swap stocks back and forth. After several go-rounds with different helpers, the Gotrocks finally listen to an old, wise uncle who advises them to fire all the helpers and simply reap 100% of their investment gains themselves." All bets are off 11/02/08   link Markets "diversification has surely not offered the benefits most pension funds expected. Indeed, it may have had perverse results. In the old days, with equities trading at below-average valuations, funds would now be on a buying spree. They could afford to ignore the short-term risks because of the long-term nature of their liabilities. Pension funds thus acted as an automatic stabiliser for the market. This time round, that does not seem to be happening. One reason may be accounting changes which make pension-fund managers more focused on the short term. Another, however, may be the strategic drive to diversification. The Wall Street Journal has reported that CalPERS, America's largest public-pension fund, has been selling shares to meet commitments to put more money into private-equity firms." Bad vibrations 11/02/08   link Markets "The great deleveraging, as it has become known, has also had a big impact on the currency markets. Many investors have been following a version of the 'carry trade', borrowing money in a low-yielding currency. All they had to do was earn a higher return from assets than the cost of their financing. Since the two big currencies with the lowest yields over the past year have been the dollar and the yen, those were the natural ones to borrow. When asset prices fall, however, this strategy is disastrous. Investors dash to sell assets and repay their debts. Since those debts were incurred in dollars and yen, that means they have to buy back those two currencies - hence their sharp recent rises." World is 'drowning in oil' (again) 10/30/08   link Markets "Three months ago, the world was running out of oil. Seriously. I kid you not. Everywhere you turned, you heard whispers that the day of petroleum reckoning was at hand. Now there's too much oil, prodding OPEC to cut production targets for the first time in two years. Last week, the Organization of Petroleum Exporting Countries, confronted with the halving of oil prices since July, announced a 1.5 million barrel-a-day cut in output." New ETFs can serve as caution signs 10/30/08   link Indexing "There are many notable exceptions, but all too often an ETF's debut coincides with the moment when investors should be starting to think about taking profits in the area of the fund's focus. As is evident in the table below, this isn't a new phenomenon. In 1996, the incipient ETF industry was bolstered by the addition of a quartet of Asian funds. Just 16 months later, Asian currencies nosedived and stock prices throughout the region collapsed, kneecapping investors with double-barreled blasts." Channeling Graham and Dodd 10/30/08   link Klarman "Klarman assembled a who's who of prominent value investors - including Glenn Greenberg, David Abrams, Howard Marks and Thomas Russo - to write introductory commentary to each of the book's sections, drawing out the timeless wisdom in the original text and combining it with additional insight and examples relevant to today's market." Is buy-and-hold dead and gone? 10/30/08   link Markets "The evidence shows that most investors get it wrong over and over again. According to a study called the Quantitative Analysis of Investor Behavior by financial research firm Dalbar, over 20 years through the end of 2007, the average equity-fund investor earned an annualized return of just 4.5%, vs. the S&P 500's 11.8% return. Why? In large part because investors, chasing performance, shift money out of lagging funds and into hot ones at the wrong times. We buy high and sell low repeatedly." The man who beat the shorts 10/30/08   link Watsa "Born in India, Watsa graduated from the prestigious Indian Institute of Technology and moved to western Ontario in 1972 at age 22. Penniless, he lived with relatives while getting his M.B.A. from the University of Western Ontario and moonlighting at night selling air conditioners and furnaces. After taking over, and renaming, an underwriter of trucking policies called Markel, he added a dozen property and casualty insurers, among them the well-known New Jersey firm Crum & Forster and TIG Holdings, once part of San Francisco's Transamerica. Taking over management of the investments, Watsa produced (according to Fairfax) a compound annual return from 1993 to 2007 on its stock portfolio of 19.5% (versus 10.4% for the S&P 500) and on its bond portfolio of 10.1% (versus 6.6% for a Merrill Lynch bond index). One of his earliest backers--and later a friend--was famed investor Sir John Templeton, who died this year at age 95." A return to thrift 10/30/08   link Thrift "Sometimes it takes a near-death experience to change bad behavior. Think of your friend who quit Lucky Strikes after a coronary incident. Or look at how banks are reducing their dependency on debt after watching rivals go belly-up. On Wall Street this process of reducing debt relative to equity is called deleveraging. Main Street should be deleveraging too." Who's buying? 10/28/08   link Markets "Remember, when dealing with Mr. Market, fear is the cost of getting a good price. It looks very grim out there and it might get worse. But stock prices will reach their lowest when uncertainty reigns and expectations are at their lowest. Investors are currently very fearful and we think that it's time to get greedy." Home prices in 20 U.S. cities fall 16.6% 10/28/08   link Real Estate "House prices in 20 U.S. cities declined in the year ended in August at the fastest pace on record as more properties went into foreclosure before the credit crisis deepened this month. The S&P/Case-Shiller home-price index dropped 16.6 percent in August from a year earlier, as forecast, after a 16.3 percent decline in July. The gauge has fallen every month since January 2007, and year-over-year records began in 2001." Greasing the slide 10/27/08   link Markets "The great paradox of the sell-off, then, is that the factors that were supposed to increase the flow of information to investors, foster long-term thinking, and encourage contrarian positions did exactly the opposite. If there's a silver lining in all this, it's that investors who can endure past the present moment now have the chance to buy what at least look like very cheap stocks. Still, it's not surprising that investors have been unwilling to step up. It's hard enough to catch a falling knife. But it's nearly impossible when hedge funds are hurling it." Evil Wall Street exports boomed 10/27/08   link Derivatives "While the collapse was most visible in the stock markets, the cause was the loss of confidence in the world's biggest bond market, structured finance. So far, it has led to the worst financial crisis since the Great Depression, the disappearance or takeover of more than a dozen banks, including three storied Wall Street firms, and almost $3 trillion in government expenditures and guarantees to contain the contagion." Treasury may purchase stakes in insurers 10/26/08   link Government "The Financial Services Roundtable, a trade association of the 100 largest banks, securities firms and insurers, pressed Treasury to broaden its guidelines so that insurance companies, broker-dealers, automobile companies and institutions controlled by foreign banks could also sell stakes to the government." Why do markets create bubbles? 10/26/08   link Markets "Bubbles are like pornography: Everyone has his or her own opinion as to what qualifies, but it is impossible to pen a precise definition. If you wish to push the metaphor further, both are also fun for a while, if you like that sort of thing, but apt to end up making you feel deflated and embarrassed. Bubbles are also embarrassing for the economics profession. It's not that we have no idea what causes bubbles to form, it's that we have too many ideas for comfort. Some explanations are psychological. Some point out that many bubbles have been stoked not by markets but by governments. There is even a school of thought that some famous bubbles weren't bubbles at all." Qtrade retains crown 10/25/08   link Brokers "Now to the question of which brokers are best. Qtrade Investor, a small firm out of Vancouver, has taken top spot for the third straight year, while BMO InvestorLine, E*Trade Canada and TD Waterhouse also scored well. Qtrade is an example of a broker that does almost everything well. Whether it's keeping costs low, providing tools that help investors make smart decisions or offering a sturdy trading platform, Qtrade has it covered." Student loan fugitives 10/25/08   link Debt "When faced with unaffordable monthly payments and relentless creditors, some see leaving the country as their only way out." Realm of fantasy in credit insurance 10/24/08   link Derivatives "If you had a 100,000 car, what kind of world would it be where you'd consider paying 50 grand over five years to insure it? You'd either have to be such an appalling driver that you ought not to be on the road, or the world would be such a lawless and dangerous place that your 100,000 car should be among the least of your worries. We do not need the details of mathematical probabilities to see there is little sense in the idea of paying out insurance costs that are a huge chunk of the value of the thing to be insured. But that is exactly what participants in credit markets are being asked to do." The revival of railroads 10/23/08   link Buffett "Last April, Warren E. Buffett flew to Kansas City, Mo., to join Matthew K. Rose for a ride in a vintage 1930s railcar. Buffett, the billionaire investor from Omaha, and Rose, the chief executive of Burlington Northern Santa Fe (BN), munched on hamburgers and jelly beans as they chugged 430 miles up to Chicago. Along the way, they talked about Burlington Northern's unlikely turnaround and how the once-stalled railroad could build on its recent momentum." An axis in need of oiling 10/23/08   link World "In sum, Iran, Russia and Venezuela are all likely to be left short of cash - and facing a diminution in their international clout. 'Never confuse brilliance with a bull market,' goes a Wall Street saying. The leaders of the oily trio may have thought high oil prices were an adequate substitute for good governance. In many quarters, the difference is now painfully clear." The economy works 10/23/08   link Buffett "Buffett, speaking to California first lady Maria Shriver's Women's Conference in Long Beach, said he has no idea what will happen in the coming two years but was confident that over a 10-year span the stock market would outperform cash-based investments, such as certificates of deposits and savings accounts, which can lose value when inflation is subtracted from gains." Credit crunch humour 10/23/08   link Fun "I went to buy a toaster and it came with a bank . . . " Myths about the financial crisis of 2008 10/23/08   link Markets "The financial press and policymakers have made four claims about the nature of the crisis. 1. Bank lending to nonfinancial corporations and individuals has declined sharply. 2. Interbank lending is essentially nonexistent. 3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels. 4. Banks play a large role in channelling funds from savers to borrowers. Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false." Companies win, investors lose 10/22/08   link Accounting "The Canadian accounting standards board announced last week that they would let companies reclassify certain assets to delay reporting losses to investors. What happened was exactly what was warned about in these pages two weeks ago. Companies are being given more leeway to manipulate net income. In short, Canadian banks and insurers will report higher income than they otherwise could have in their forthcoming year-end reports." Montier: 'Analysts are rubbish' 10/22/08   link Montier "Seemingly everyone, on both sides of the Atlantic, is now taking about recession. Even Mervyn King. So why, asks SocGen's James Montier in his latest issue of Mind Matters, is the investment research industry still predicting earnings growth of between 12 and 15 per cent? He's got a chart to illustrate that analysts are exceptionally good at one thing and one thing alone - telling you what has just happened." Junk-bond yields bode ill for stocks 10/22/08   link Bonds "Unsurprisingly, yields in the corporate bond market have recently risen to nine-year highs and high yield, or junk bonds, are trading at record levels as well. Usually junk bonds yield 4.5 to 5 percentage points more than the 10-year Treasury, but now that spread is about 14 points." Russia and the crisis 10/22/08   link World "Dmitry Medvedev dreams of turning Moscow into a global financial centre, but he has an awful long way to go. For Russia.s markets have slumped. Even after recent one-day rallies, the dollar-denominated RTS index and the rouble-denominated MICEX index have shed around two-thirds of their value since mid-May (see chart). These falls are bigger than in any other emerging markets, dealing a blow to Kremlin claims that Russia is a safe haven from global financial turmoil." Rippling economic turbulence 10/22/08   link Taleb "As the financial sector shifts, so does the reach of the jolt to economic structures around the world. Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, speak with Paul Solman about chain reactions and predicting the financial crisis." Next likely bank failures 10/20/08   link Stocks "U.S. banks large and small are buckling under the pressure of the credit crisis. The Federal Deposit Insurance Corp. has seized 13 institutions this year, most recently Washington Mutual. The regulator, which maintains a list of "problem" banks, doesn't disclose which others raise red flags. But one measure, the so-called Texas Ratio, may offer a clue." Perspective on the bear market 10/20/08   link Hallett "The decline in stock prices triggered by the U.S. financial crisis has been frightening at times. Most shocking has been the sheer velocity of the decline, which rivals that of the crash of 1929. And despite a recent rally, there is enough bad news to push stock prices back down. But unless you believe the global economy will grind to a halt; I see five reasons why investors should be optimistic today." There are old-school investors ... 10/19/08   link Kahn "Market's panic 'not so new to me,' says 102-year-old disciple of Benjamin Graham. He and his son Thomas like such banged-up stocks as Pfizer and Bristol-Myers Squibb." The confidence game 10/19/08   link Grant "In the past two weeks, governments in Asia, Europe and the U.S. have effectively nationalized vast swaths of banking. Central banks have ramped up their money printing. In the past week alone, the Fed's balance sheet swelled by $179 billion, to a grand total of $1.77 trillion. In announcing such radical measures, intervening governments never fail to invoke confidence. They say they must restore it. Destroying confidence, however, is what governments do best. And the confidence they can restore is usually the kind that got us where we are today. Inflation and moral hazard led directly to the immense overvaluation of equities and residential real estate -- and of the bloating of the leverage that sustained those prices. Yet, to cure what ails us, credit creation and the public guarantee of banking liabilities are the policies today most favored." Home prices seem far from bottom 10/19/08   link Real Estate "Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession. In hard-hit areas like California, Florida and Arizona, the grim calculus is the same: More and more homes are going up for sale, but fewer and fewer people are willing or able to buy them. Adding to the worries nationwide are rising unemployment, falling wages and escalating mortgage rates - all of which will reduce the already diminished pool of would-be buyers." Take a deep breath, calm yourself 10/18/08   link Zweig "You can catch other people's emotions as easily as you can catch a cold. In an experiment by neuroscientist Elizabeth Phelps at New York University, people either watched someone else get a mildly painful electric shock or suffered the shock themselves. Their brain responses and their dread before the shock were highly similar in both cases, suggesting that seeing another person's fear is all it takes to make us afraid. Even encountering the circumstances under which the other person was shocked is enough to trigger your own fear. Viewed this way, today's financial markets -- in which tens of millions of investors watch each other's fears unfolding in real time on television and online -- constitute one giant panic-transmission machine." Keep your money in the market 10/18/08   link Markets "We will have a serious recession now, but a 1930s-style depression is highly unlikely. We will not let the money supply decline by 25 per cent, as we did in the '30s, and automatic stabilizers (like unemployment insurance) are now a significant element of fiscal policy. Don't forget that the US economy is still the most flexible in the world and our "innovation machine" is alive and well. No one has consistently made money by selling America short, and I am confident the same lesson is true today." Q3 2008 Oakmark commentary 10/18/08   link Value Investing "In fact, we believe the decline in the market has created a very attractive environment for investing new capital. For most people, the right question to ask after a big decline is: 'Should I be investing more?'" Whitman sampler of value stocks 10/18/08   link Whitman "Few investors in the market today are as bear-market-seasoned and savvy as Marty Whitman, 84-year-old founder of M.J. Whitman LLC, chairman and founder of Third Avenue Management and portfolio manager of Third Avenue Value Fund. Like Sam Zell, Leon Black and Eddie Lampert, Whitman's roots are in distressed-company investing." Concentrated value investing 10/18/08   link Value Investing "Mohnish Pabrai, the Managing Partner of the Pabrai Investment Funds, has outperformed market indices over the last nine years by consistently believing in concentrated value investing. Pabrai likes to hold fewer stocks positioned in industries that he understands well, paying attention to two key variables: the intrinsic value of a business and its current price." AIG: Europe's lethal loophole 10/17/08   link Markets "Before the financial crisis hit, AIG did a booming business in credit default swaps, complex instruments originally designed to protect lenders if borrowers fail to make debt payments. The biggest buyers were European banks, whose deals last year with AIG totaled a staggering $426 billion. But the banks didn't always buy the swaps as insurance against defaults - they often used them to skirt capital requirements." Buy American. I Am. 10/17/08   link Buffett "I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities." Former Vanguard guru is buying stocks 10/16/08   link Neff "In a small office in West Conshohocken, a legendary stock market bottom feeder has been having a feast. John B. Neff, who racked up record gains as manager of Vanguard's Windsor Fund over three decades, is buying stocks again." Repeal the Glass-Steagall act 10/15/08   link Government "I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010" [from 1999 ...] SEC agrees to accounting shift 10/15/08   link Accounting "The Center for Audit Quality, which represents accountants, said in a letter seven days later that perpetual preferred securities should be treated as equity because the holdings do not have a maturity date and 'the investor cannot recover its investment simply by holding the investment.'" Dimon, Munger, Rohatyn: No more vegas 10/14/08   link Munger "Munger wants Wall Street balance sheets reduced by 70% and insists that the firms "be a market maker, a broker, an underwriter and a custodian of securities but not the hedge funds they have become." He wants to restrict leverage to 50% on every securities transaction except for the Treasury trading desk where "you're dealing with the safest securities around." That 50% margin level, incidentally, is the maximum that ordinary investors can obtain from their broker when they purchase common stock. Before their respective demises, Bear Stearns and Lehman Brothers were leveraged to the tune of $30 of debt for every $1 of capital." Paulson urges banks to deploy capital 10/14/08   link Government "Treasury Secretary Henry Paulson urged banks receiving $250 billion in capital injections from the government to use the funds to spur economic growth. 'We must restore confidence in our financial system,' Paulson said in a statement in Washington. 'The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.'" Fear factor 10/13/08   link Markets "There have been, and are, plenty of reasons for investors to freak out: the failure of banks; the demise of institutions like Lehman Bros.; the necessity for repeated, spastic government interventions. Nearly every economic indicator in the past few weeks, from auto sales to employment, has been negative. The stock of General Motors sunk to its lowest level since 1950. Banks are refusing to lend to one another. The traditional safe havens of investment, such as municipal bonds and money-market funds, have buckled. The trumpets of leadership are so uncertain, they sound like kazoos." America for sale: price reduced 10/13/08   link Value Investing "At the depths of the 1973-74 bear market -- the worst of the post-war period -- when the Dow Jones industrial average was approaching its low of 577, Warren Buffett told Forbes magazine that he felt like "an oversexed guy in a whorehouse. This is the time to start investing." Buffett's words may have been indelicate -- Forbes ended up changing the world "whorehouse" to "harem" when the interview ran -- but the CEO of Berkshire Hathaway was on the mark because that era produced some of the best bargains of the past 50 years." Traders' worst fears realised at Lehmans auction 10/13/08   link Derivatives "Analysts say the amount of money that has to change hands could be more than $200bn. Some estimates put the value of outstanding credit default swaps on Lehman Brothers debt at $400bn, although some of these trades have already been netted out because some investors both sold and bought CDS contracts. Exact figures are not available because a CDS is a private contract and is not traded on an exchange, but the payout will certainly be the biggest in the 10-year history of the market." It's time to invest 10/13/08   link Markets "Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap." Think long 10/12/08   link Value Investing "It is also possible to see bargains at the individual stock level. Both BP and Shell have a dividend yield equal to, or higher than, their p/e: an old rule of thumb for value investors. True, the oil price is falling sharply, but shares in oil companies lagged well behind the crude prices when it was soaring to $147 a barrel." The market's silver linings 10/12/08   link Value Investing "Bolton's reasons for optimism aren't macroeconomic; the UK is almost certainly in recession for the first time in almost two decades. But he believes the high level of dividend yields compared to gilt yields, and the large cash positions in mutual funds and hedge funds, are good indicators that the market's fortunes may be about to change. "In some sectors, I'm seeing the lowest valuations I've seen in more than 30 years," Bolton says. He says he likes the look of the consumer cyclical sectors, such as the general retailers and media stocks. "Media has underperformed the market for the last seven consecutive years, and both [retail and media] are unloved by institutional investors [at the moment]," he says." How this bear market compares 10/11/08   link Markets "The current bear market is already among the worst in history. Here is how it lines up - in losses and length - with those of the lasy 80 years." U.S. will buy bank equity 10/10/08   link Government "U.S. Treasury Secretary Henry Paulson said the U.S. will buy equity 'as soon as we can' in banks and other financial institutions to restore market stability and revive economic growth." The new age of frugality 10/10/08   link Thrift "On a shady lane in New Hope, Pa., a quiet revolution in American culture may be taking shape. Here, a family of four lives in a white, colonial-style house in a manner that once would have been considered All-American but more recently has been seen as just plain weird: They're frugal." They warned us about the mortgage crisis 10/10/08   link Government "Some states, including North Carolina and Georgia, passed laws aimed at deterring rash loans only to have federal authorities undercut them. In Iowa and other states, mortgage mills arranged to be acquired by nationally regulated banks and in the process fended off more-assertive state supervision. In Ohio the story took a different twist: State lawmakers acting at the behest of lenders squelched an attempt by the Cleveland City Council to slow the subprime frenzy. A number of factors contributed to the mortgage disaster and credit crunch. Interest rate cuts and unprecedented foreign capital infusions fueled thoughtless lending on Main Street and arrogant gambling on Wall Street. The trading of esoteric derivatives amplified risks it was supposed to mute. One cause, though, has been largely overlooked: the stifling of prescient state enforcers and legislators who tried to contain the greed and foolishness. They were thwarted in many cases by Washington officials hostile to regulation and a financial industry adept at exploiting this ideology." Lehman credit-swap auction sets payout 10/10/08   link Derivatives "Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market." Defaults and a near-death experience 10/10/08   link Markets "It is a remarkable fact that the United States, despite having the largest, strongest and richest economy in the world, has--and has always had--a banking and bank regulatory system that is an irrational mess." We have the tools to manage the crisis 10/10/08   link Government "First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact. More important in existing circumstances is the clear determination of our Treasury, of European finance ministries, and of central banks to support and defend the stability of major international banks. That approach extends to providing fresh capital to supplement private funds if necessary." Eveillard proteges prowl for bargains 10/09/08   link Value Investing "The two, who hunt the globe for companies whose worth they believe analysts have misjudged, viewed International Speedway more as a media company. It's a classic page out of the playbook of value investors, something that comes naturally to de Vaulx and de Lardemelle, who worked for years under one of the best: Jean-Marie Eveillard." Buying the bargains in health care, energy 10/09/08   link Dorfman "Dorfman noted that drug-company stocks are selling at similar multiples to tobacco stocks, "and the last time I looked, tobacco stocks didn't save people's lives." After five years of being sold hard, Dorfman likes the look of pharmaceutical stocks, and he also is interested in metals and energy stocks because they soared early in the year and have now been hammered to bargain levels. Dorfman also suggested that investors avoid the "glamour premium" of gold stocks." Profit from panic 10/09/08   link Stocks "The "other Berkshire" is Fairfax Financial a P&C insurer headed by brilliant capital allocator Prem Watsa. Fairfax is about as close as you can get to investing in a company that does great in good markets and exceptionally well in disastrous ones." Fear and value 10/09/08   link Dividends "The trend of late is clear: yields are rising, dramatically so in recent months. European yields lead the pack at 4.93% at last month's close, based on S&P Global Equity Indices. The U.S., Asia Pacific and the developed world-ex-US are also posting substantially higher dividend yields compared to recent years. For reasons that need no explanation, however, investors are reluctant to avail themselves of these higher yields. For comparison, the yield on the benchmark 10-year Treasury Note closed out September 2008 at 3.85%." Why the ECB can't fix Europe 10/09/08   link World "The European Central Bank joined the United States Federal Reserve and other major central banks in cutting key interest rates by half a point on Wednesday in a concerted move to stabilize financial markets and avert recession, but the ECB's power to stem the financial crisis in Europe is limited, economists say." US open: happy anniversary 10/09/08   link Markets "There is still plenty of opportunity for financials to fall. Paulson and the US Treasury are coming under increasing pressure to follow the UK.s lead and recapitalise US banks. Paulson himself has said he thinks more banks will fail. Credit markets are still showing extreme stress. Commercial paper lending still has not normalised and interbank rates continue to widen. The TED and the Libor-OIS spreads are at all-time highs today." Iceland takes over Kaupthing 10/09/08   link World "'It's difficult to find any parallels to what's happening in Iceland in the industrialized world,' Jensen said. 'You'd have to look to emerging markets, and after the Asian crisis, for example, those economies contracted about 10 percent.' The debts of the Icelandic banking system are too big for the government to repay. 'There is no way that the Icelandic population can assume responsibility for the private debt' that the banks have built up, Haarde said yesterday." Central banks cut rates in coordinated move 10/08/08   link Government "The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point. Today's decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937" Fed to purchase U.S. commercial paper 10/07/08   link Government "The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations." 3% days becoming the norm 10/07/08   link Markets "Oh what we all wouldn't give for just a week of sub-1% moves! Over the last month (23 trading days), the S&P 500 has seen 10 days where the index rose or fell (mostly fell) by more than 3%. You have to go all the way back to 1938 to find another one-month period where there were this many 3% days. As shown in the chart below, there were many multi-year periods between 1950 and 2007 where the S&P 500 didn't have even one 3% day. If you're not a regular market participant and someone that is tells you we are experiencing something that hasn't happened since the Great Depression, they're not joking!" Warren E. Buffett braves a crisis 10/06/08   link Buffett "In the midst of a financial crisis, a towering figure of American business steps forward with his reputation and financial resources for public good and personal gain. Their times and personalities are vastly different, of course. But J. Pierpont Morgan's role in the Panic of 1907 has its echo in Warren E. Buffett's actions during the current financial troubles." Is junk a bargain? 10/06/08   link Bonds "The recent selloff has shocked junk investors, who had grown used to monthly returns in a range of negative 1% to positive 2%. Based on some statistical measures, September's 8% drop should have occurred only once in 27,777 years, according to Leverage World, a weekly publication of Garman Research." Pursuit of an edge 10/06/08   link Markets "This particular type of market failure occurs when two conditions are met. First, people confront a gamble that offers a highly probable small gain with only a very small chance of a significant loss. Second, the rewards received by market participants depend strongly on relative performance. These conditions have caused the invisible hand to break down in multiple domains. In unregulated housing markets, for example, there are invariably too many dwellings built on flood plains and in earthquake zones. Similarly, in unregulated labor markets, workers typically face greater health and safety risks. It is no different in unregulated financial markets, where easy credit terms almost always produce an asset bubble." Help wanted: compliance officer 10/04/08   link Crime "In these trying times, it will come as a great relief to many to learn that there will be at least one new hire on Bay Street between now and Christmas (2009). The subject of this post is a little unusual for PrefBlog, but I.m just trying to help out and spread the news of a vacancy. And besides, this is hilarious." Buffett: My fix for the economy 10/03/08   link Buffett "Warren Buffett suggested Thursday that the U.S. Treasury team with private investors to buy the distressed mortgage assets at the center of the controversial $700 billion Wall Street bailout, and said the price tag of the rescue plan may have to rise." Alarm led to action 10/02/08   link Markets "Behind the scenes, the credit markets had almost completely frozen up. Banks were refusing to lend to other banks, and spreads on credit default swaps on financial stocks - the price of insuring against bankruptcy - veered into uncharted waters. Moreover, the drain on money funds continued. By the end of business on Wednesday, institutional investors had withdrawn more than $290 billion from money market funds. In what experts call a 'flight to safety,' investors were taking money out of stocks and bonds and even money market funds and buying the safest investments in the world: Treasury bills. As a result, yields on short-term Treasury bills dropped close to zero. That was almost unheard of." Lehman bankruptcy gets ugly 10/02/08   link Stocks "It's looking like Lehman, contrary to the conventional wisdom, may have been too big to fail after all. And the fallout from the bankruptcy may further undermine investors. confidence in the financial system." This economy does not compute 10/01/08   link Markets "Certainly, markets have internal dynamics. They're self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market's optimism or pessimism. It's these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up. Really understanding what's going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings." Buffett buys GE preferred 10/01/08   link Buffett "General Electric Co. plans to offer $12 billion in common shares and billionaire investor Warren Buffett's Berkshire Hathaway Inc. will buy $3 billion stake of preferred shares." Cities are cutting back projects 10/01/08   link Government "Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening." A contrarian gets the last laugh 10/01/08   link Value Investing "Vito Maida says he's lucky. But he could just as easily say, "I told you so." More than four years ago, with stock prices roaring upward and a global real estate boom gaining pace, the Toronto money manager sat down to pen his thoughts on the markets, and realized that his views were out of step with the rest of the financial world." Canada may face housing bust: Shiller 10/01/08   link Real Estate "The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets as Vancouver and Calgary, said Robert Shiller, the Yale University professor who predicted both the 1990s stock market boom and bust and the US housing slump." U.S. home prices declined 16.3% in July 09/30/08   link Real Estate "The S&P/Case-Shiller home-price index dropped 16.3 percent from a year earlier, more than forecast, after a 15.9 percent decline in June." Corporate bonds worse than equities 09/29/08   link Bonds "Even though equity markets are down nearly 7% today, the corporate bond market is even worse. Below we highlight a price chart of an ETF that tracks an index of investment grade corporate bonds (LQD). As shown, the ETF is down nearly 10% today!"