viewfromnyc's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/184520/comments http://seekingalpha.com/article/179841-fannie-freddie-what-does-treasury-know?source=feed#comment-821899 821899 Sat, 26 Dec 2009 12:09:23 -0500 http://seekingalpha.com/article/177790-how-buying-a-home-is-gambling?source=feed#comment-802936 802936 Sat, 12 Dec 2009 12:47:01 -0500 http://seekingalpha.com/article/177790-how-buying-a-home-is-gambling?source=feed#comment-802924 802924 Sat, 12 Dec 2009 12:31:10 -0500 http://seekingalpha.com/article/177553-housing-can-indeed-be-a-good-investment?source=feed#comment-801582 801582 Fri, 11 Dec 2009 10:53:04 -0500 http://seekingalpha.com/article/177553-housing-can-indeed-be-a-good-investment?source=feed#comment-801573 801573
There are three reasons a home purchase is a mechanism of wealth creation, 1) large amounts of low cost leverage, 2) interest tax deduction and 3) the forced savings component of an amortizing mortgage. ]]> Fri, 11 Dec 2009 10:46:16 -0500
There are three reasons a home purchase is a mechanism of wealth creation, 1) large amounts of low cost leverage, 2) interest tax deduction and 3) the forced savings component of an amortizing mortgage. ]]> http://seekingalpha.com/article/170583-cit-group-s-bankruptcy-plan-goodbye-common-and-preferred-stock?source=feed#comment-742272 742272 Tue, 03 Nov 2009 10:39:26 -0500 http://seekingalpha.com/article/167386-fannie-and-freddie-worthless?source=feed#comment-722100 722100 Tue, 20 Oct 2009 11:11:00 -0400 http://seekingalpha.com/article/164510-banking-sector-worst-is-yet-to-come?source=feed#comment-702366 702366
One reason Paulson's current strategy is successful is that the government has removed the risk that many banks will be forced to shut or be seized. First in the too big to fail tier, there is zero chance of failure so the banks are now given time to rebuild the capital base and will eventually earn extraordinary profits by virtue of artificially low cost of capital and by reduced competition. In a normal banking environment when by virtue of idiosincratic risk a bank that falls below the required level of capital it is shut, it is game over with no chance of a future therefore zero equity value. Correspondingly, the only losers should be the equity holders as the assets should be sufficient to pay depositors and creditors. While for smaller regional and local banks, the shut down condition has not been completely removed, it is certainly less likely. The FDIC seems taking out the worst banks first so a relatively better bank, which in normal times would be seized immediately, now has a long time during which it can potentially earn enough to recapitalize.

When Warren Buffet was privately financing the banking system, the cost of capital was over 10% yet the Federal Reserve now provides it at 0.25%. That subsidy is a great stealth transfer of wealth from savers to the banks. The stockholders of the banks that survive are going to be richly rewarded.

Disclosure: No positions. Formerly short FED, CORS, WFC, BOFL. ]]> Sun, 04 Oct 2009 10:50:29 -0400
One reason Paulson's current strategy is successful is that the government has removed the risk that many banks will be forced to shut or be seized. First in the too big to fail tier, there is zero chance of failure so the banks are now given time to rebuild the capital base and will eventually earn extraordinary profits by virtue of artificially low cost of capital and by reduced competition. In a normal banking environment when by virtue of idiosincratic risk a bank that falls below the required level of capital it is shut, it is game over with no chance of a future therefore zero equity value. Correspondingly, the only losers should be the equity holders as the assets should be sufficient to pay depositors and creditors. While for smaller regional and local banks, the shut down condition has not been completely removed, it is certainly less likely. The FDIC seems taking out the worst banks first so a relatively better bank, which in normal times would be seized immediately, now has a long time during which it can potentially earn enough to recapitalize.

When Warren Buffet was privately financing the banking system, the cost of capital was over 10% yet the Federal Reserve now provides it at 0.25%. That subsidy is a great stealth transfer of wealth from savers to the banks. The stockholders of the banks that survive are going to be richly rewarded.

Disclosure: No positions. Formerly short FED, CORS, WFC, BOFL. ]]> http://seekingalpha.com/article/148042-why-netflix-is-a-short?source=feed#comment-586328 586328 Mon, 13 Jul 2009 15:53:38 -0400 http://seekingalpha.com/article/148042-why-netflix-is-a-short?source=feed#comment-581929 581929
Disclosure: short NFLX for a while]]> Fri, 10 Jul 2009 08:54:40 -0400
Disclosure: short NFLX for a while]]> http://seekingalpha.com/article/141558-the-leading-cause-of-personal-bankruptcy?source=feed#comment-533429 533429
The problem with the American system is that an individual is better off not preparing for future or potential healthcare costs. The worst that can happen is that in the unlikely event you suffer a catastrophic illness is that you go bankrupct. If you never have a catastrophic illness, you get to consume more (cars, televisions, homes) than the people who protect the downside by purcashing insurance. The maximum benefit of purchasing insurance is limited to the amount of unprotected assets in bankruptcy. Since most Americans couldn't earn and save enough to self fund the costs of a catastrophic illness anyway it makes no economic sense to purchase insurance. ]]> Fri, 05 Jun 2009 10:34:17 -0400
The problem with the American system is that an individual is better off not preparing for future or potential healthcare costs. The worst that can happen is that in the unlikely event you suffer a catastrophic illness is that you go bankrupct. If you never have a catastrophic illness, you get to consume more (cars, televisions, homes) than the people who protect the downside by purcashing insurance. The maximum benefit of purchasing insurance is limited to the amount of unprotected assets in bankruptcy. Since most Americans couldn't earn and save enough to self fund the costs of a catastrophic illness anyway it makes no economic sense to purchase insurance. ]]> http://seekingalpha.com/article/138186-a-stealth-rally-in-commercial-real-estate?source=feed#comment-508323 508323 Mon, 18 May 2009 11:55:40 -0400 http://seekingalpha.com/article/137546-reinstate-the-uptick-rule?source=feed#comment-503766 503766
In capitalism, the main purpose of a stock market is to lower the cost of equity capital by providing liquidity. Anything that reduces liquidity, e.g. restricting short sales through a tick test, raises the cost of capital for companies that raise capital. Short sellers are the only market participants that eventually need to buy. Removing or reducing the participation leads to higher volatility, since short selling has a potential dampening effect as they amplify the effect of mean reversion value investors, buying in big declines and selling on big moves up. All those who are skeptical of the academic work on short selling that led to the removal of the up tick rule by the SEC, should look at the Australian market during the period when short selling was banned.

Finally as a long time arbitrageur, the outcry over naked short selling is completely overblown. For the past 15 years that I have been in the market almost every NYSE and actively traded NASDAQ stock has been available to borrow, albeit some at a steep cost as high -30% rebate. Naked short selling is only a problem in the penny stock and OTCBB arenas where no real investors should be anyway.]]> Thu, 14 May 2009 12:04:45 -0400
In capitalism, the main purpose of a stock market is to lower the cost of equity capital by providing liquidity. Anything that reduces liquidity, e.g. restricting short sales through a tick test, raises the cost of capital for companies that raise capital. Short sellers are the only market participants that eventually need to buy. Removing or reducing the participation leads to higher volatility, since short selling has a potential dampening effect as they amplify the effect of mean reversion value investors, buying in big declines and selling on big moves up. All those who are skeptical of the academic work on short selling that led to the removal of the up tick rule by the SEC, should look at the Australian market during the period when short selling was banned.

Finally as a long time arbitrageur, the outcry over naked short selling is completely overblown. For the past 15 years that I have been in the market almost every NYSE and actively traded NASDAQ stock has been available to borrow, albeit some at a steep cost as high -30% rebate. Naked short selling is only a problem in the penny stock and OTCBB arenas where no real investors should be anyway.]]> http://seekingalpha.com/article/137655-new-government-policy-tax-credit-as-mortgage-down-payment?source=feed#comment-503677 503677

As policy it is probably better to put some full price buyers (owner/occupiers) into the homes even if the credit risk is high versus having the properties trade at discount valuations to higher credit quality buyers with the government taking the stealth loss through TARP, PPIP, TALF etc. The model would be similar to the credit card company model whereby the high interest rates offset the high default rates. From a societal prospective, the positive externalities of "stabilized prices" and increased homes sales velocity need to be factored into the credit loss equation to determine the true impact to the taxpayer. To make a rationale investment decision, investors need to focus not on what should be and what is fair and right, but on what is. Ultimately we are price takers, which is why the government can set interest rate artificially low. The essense is whether you would you rather earn negative real return by holding cash or an essentially zero after tax return by buying government bonds. Once business risk appetite returns worldwide, the government will lose control of interest rates and will not be able to artificially have credit providers subsidize the mortgage market.

]]> Thu, 14 May 2009 11:20:41 -0400

As policy it is probably better to put some full price buyers (owner/occupiers) into the homes even if the credit risk is high versus having the properties trade at discount valuations to higher credit quality buyers with the government taking the stealth loss through TARP, PPIP, TALF etc. The model would be similar to the credit card company model whereby the high interest rates offset the high default rates. From a societal prospective, the positive externalities of "stabilized prices" and increased homes sales velocity need to be factored into the credit loss equation to determine the true impact to the taxpayer. To make a rationale investment decision, investors need to focus not on what should be and what is fair and right, but on what is. Ultimately we are price takers, which is why the government can set interest rate artificially low. The essense is whether you would you rather earn negative real return by holding cash or an essentially zero after tax return by buying government bonds. Once business risk appetite returns worldwide, the government will lose control of interest rates and will not be able to artificially have credit providers subsidize the mortgage market.

]]> http://seekingalpha.com/article/134502-annihilate-the-perverse-effect-of-cds-on-bondholders?source=feed#comment-486661 486661
Again until the company defaults, there is really nothing a bondholder can do to save the debtor, other than forgiving the debt. The company may make a debt for equity offer, buy back bonds on the open market, negotiate a prepackage plan of reorganization, but still the company controls its own fate.

CDS is a complex knock in option struck at par. As a bondholder, I would have to pay a premium to protect my position, once the credit quality of the issuer deteriorates that option becomes very expensive, so it would be cheaper to sell and realize the loss. The reason for creating the synthetic call is from a belief that the credit will recover. Options are not free. The same is true for equity options, if I have created a zero exposure postion in order to control voting rights, I have paid real money to do that. I have decomposed the value of the equity by separating the voting rights and compensated someone else who has the economic exposure for those rights. My interest as a shareholder or bondholder Seeking Alpha are not necessarily aligned with the other stakeholders of hte company, e.g. management and employees. As a shareholder, I want the company to take on maximum leverage and return capital to me either through buybacks or dividends. Most companies that borrow money to buy back stock are not doing so to insure the survival of the company but to maximize potential returns to share holders and shift risk to bondholders. The key for investors is not to whine and complain but to analyze the game theory to understand who profits and why.]]> Sat, 02 May 2009 13:02:38 -0400
Again until the company defaults, there is really nothing a bondholder can do to save the debtor, other than forgiving the debt. The company may make a debt for equity offer, buy back bonds on the open market, negotiate a prepackage plan of reorganization, but still the company controls its own fate.

CDS is a complex knock in option struck at par. As a bondholder, I would have to pay a premium to protect my position, once the credit quality of the issuer deteriorates that option becomes very expensive, so it would be cheaper to sell and realize the loss. The reason for creating the synthetic call is from a belief that the credit will recover. Options are not free. The same is true for equity options, if I have created a zero exposure postion in order to control voting rights, I have paid real money to do that. I have decomposed the value of the equity by separating the voting rights and compensated someone else who has the economic exposure for those rights. My interest as a shareholder or bondholder Seeking Alpha are not necessarily aligned with the other stakeholders of hte company, e.g. management and employees. As a shareholder, I want the company to take on maximum leverage and return capital to me either through buybacks or dividends. Most companies that borrow money to buy back stock are not doing so to insure the survival of the company but to maximize potential returns to share holders and shift risk to bondholders. The key for investors is not to whine and complain but to analyze the game theory to understand who profits and why.]]> http://seekingalpha.com/article/134502-annihilate-the-perverse-effect-of-cds-on-bondholders?source=feed#comment-485857 485857 Quite simply companies don't file for bankruptcy because their stock price declines or their bond prices decline. They file for bankruptcy because they cannot pay either their debt!

Limiting CDS purchases to bondholders is a solution proposed by people who do not understand financial markets. Just like any other market there are a variety of different participants, e.g. long term holders, short term traders, speculators, hdegers etc. If potential participants are not allowed to enter the market, the market for that instrument will be less liquid and therefore more expensive either as a result of wider spreads or lack of market depth. Commentators fail to consider the ramifications of that sort of proposal. For example if I bought a bond and CDS protection, what would happen if I sold the bond and the buyer decided that they didn't want to buy the hedge? I would end up long CDS on a bond I no longer own, should I have to sell it back to the bank (I wonder where the bid would be), should I have to keep paying the premium even though I no longer need the protection?

For this writers proposal, the question is why the CDS seller should get some of my recovery? If the CDS settles at 20 cents, my expected recovery in bankruptcy is 20 cents. If my claim is split with the CDS writer I would only get 4 cents (20% of 20 cents). ]]> Fri, 01 May 2009 13:38:53 -0400 Quite simply companies don't file for bankruptcy because their stock price declines or their bond prices decline. They file for bankruptcy because they cannot pay either their debt!

Limiting CDS purchases to bondholders is a solution proposed by people who do not understand financial markets. Just like any other market there are a variety of different participants, e.g. long term holders, short term traders, speculators, hdegers etc. If potential participants are not allowed to enter the market, the market for that instrument will be less liquid and therefore more expensive either as a result of wider spreads or lack of market depth. Commentators fail to consider the ramifications of that sort of proposal. For example if I bought a bond and CDS protection, what would happen if I sold the bond and the buyer decided that they didn't want to buy the hedge? I would end up long CDS on a bond I no longer own, should I have to sell it back to the bank (I wonder where the bid would be), should I have to keep paying the premium even though I no longer need the protection?

For this writers proposal, the question is why the CDS seller should get some of my recovery? If the CDS settles at 20 cents, my expected recovery in bankruptcy is 20 cents. If my claim is split with the CDS writer I would only get 4 cents (20% of 20 cents). ]]> http://seekingalpha.com/article/127574-will-all-be-well-at-wells-fargo?source=feed#comment-438821 438821
The other delusion is that the assets are good and it is just market to market accounting that forces banks to take a loss. It doesn't take many back of the envelope calculations to determine that even a prime conforming loan made in 2005 to 2007 is in trouble. At 90% LTV with the value down 25%, the loan is underwater almost 17%. While the loan is still servicable and all is fine until the prime borrower losses his or her job, then the 25% decline in value of the underlying collateral becomes 50% loss in foreclosure. Examine California sales data and a 25% decline is conservative. None of the pundits who spout this unsubstantiated assertion are willing to pay even 80 cents on the dollar for these assets (levels where banks would be happy to sell) or there would be no need for the Treasury's Public Private Investment Plan. Even if the assets were 90 cents on the dollar, the equity in a bank levered 8 to 1 would wiped out. Consider that too when analyzing bank holding companies with off balance sheet liabilities, e.g. GS and JPM. ]]> Tue, 24 Mar 2009 18:06:11 -0400
The other delusion is that the assets are good and it is just market to market accounting that forces banks to take a loss. It doesn't take many back of the envelope calculations to determine that even a prime conforming loan made in 2005 to 2007 is in trouble. At 90% LTV with the value down 25%, the loan is underwater almost 17%. While the loan is still servicable and all is fine until the prime borrower losses his or her job, then the 25% decline in value of the underlying collateral becomes 50% loss in foreclosure. Examine California sales data and a 25% decline is conservative. None of the pundits who spout this unsubstantiated assertion are willing to pay even 80 cents on the dollar for these assets (levels where banks would be happy to sell) or there would be no need for the Treasury's Public Private Investment Plan. Even if the assets were 90 cents on the dollar, the equity in a bank levered 8 to 1 would wiped out. Consider that too when analyzing bank holding companies with off balance sheet liabilities, e.g. GS and JPM. ]]> http://seekingalpha.com/article/127537-the-geithner-some-plan?source=feed#comment-438133 438133
If the premise is to save the banks, the best course of action for the American taxpayer is to separate the banking infrastructure (branches, managers, software and systems etc.) from the existing owners and creditors. The FDIC could seize the insolvent banks and the U.S. Treasury could recapitalize the skelton, leaving the losses with the stock and bond holders. The government would end up owning the financial assets as it eventaully will in the Public-Private Plan but it would own less of the loses. As taxpayers we would also own 100% of the potential upside.

In the Public-Private purchase plan the government is bearing substancially all the risk and giving the half the potential profits to a select group of large investment firms. The private partners in the plan are going to earn extraordinary returns on equity. First and foremost the private capital will have a earn a significant interest spread (6%-2.5% for 350 bps) between the cost of the guaranteed debt and the yield on the assets (levered 6x) . Why the government willing to give this away, for what essentially is private capital's advice on setting the price, is incredible. I predict private capital will earn back its investment in 18 month. If the govenment lets them extract those profits prior to the guaranteed debt being repaid, the private partners will have created a free call on the toxic assets with an ongoing income stream. As taxpayers we are giving up potentially half the upside for about 7% downside protection. That is a terrible risk reward ratio for our government and the American taxpayer.

]]> Tue, 24 Mar 2009 10:56:20 -0400
If the premise is to save the banks, the best course of action for the American taxpayer is to separate the banking infrastructure (branches, managers, software and systems etc.) from the existing owners and creditors. The FDIC could seize the insolvent banks and the U.S. Treasury could recapitalize the skelton, leaving the losses with the stock and bond holders. The government would end up owning the financial assets as it eventaully will in the Public-Private Plan but it would own less of the loses. As taxpayers we would also own 100% of the potential upside.

In the Public-Private purchase plan the government is bearing substancially all the risk and giving the half the potential profits to a select group of large investment firms. The private partners in the plan are going to earn extraordinary returns on equity. First and foremost the private capital will have a earn a significant interest spread (6%-2.5% for 350 bps) between the cost of the guaranteed debt and the yield on the assets (levered 6x) . Why the government willing to give this away, for what essentially is private capital's advice on setting the price, is incredible. I predict private capital will earn back its investment in 18 month. If the govenment lets them extract those profits prior to the guaranteed debt being repaid, the private partners will have created a free call on the toxic assets with an ongoing income stream. As taxpayers we are giving up potentially half the upside for about 7% downside protection. That is a terrible risk reward ratio for our government and the American taxpayer.

]]> http://seekingalpha.com/article/123345-what-wipe-out-the-stockholders-really-means?source=feed#comment-408182 408182 Sun, 01 Mar 2009 14:40:20 -0500 http://seekingalpha.com/article/122545-things-not-all-that-bad-at-general-growth-properties?source=feed#comment-403121 403121 Wed, 25 Feb 2009 11:56:15 -0500 http://seekingalpha.com/article/121726-recent-policy-decisions-and-a-greater-depression?source=feed#comment-397152 397152 Fri, 20 Feb 2009 17:11:06 -0500 http://seekingalpha.com/article/118994-in-search-of-a-new-hedge-fund-business-model?source=feed#comment-378508 378508 Fri, 06 Feb 2009 12:58:32 -0500 http://seekingalpha.com/article/118111-why-the-hedge-fund-industry-needs-to-reinvent-itself?source=feed#comment-374751 374751 Tue, 03 Feb 2009 15:36:46 -0500 http://seekingalpha.com/news/market_currents/post/11840?source=feed#comment-311037 311037
disclosure: long C ]]> Thu, 20 Nov 2008 14:12:38 -0500
disclosure: long C ]]> http://seekingalpha.com/article/104904-it-might-be-impossible-to-stop-the-decline-of-housing-prices?source=feed#comment-301291 301291 Sun, 09 Nov 2008 13:44:51 -0500 http://seekingalpha.com/article/94155-bill-gross-politicking-for-his-own-bailout?source=feed#comment-247166 247166
In the short term, perhaps the hombuiders will rally as market participants believe that liquidity will return to the mortgage market. I would short any strength take your pick of names or use the XHB. The government simply won't have the capacity to reflate the market. All Paulson et. al. are trying to do here is to stabilize home prices. What will probably happen is that home prices will find a bottom but transaction volume will decline and inventories will remain high as the market won't clear due to a wide bid/ask spread and a general lack of creditworthy buyers. After a bailout, I doubt regulators will permit the wide range of "affordability products" to be offered again by banks. Banks will probably be weak too as they continue to be hobbled by a lack of capital and a trouble loan book. It will take some time for potential homebuyers to repair their balances to the point where they can afford 10% down on a Southern California or Northeastern U.S. home.

Asset prices (stocks, bonds, real estate) need to decline for equilibrium to be restored to the market. The government can't keep asset prices at their high water mark through manipulation of short term interest rates. The phantom wealth created by Greenspan is gone! Somebody had to lose the money, it is now just a process of realizing all those unrealized losses. The result will reveal itself in one of two forms, losses at financial institutions as debtors default or long term diminished capacity of debtors/average Americans to consume and invest either because they are debtors who have overpriced assets or they are investors who will never be able to realize the phantom gains. I don't think PIMCO will ever be able to monetize all of its overvalued bonds. Great paper profits and a nice bonus for Bill Gross as the government keeps rates low. Watch out when they lose control. ]]> Sat, 06 Sep 2008 19:47:33 -0400
In the short term, perhaps the hombuiders will rally as market participants believe that liquidity will return to the mortgage market. I would short any strength take your pick of names or use the XHB. The government simply won't have the capacity to reflate the market. All Paulson et. al. are trying to do here is to stabilize home prices. What will probably happen is that home prices will find a bottom but transaction volume will decline and inventories will remain high as the market won't clear due to a wide bid/ask spread and a general lack of creditworthy buyers. After a bailout, I doubt regulators will permit the wide range of "affordability products" to be offered again by banks. Banks will probably be weak too as they continue to be hobbled by a lack of capital and a trouble loan book. It will take some time for potential homebuyers to repair their balances to the point where they can afford 10% down on a Southern California or Northeastern U.S. home.

Asset prices (stocks, bonds, real estate) need to decline for equilibrium to be restored to the market. The government can't keep asset prices at their high water mark through manipulation of short term interest rates. The phantom wealth created by Greenspan is gone! Somebody had to lose the money, it is now just a process of realizing all those unrealized losses. The result will reveal itself in one of two forms, losses at financial institutions as debtors default or long term diminished capacity of debtors/average Americans to consume and invest either because they are debtors who have overpriced assets or they are investors who will never be able to realize the phantom gains. I don't think PIMCO will ever be able to monetize all of its overvalued bonds. Great paper profits and a nice bonus for Bill Gross as the government keeps rates low. Watch out when they lose control. ]]> http://seekingalpha.com/article/92274-4-tidbits-from-third-avenue-value-fund-s-q3-letter?source=feed#comment-237753 237753 Sun, 24 Aug 2008 13:05:41 -0400 http://seekingalpha.com/article/91148-the-hedge-fund-hustle?source=feed#comment-231901 231901
If trading is so bad, why do we have markets that are open all day and night. Why not just have one price for all trades done on a given day? High frequency traders provide liquidity, to the venerable (sarcasm intended) long only managers, long term investors and all the other constituencies that claim to suffer from excessive trading and volatility. Buy and Hold Long only is a completely mediocore strategy. When you benchmark against annual returns of an index long only is fine. If you were to benchmark against some other measure of maximum potential return in the market, hypothetically say the absolute value of the whole years daily market changes, long only looks pathetic. Theorectically a trader could go long or short the S&P 500 (a popular benchmark) at the end of every day, analogous to betting red or black on roulette. The maximum return if you are right every day dwarfs anything produced by a long only manager. Oh and you can make money in an up market, a down market, and a flat market. The stock market isn't an odds based game like roulette where you can caluculate your expected return. There is information available which allows investors who gather and correctly analyze the information the opportunity to gain an advantage. Market participants who either don't gather the information or don't correctly analyze it and trade/invest accordingly get "fleeced" by those who do. You wouldn't gamble in a casino without knowing the rules of the game, it is no different in trading markets, just that the game is more complex.

No systematic risk comes from trading firms, whether they are hedge funds, prop desks, entering the public markets and providing liquidity. Systematic risk is introduced when someone decides to lend the traders and investors too much money, i.e. LTCM, the mortgage brokers, FNM, FRE etc. The biggest systematic risk in the market right now is derivatives trading. Which is why Bear was bailed out. The large banks seem to think that they should provide nearly limitless capital to investment funds to make bets in the CDS market. The banks and insurance companies also seem to think the counterparties in the CDS market have the creditworthiness to back all the CDS written. This is the same fallacy that lend to the problems with MBIA and Ambac et. al. That is the real potential problem. ]]> Sat, 16 Aug 2008 12:14:20 -0400
If trading is so bad, why do we have markets that are open all day and night. Why not just have one price for all trades done on a given day? High frequency traders provide liquidity, to the venerable (sarcasm intended) long only managers, long term investors and all the other constituencies that claim to suffer from excessive trading and volatility. Buy and Hold Long only is a completely mediocore strategy. When you benchmark against annual returns of an index long only is fine. If you were to benchmark against some other measure of maximum potential return in the market, hypothetically say the absolute value of the whole years daily market changes, long only looks pathetic. Theorectically a trader could go long or short the S&P 500 (a popular benchmark) at the end of every day, analogous to betting red or black on roulette. The maximum return if you are right every day dwarfs anything produced by a long only manager. Oh and you can make money in an up market, a down market, and a flat market. The stock market isn't an odds based game like roulette where you can caluculate your expected return. There is information available which allows investors who gather and correctly analyze the information the opportunity to gain an advantage. Market participants who either don't gather the information or don't correctly analyze it and trade/invest accordingly get "fleeced" by those who do. You wouldn't gamble in a casino without knowing the rules of the game, it is no different in trading markets, just that the game is more complex.

No systematic risk comes from trading firms, whether they are hedge funds, prop desks, entering the public markets and providing liquidity. Systematic risk is introduced when someone decides to lend the traders and investors too much money, i.e. LTCM, the mortgage brokers, FNM, FRE etc. The biggest systematic risk in the market right now is derivatives trading. Which is why Bear was bailed out. The large banks seem to think that they should provide nearly limitless capital to investment funds to make bets in the CDS market. The banks and insurance companies also seem to think the counterparties in the CDS market have the creditworthiness to back all the CDS written. This is the same fallacy that lend to the problems with MBIA and Ambac et. al. That is the real potential problem. ]]> http://seekingalpha.com/article/89819-sears-faces-risk-if-economy-doesn-t-improve?source=feed#comment-228934 228934 Tue, 12 Aug 2008 18:31:42 -0400 http://seekingalpha.com/article/84766-senator-schumer-s-careless-remarks-result-in-indymac-s-early-demise?source=feed#comment-205029 205029 Mon, 14 Jul 2008 09:17:27 -0400