Article by Bill Gross

A good article by Bill Gross. He seems pretty bearish on gov't debt, which is rare for bond guys.




Rocking Horse Winner [PIMCO]


Of most concern:
" In the U.S. in addition to the 10% of GDP deficits and a growing stock of outstanding debt, an investor must be concerned with future unfunded entitlement commitments which portfolio managers almost always neglect, viewing them as so far off in the future that they don’t matter. Yet should it concern an investor in 30-year Treasuries that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures (Social Security and Medicare primarily) was $46 trillion as of 2009, a sum four times its current outstanding debt? Of course it should, and that may be a primary reason why 30-year bonds yield 4.6% whereas 2-year debt with the same guarantee yields less than 1%.

The trend promises to get worse, not better. The imminent passage of health care reform represents a continuing litany of entitlement legislation that will add, not subtract, to future deficits and unfunded liabilities. No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer as asserted by Democrats and in fact the Congressional Budget Office. Common sense alone would suggest that extending health care benefits to 30 million people will cost a lot of money and that it is being “paid for” in the current bill with standard smoke, and all too familiar mirrors that have characterized such entitlement legislation for decades. An article by an ex-CBO director in The New York Times this past Sunday affirms these suspicions. “Fantasy in, fantasy out,” writes Douglas Holtz-Eakin who held the CBO Chair from 2003–2005. Front-end loaded revenues and back-end loaded expenses promote the fiction that a program that will cost $950 billion over the next 10 years actually reduces the deficit by $138 billion. After all the details are analyzed, Mr. Holtz-Eakin’s numbers affirm a vigilante’s suspicion – it will add $562 billion to the deficit over the next decade. Long-term bondholders beware."

America's AAA Rating in Jeopardy

Hmmm...weird, who would think after adding a couple trillion to our national debt our rating would be in jeopardy??





S&P issues warning over America's top-tier rating [Financial Times]

Mark Madoff: Back in the Game

I'm sure we all feel bad for him:




Mark Madoff: Back in the game [Dealbreaker.com]

Happy 1st Birthday

Happy 1st birthday to this Bull market. It was exactly 1 year ago today that we hit the diabolical 666 on the S&P 500. Today intraday we are at 1142.

What a difference a year can make:
* The VIX was 50, not 17.
* The yield on the 10-year Treasury note was 2.9%, not 3.7%.
* The budget deficit was $900 billion, not $1.5 trillion.
* Baa spreads were 540bps and tightening, not 260bps and widening.
* The market was 20% ‘cheap’ as per Shiller P/E ratio, not 25% overvalued.
* Oil was at $47/bbl, not $82/bbl.
* Equity PM cash ratios were at 5.5%, not 3.6%.
* Market Vane bullish sentiment was at 32%, not 53%.
* Real GDP was -6.4%, not +5.9%; and the ISM was 36, not 57.

These people run our country??

Footage of Ben Bernanke testifying and getting "grilled" on monetary policy by Maxine Waters. Bernanke has to sit through this and actually answer these questions? Can't they just send a high school senior to answer these?

It's scary that people with this little monetary knowledge are helping to run the country. No wonder we are where we are.






I'd hate for the 25bps increase in the discount rate to affect mortgage rates...

Goldman Sachs Daily Trading Revenues

Here are the charts of the daily revenues made by GS trading.

Totals (Both Q3&4 - 134 Trading days):

Days over $100MM: 38%
$75MM -$100MM: 14%
$50MM-$75MM: 15%
$25MM-$50MM: 18%
$0-25MM: 8%
$(25)MM-0: 6%
$(50)MM-$(25)MM: 1%

I think I would take those odds, this begs the question...has the easy money already been made?

Quarter 3:


Quarter 4:

Variable Annuities: Death Pay

So here's a new scheme that may seem morbid, but actually works: Investors Recruit Terminally Ill to Outwit Insurers on Annuities (from WSJ)

In short, the investor pays the terminally ill to enter a V.A. (i.e. $2,000) and then the investor puts $1,000,000 into the annuity, which pays the beneficiary after the terminally ill person passes away. Worse case scenario the investor loses $2,000, best case is infinity return, as the VA is guaranteed to pay the initial $1MM at the time of death.

Wall Street meets The Strip?

Article about sports betting and bond market techniques, and how they are coming together to form live sports beting using bond market risk management techniques.


Cantor Fitzgerald Takes Wall Street Trading Software to Las Vegas - WSJ.com

University Endowment Losses

CNBC had a list of the Largest 2009 Endowment Losses (out of the 250 largest universities):

15. Principia College: -28% ($206 MM)

14. Univesity of St. Thomas : -28.16% ($98.8 MM)

13. Florida State Univesity: -28.22% ($161 MM)

12. Yale Univesrity: -28.6% ($6.5 B)

11. Fuller Theological Seminary: -29.1% ($123 MM)

10. Carnegie Mellon: -29.4% ($313 MM)

9. Harvard Univesity: -29.8% ($10.9 B)

8. Farnklin W. Olin College: -30% ($141 MM)

7. Bates College: -31.2% ($83 MM)

6. Samford University: -31.22% ($96 MM)

5. Ithaca College: -31.7% ($75 MM)

4. Regent Univesrity: -31.9% ($87 MM)

3. Baylor College of Medicine: -33% ($360 MM)

2. Syracuse University: -33.2% ($327 MM)

1. Haverford College: -35.5% ($185 MM)


As a Portfolio Manager, this makes me feel good about what we are doing. In 2009, we had a great market rally, and even the smartest of people predicted it was going the other way. In 2009, none of our portfolios that we run lost money, yet these teams were losing 1/3 of theirs.

Regulations

This from the Upside Trader:

"Maybe oil companies are next because they make too much loot or maybe some of the food companies will get levied because they are putting too many chocolate chips in their cookies. The markets hate regulation of any kind, they especially hate regulation on a sector that we just threw hundreds of billions at to try and save and then months later try and tear down. Counter intuitive at best. It causes confusion, markets hate confusion."

The January Indicator

This is a chart of the January indicator. This theory hypothesizes that when January finishes in positive territory, and vice versa. I do not buy into this theory whatsoever as there are many other factors that drive markets. If you look back at the last 10 years 6 time the theory has held true, 4 times it hasn't. Now looking back further, it seems as though it is right more often, but I think it is wise to only consider the recent pieces of data, as those are the economic conditions most similar to ours today.

Which Default is more Troublesome?

Lots of talk about Greece's debt problems, which would you rather have?

Reasons for Unemployment

We all know those people that got laid off and now choose to stay at home, not looking for a job, or becoming a mother, but still technically (as the numbers go) unemployed. This charts breaks down the numbers behind unemployment.

Earnings: Looking good?

So far earnings this quarter have been looking great considering our environment, right?

Wrong. While the bottom line of net profit may be looking tasty and better than it has in a long time, that is due to the cutting of jobs. We need remember that among this media spin of good profits, is the fact that the top line items (sales) have been shrinking.

Just a reminder that it is good to look at the company's financial position, and how they got there, not just the bottom line.

Here's is a little piece from The Reformed Broker:

I run a fairly sizable brokerage and advisory business. I could fire my staff and cut off the research products I subscribe to and only commute to work 4 days a week instead of 5 and stop wining and dining prospective clients and drop the amount of states I do business in to lower registration fees. And yes, my take home pay would look much improved at first. But then what? How can I grow my book of business if I've gutted it of the raw materials and resources it needs to get bigger?

The answer is I cannot, and as my revenues decline, my juicy margins from all that expense trimming are sure to fade along with them. And then no one is happy, especially not the wife or her salesgirl at Bloomingdales.

The meeting of temporary profitability targets may earn execs their bonuses and make for good headlines, but at some point, you aren't aren't just cutting fat - you're chopping into the muscle itself that you need to walk the next mile.

Stupid Things We Hear

Courtesy of the Reformed Broker, here is a list of stupid comments he has heard recently, and it all sounds too familiar...

Some stupid s&%# I've heard recently from some of the market participants I (am forced to) talk to...

"The Vix is dead, it should to be delisted."

"As long as China wants to keep buying up all our debt, I wonder if they'd like to take a look at my latest Discover Card bill."

"Why can't we just bring back Clinton and Greenspan, then everything will be cool again, like in the 90's."

"Yeah but I heard on CNBC that Wal-Mart and TJ Maxx are doing well, so the consumer must be recovering."

"I don't understand why people don't just put 100% of their portfolios in emerging markets and metals? All they do is go up everyday, duh!"

"So what they laid off 70% of their workforce, beating earnings is beating earnings!"

"I don't want to load up on BBB paper, but the Fed is basically forcing me to."

"If you just read John Thain's resume and see Goldman VP, head of NYSE, CEO of Merrill and you ignore all the news articles about him, he's actually overqualified to lead CIT."

"Can I switch my direct deposit to just go into GLD instead of my bank account?"

"I can't wait for the Facebook IPO, how many shares do you think each member is gonna get? Will it go by how many friends you have?"

At Least We Have Our Priorities Straight...

We may not have jobs, but we have iPhones...Is there an app for jobs?

Yield Curve Record

Today, the yield curve hit a record. At 380 basis points, which incidentally was the widest spread between the 2 Year and the 30 Year ever, it has never been easier for banks to make money on the short-long interest spread.

This isn't necessarily a bad thing. The quick reaction to a steepened yield curve is to buy equities. Banks can now loan more money. So a steepening yield curve in theory helps to boost the debt and equity markets.


-Image Courtesy of Zero Hedge

Your Friendly Reminder

The last 3/4 of 2009 were awesome and we've really been having a great run up in the market, but from The Reformed Broker comes a friendly reminder that we could also turn down at any point, and quick. Just look at the recent run up and what has 'triggered" them:

Here are some features of the recent anti-gravity stock market:

* Bad employment number - stocks go up
* Good employment number - stocks go up
* Sovereign credit default - stocks go up
* Sovereign credit downgraded to junk - stocks go up
* Hawkish Fed speech - stocks go up
* Dovish Fed speech - stocks go up
* Hawkish Fed minutes released - stocks go up
* Dovish Fed minutes - stocks go up
* Treasury auction goes well - stocks go up
* Treasury auction goes poorly - stocks go up
* Crude oil and other raw costs rally - stocks go up
* Crude oil and other raw costs sell off - stocks go up
* Banks report earnings - stocks go up
* Banks dilute their shareholders back to the bronze age - stocks go up
* CES preview captures our imaginations - stocks go up
* CES becomes a joke with 3D TV and a $2300 battery-powered bike - stocks go up
* The weather is unseasonably warm in November - stocks go up
* The weather is Antarctic across the country, Black Friday is snowed out - stocks go up
* Stimulus plan is roundly criticized as wasteful and irresponsible - stocks go up
* Talk of a yet another stimulus plan begins - stocks go up

Ladies and Gentlemen, We Are Trading on the Moon- The Reformed Broker

Hedge Fund Managers, Nothing more than Major Index Huggers?

An interesting article was just released showing that in 2009 on average hedge funds returned 24.6% where the S&P 500 returned 26.5% in 2009. Now the thing to keep in mind is these are the Hedge Funds in the Hennessee Hedge Fund Index. the index is made up of about 1,000 funds calculated on an equal weighting, so by no means does this mean that all hedge funds were directly correlated with the S&P 500 in 2009.

I NEVER agree with just comparing anything to a single major broad market, as I feel risk mitigation is also essential in designing a portfolio. If you were in only the S&P 500 in 2008, you would have lost nearly twice as much as the Hennessee Hedge fund Index.

So if you had 100,00 to start 2008 an "Investor A" put it into the S&P 500 it would have lost 38.5% in 2008 then gained 26.5% for and ending value of about $77,797.50. "Investor B" put their money into the Hennessee Hedge Fund Index which lost 19.83% in 2008 then gained 24.6% in 2009 for an ending value of $99,921.72. Point being, limiting your downside risk is important as well, I would never recommend just putting all your money into any single index.

Just some interesting food for thought.

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