Charles N. Bressel, Ph.D

Charles N. Bressel, Ph.D
Contributor since: 2008
Company: Bressel Associates - Financial and Physical Systems Engineering Modeling and Simulation
I want to thank the author, and those who commented, for your wonderful insights and ideas!! I do have some questions.
Would it not be appropriate to consider the net rate of return to include the yearly loss in stock price as well as the dividend? The effective yield on those of my shares of AT&T that I purchased in 2014 has been negative. That's worse than fixed income investments right now. (I have not owned bonds for a number of years.) If, as has been suggested, the secular trend were to continue to be negative at a rate close to or exceeding the dividend, that is not a happy thought for retirees, including me, who want to maintain their assets as well as generate income from them.
One commenter sees the secular trend as possibly reversing to the positive if AT&T's focus on The Americas pays off. I wonder how solid is that expectation? In addition, Google's entry worries me. Does anyone see a way to perform a risk analysis on that?
Perhaps a sounder approach, as some comments noted, is to not purchase AT&T shares on dips, but to direct those purchases to content providers like Disney and Discovery. (I know nothing about Discovery.) What about Netflix as a proven content provider? They are seeking to establish a pipeline of new content offerings each year from now on. Does anyone you respect cover Netflix?
I suppose one could establish an optimal asset allocation between content providers to net income (dividend minus secular loss) providers. Has anyone done that or is planning to do so?
Again, my thanks to you all for this illuminating discussion, and best wishes for the new year,
@Michael Blair:
Thank you for pointing out these facts in your valuable article. As an Apple shareholder, this scenario, which would indicate a drop in the price of Apple shares, is quite worrisome. I would like to see some assessment of the probability that either Apple's share will grow beyond 50% or that Apple's sales volume will increase due to the new China market deal. I wonder if that is possible without just waiting to see how things play out.
A few days ago, before I saw your valuable article, I sold some of my Apple shares. My reasons for selling were to mitigate risk. To my mind, Apple wasted money on share buybacks instead of making intelligent acquisitions. Icahn seems to have frightened management and the board into that nonsensical behavior. These are people, and they are not perfect. They do seem to be too timid...
I did not sell all my shares because I cannot rule out the possibility of some good news. However, preventing likely short term losses is a good thing. I need to reduce risk. If and when some good news is revealed, either as a new product or increasing sales in China, it seems likely that I will be able to buy back shares close to or slightly above current levels. I would not be unhappy with repurchasing at somewhat higher levels once I see a rosy future beginning.
The announcement of a new product would be sufficient reason for me to repurchase my sold shares and some more in addition.
I find your comment very interesting. Your point is more widely applicable than just to China. I can understand that in many parts of the world, an iPhone is a more affordable luxury to many people who could not aspire to a house or a car. The idea that one goes for one top-of-the-line item or group of items, like Apple's smoothly integrated products, is true here in the US as well. I prefer to stick with Apple as much as possible. I did buy one of the first Macs for its enjoyable features, even though I had a PC at the time. I have preferred most Apple products over the years, though I did buy other companies' products from time to time. I generally stick with Apple because I prefer Apple's ecosystem.
Here are some excerpts from an article in yesterday's WSJ.
“I think what investors are focusing on and has been driving the stock over the past couple weeks is renewed optimism about a couple issues at the company,” CreditSights analyst Rob Haines said in an interview.
He said the outlook for the sale prices of AIG businesses has gotten better along with the improving market, and it appears businesses are beginning to stabilize.
“One quarter doesn’t mean a trend, but if you look at the last quarter’s numbers, to me and to a lot of investors, it appears the cratering in the business units, the exodus of employees and the difficulty placing business has subsided to an extent,” Mr. Haines said, adding part of that is because AIG hasn’t been in the headlines as much as it was.
He also said AIG has been rolling off its swap books as expected, and he believes if there was going to be a “cratering” in the swap books, it would have happened a couple quarters ago.
“The fear of need for another government bailout or something extremely dilutive to shareholders is diminishing,” Haines said. “As the value of business units increase, the likelihood for some equity holders in turn increases. … It appears to myself and a number of investors that there is going to be residual value for equity holders.”
But he cautioned how much that value will be is up for debate...
To me the most significant point is that
"AIG has been rolling off its swap books as expected, and he believes if there was going to be a “cratering” in the swap books, it would have happened a couple quarters ago."
About a year ago I had the idea that what these reinsurers should do is compile a database of all the swaps they insured and cancel off matching swaps in opposite directions. That way we would know how much risk they really contain, if any. The fact that the piecemeal approach they are taking shows little residual risk leads to some interesting ideas about the nature of that risk. Apparently it's much more benign than a worst case scenario.
On Aug 28 08:04 AM einstein p fleet wrote:
> AIG was up 10 points because? Was yesterday, buy an insolvent company
> day?
This is not my field, but I understand models. I find it very interesting that you have created a model that makes predictions about rates. I would like to understand it better. It would help me to see some graphs of the current and past yield curves you mentioned. You seem to be able to input parameter values at some time in the past and make verifiable predictions to test the utility of the model. Is that correct?
Would you like to say more about your model? What are the inputs and outputs? Is it available to play with? What programming language or spreadsheet do you use? Is your model documented? Do you have any recommendations for a good study guide? Is the model a variation of something in the literature or a handbook? I assume there is a literature. (;-)
I definitely found this article interesting!
Thank you for this very timely article. I have been buying FXY as a safe haven as the dollar depreciates. This seems to be working to safeguard my portfolio somewhat. I appreciate your clear explanations with lots of charts, so I can visualize what's happening and why.
Greg Harris,
Thanks for your interesting questions.

Re Question 1: I did read the latest 10-Q quarterly report available when I did my trivial analysis. I just didn't believe what I read. I did my calculations as sanity checks of what they wrote, or at least of what I understood it to mean. I quickly realized that if the books told the whole story, Citigroup wouldn't be in the mess that was, and still is, relentlessly unfolding. I did it a few weeks before submitting it here.
Did you read "what's on the books"? Did you come up with a prediction of a worsening crisis for Citi on that basis? If you did so without a method similar to the one I used, I would appreciate hearing how you did that! I love to learn alternative methods.
Re Question 2: SEC filings require patience and a concentrated, skeptical mind. Realizing what they do not contain, and what the crisp wording might mean, is interesting to say the least. Is it rocket science? I think not. Does the SEC review it for completeness and honesty?
I suppose it's fair to say I "make stuff up". In my profession it's called using what-if scenarios. I try to check any assumptions. I varied the values of parameters (parametric variation) intentionally to explore the range of possibilities. It also helps in identifying "worst case scenarios". It's part of a reasonable assessment of risk. I recommend it.
It's valuable to use independent methods and to make sure they agree, or to understand why they differ. I would like to learn about any alternative methods. Especially so, if you know of a better, simpler, cleverer, more reliable approach.
I am not in love with my approach. I use it because it tends to uncover discrepancies, incorrect assumptions, and evaluate risks. I continue to use it only because I don't know better methods.

You seem to really know the banking business.
Paragraph 1: I found your first paragraph very interesting. I will have to research the Basel requirements. The paradigm shift you refer to may make the banking industry an unsafe investment tool for retirees, except in the higher risk portions of their portfolios.
On the other hand, no paradigm shift should entail making very elementary mistakes and taking obviously correlated risks with a built in rapid escalation of almost guaranteed non-performance in three years. That makes the risk in three years over 90% and possibly 99.9%. That's a poor investment for anyone at less than some interest or dividend rate over ~30%. And that's just break even.
That sounds a bit like the paradigm shift in the dotcom bubble. That had two main components. The first was the more money you spent, without any earnings, at all the better because it meant you were gathering market share. The second was that investing in ten "uncorrelated" ideas improved your probability of success. They also missed the correlation implicit in the first component. Also, Psuccess_n_bad_ideas=(... The more bad ideas they came up with to pour money into, the more toxic the paradigm.
That bubble taught me to be wary of the words "paradigm shift" regarding investments. When I hear those words I think of Professor Harold Hill in "The Music Man"; To paraphrase... 'shift' rhymes with 'berift' (of value) and it means 'we have trouble in City Citi'. (Of course, in the show, the students succeeded. Aren't musicals wonderful?)
Paragraph 2: I have to disagree. They didn't get caught with stuff they intended to unload. Everyone made money investing in the same junk ( see Rich Shinnick's later comment) ABS, MBS, and CDOs they were selling to their customers. No one wanted to have less success than their competitors. Goldman Sachs was lucky. One of their analysts figured out they would do much better with much less risk by selling the bad stuff short. I read they had a long acrimonious meeting regarding whether or not to sell short. I wonder if the person who steered them correctly and saved their lunch is now highly regarded or viewed with suspicion?
Paragraph 3: Yes, I agree totally! Realizing that early on led me to try a different approach to bounding their likely range of losses. Since I don't have access to that "database of underlying mortgages that comprise their ABSs," I had to come up with another way. I simply asked myself..."self, how many bad mortgages did they buy assuming they were buying?" I assumed they were buying, because otherwise they would not have ever growing estimates of loss. Think about it, the estimates of loss are still growing and they are scurrying around to raise ever growing funds to cover losses, and selling "non core related assets." If they were not buying to hold, I believe the losses would have actually been "contained and manageable" (or words to that effect) as they asserted early on.
Actually I got the idea when I heard the very first $3 billion estimate. I remarked to my wife when we were watching NBC's Nightly News, that this had to be a gross understatement. A quick mental "back of the envelop calculation" showed the stated number was only a few days or hours worth of writing loans, at $500 million a bad loan. This isn't rocket science. When their estimates kept going up, I asked myself how I might get a bound on the problem? The lower number, $50 billion, is probably pretty good. The upper bound has large uncertainties, as pointed out by a knowledgeable friend, and also by a very knowledgeable Cousin, due to unknown leverage so I multiplied it by a comfort factor of 2. That could be way too low.
By the way, if we had the details in the database, of the structure of the "tranches" purchased and the leverage used in the hedging swaps, we could model it quite accuracy, with a fair amount of precision. I assume the analyst with brains in Goldman did just that.
As an aside: The higher the precision the more significant digits can be calculated. We do not actually need "high" precision, since we only need 1 or 2 significant figures and the order of magnitude. But I digress.
Thanks for the education, and for pointing out what I did not say in the article. I appreciate it.
Thanks for that news alert. I assume there is a lot of disagreement within China about how to handle this hot potato.
Paulo, thanks for your suggestion. It's nice to know another couple is having similar discussions, and has come up with an interesting idea.
Your approach to avoiding having to time the banking systems is quite interesting, and makes tactical sense. Today's percentage changes in KBE and SDS almost cancelled each other out. SDS did better. So it worked today.
Is the net effect of doing that to lower the return of the dividend in the dividend paying instrument to something like half of it's stated rate on the day you bought it?
I don't see the banking shares coming back over the next few years, until they sell off sufficient assets to cover these enormous, real losses that they are revealing to the public a little at a time. In addition, they are issuing and selling new shares of preferred stocks to new investors. Even if they are not fools, and have good reasons for taking control of a shell, the new preferred shares they receive do dilute your investment for the reasonably foreseeable future. The funds they put in are not additional asset purchasing funds, and just cover already incurred losses that were hidden.
That all seems to mean that the NAV on Citigroup, and other financial institutions with similar problems, will be gravitating to a significantly lower number about which it may fluctuate. That will be true until they almost start to make profits. Whoever buys them is buying damaged goods which could be hard to resell near where you bought them... for a long time, possibly ever.
In your strategy, what happens when Nasdaq turns upward, SDS starts declining, and the banks still struggle in their downward spiral, like a star orbiting a black hole? That seems risky to me. Fortunately, we are not locked into KBE, since commissions are very small. I am confident there are less volatile, safer, dividend paying stocks that do well in bear markets. Consumer necessities such as milk, soap, soda, baked beans, and beer are a few examples that come to mind.
Arguing against my own position, Sandy Weil is apparently investing in this rescue effort, and he is brilliant. The article seemed to say it was his own money. If that's true, I would like to hear his reasons. I would love to talk to him. I would hate to bet against Sandy Weil.
As dsilisk pointed out, Warren Buffet's first rule of investing is "Never lose money."
Thanks for sharing your strategy. I bought some SDS, and just a few shares of KBE, so like RNP, it's now on my radar screen.