reluctantQuant

Cause for Concern: No Change from the Fed

Methinks the long-end has spoken. good day to study the curve. flat curve = complacency ... steep curve = fear.

the long end is trying to tell Ben something.

--rq

DNO: New Short Oil Fund Compounds Interest Daily

beware the Goddess of Tracking Error, all ye who enter here! <snicker>

--rq

What Is McDonald's Thinking?

MCD seems to have no problem covering the interest on its debt.
2008, after cap-ex, EBITDA was 10 times interest expense.
Q2 this year, 12.7 times.

Ah, if only more folks in the world could cover their monthly mortgage expense with that level of take-home pay.

Keep those quant models humming along. But understand what they're kicking out, sil vous plait.

--rq

Natural Gas ETF Premium Reaches 20%: Time to Unload?

I'm sure it's different this time.
<grin>
--rq

Background Info on Leading Bond ETFs

Maybe future article could show total return comparisons between an index, an ETF and a bond mutual fund. After full cost loading, I'd be interesting to see how well the alternatives perform relative to the "never truly investable" indices.

Keep up the illumination. Thanks.
--rq

Gold Lease Rates Show LIBOR's a Lousy Interest Rate Indicator

So what rate would you use? Or is this more about throwing out the whole indicator - could see either approach...

Yes, one can invest at higher rates than LIBOR, but that's not why LIBOR was used for the indicator. LIBOR is the first step in the credit ladder of interest rates. Changing the credit component - well, that's not what the indicator is really about is it?

--rq

Game Over for U.S. Oil, Natural Gas ETFs?

Buying front crude contracts is hard for individuals, buying ETF's is easy. So what should we expect? Get exposure to oil or NG without having to think too much. Don't study K's & Q's, don't look at forward earnings estimates, don't compare companies in some esoteric GIPS sub-group.

"My broka said jus' buy dem ETF's, and don't be bettin' on some mutual fund managa dude that just lost ten yeahs o'my savins..."

Is this what they *should do?* Probably not.
Is this what they're *going to do?* Safe forecast. Play accordingly.

--rq

Why Banks Prefer Foreclosures over Mortgage Modifications

Banks are information distilleries. Which pipeline and cracking process has the optimal throughput, assuming channels are built for both foreclosure and workout? The "managerial decision" on how to allocate the processing is usually driven more by operational throughput than by return forecasting. The boss wants to know how many you got done this month, not whether you made an incrementally better economic decision.

And our economy moves forward based on when this gets done, not how it gets done. Homeownership rate is too high, the marginal owner today shouldn't be an owner. Sorry, but Darwin said so. The bank wants to take its lumps and move on, get this behind us sooner, not cheaper.

good piece, thanx author.
--rq

Bloomberg's 'So-Called' Financial Lexicon

Good to see we have a so-called William Safire for the rarely-referred-to "log-o-fin-asphere".

Methinks the journalists over there are equally tired of the "write for Dear Aunt Sally" style requirements. Apparently, though, Sally reads the online content, too. All those stories must pass muster in that regard before hitting the wire/web/cloud. And Dear Aunt Sally writes in every time they misrepresent the kurtosis in the vol skew, "youbetcha."

--rq

Beware Economic Forecasters

Humans stink at forecasting. Always have. Wish we didn't, but we do... direction is a bit easier, but the time component - lousy.

Sure, I can predict when the apple will hit the ground, if I know when it leaves the tree. Gravity is awfully consistent. Not too many forces or unknowns at work there. Ah.. you want to predict when it will leave the tree? hmm.... I'll make a better spreadsheet.

How many katrillions of dollars have been spent over centuries to predict the weather? Now, there's a nice complex system to discuss, much like global financial markets. But humans have been working on this weather forecasting gig for MUCH longer. How's that going? Yep, after a few katrillion dollars, we're good to forecast a solid three DAYS forward. A "fifth day" forecast has no utiility, and we all know this.

Good investing methods must EXPECT forecast error and adapt to changing conditions, just like a good sailor or mountaineer. Black Litterman asset allocation methods actually take a good approach to this (another story).

Go back and look at any economic article from 2006. Yes, there's that precious 10% that "got it right" during any given month, but very very few show any persistence over time. And just how does one know when that 1 out of 100, the contrarian of the hour, happens to be right - at that moment? Ya don't.

Forecast, schmorecast. Agility and prepared-ness beat 'em every time.
--rq

Why the SEC Just Doesn't Get Short Sellers

1. I don't think anyone, including the SEC, is talking about "banning" short sellling. Anyone on that tirade needs to do some more homework.

2. Because the penalties for "failing to deliver" on ANY equity sale, short sale or long sale, are so ridiculously cheap, too many players were intentionally selling without covering the borrow -- yeah, the naked people. Here is another place where equity markets could learn a thing or two from fixed income markets.

3. I agree the uptick rule will have very limited value in maintaining orderly markets, and probably force a lot of unproductive expense on the industry. But, it's simple and it utilizes rules that are already in "street memory." -- these systems and controls are not really new.

4. It would be better to simply force T+3 or T+4 buy-ins. That means if ANY seller doesn't deliver what he promised on settlement date, it gets purchased at the market and the seller eats the difference. THEN the economics control the short seller's actions, not the market mechanics. Ticks? Whatever. Pre-borrows? Whatever. Give symetry to buying and selling mechanics without friction, then put economic penalites downstream to control "bad behavior."

5. "He who sells what isn't his'n - makes delivery or goes to pris'n."

--rq

Boring Bonds Become More Interesting

The author illustrates effective ways to obtain exposure to these sectors via the stock market, but longer term investors should beware the tracking error of these ETF's. One can never completely match specified asset returns via a "proxy asset" like ETF's and ETN's. For short term directional traders and hedgers, tracking error is unlikely to be an issue. But a long term investor is generally better served by buying an actual asset in the desired class.

Don't put Grandma in a treasury or tips ETF. Buy her the real thing direct from the treasury. Put her in a low low cost bond mutual fund for Munis. Less friction, less basis risk, less tracking error, more take-home return.

A drastic example of such tracking error is clarified if you compare the monthly returns generated by the USO ETF (oil) versus spot Crude prices over the last 3 years -- look at a 2 series chart if you have the tools. While the ETF clearly has utility in caputuring trends for a tactical investor, its longer term performance would get any manager fired. Alas, it's tough to buy commodities as a retail investor. But not so true for bonds...

--rq

Farewell, TED Spread… See You Again, Soon?

Ah, TED's an old and close friend of mine, always love seeing him in the news.
1. no, TED's always a positive guy, unless your government actually colapses.

2. TED directly shows the short term "psychotic factor" of the big bank treasurers. If they're happy, liquid and credit worthy, they offer LIBOR at comfy low levels, relative to Treasuries, while if they're starting to feel "horror show" inklings about deposits, borrowing and counterparty risk, they tighten up their offered lending levels (NCNB - No Cash for No Body). This is more important because it drives up the internal pool rate within the bank itself, increasing the hurdle rate for adding new assets (like making a long term loan).

3. At the end of the day, if the bank treasurer starts getting psycho, then everyone else around the bank has to get psycho, too, because it hits them in the wallet. That's why TED matters so much - it tells you what's going on with the cat who controls the cash.

4. For those who do care about the definitions, TED used to be the spread between the ED eurodollar futures and the T treasury bill futures, and not to be confused with any currency called EUR. But now, since the Tbill doesn't really trade anymore, TED is typically the difference between 3 month LIBOR and 3 month T-bills. This is also considered the "first stairstep" in the credit ladder and is very much a building block in interest rate swap spreads over longer terms. You'll also see TED's cousin a lot, Miss OIS. Some think she's much better looking and a bit more articulate than TED, but that's for another conversation.

Good article.
--rq

Banks Still Not Ready to Give In on Derivatives

CDS: 80% of what trades is "cookie cutter stuff." The other 20% provides for the counterparties who want "custom fit suits." This is true of lots of markets.

Guess which part is most profitable, and which generates the fattest fees for the dealers?

These same 80/20 characteristics hold true for equity options markets. One can get the basic stuff through an exchange (listed puts & calls) or one can get something more exotic custom built by a dealer (path dependent, averaging, multi-legs).

The biggest problem wrought by CDS has been leverage. When an investor can take sizeable "naked" risk in credit and rates with relatively little INITIAL collateral... well, we all read the papers (and own a little AIG as taxpayers).

The exchange concept provides one central view on players' aggregated exposure. Daily central collateral netting and open interest monitoring by a third party provides ongoing stability. Think about why the Amaranth debacle, multiples of the LTC mess, didn't disturb a single bank too much.

Let the OTC folks do their deals, give them a nasty haircut against capital, put the cookie cutter stuff on an exchange just like commodities and equity vanillas, and let's all send the lawyers and lobbyists home early.

--rq

Citi Proves That Contrary Opinion Works More than We Thought

The aggregation process for large, multi contributor databases is always akin to making sausage.

Some "clean up" entries are legit, some are not. The person who gives the data to the colletor / aggregator is not always the sharpest tool in the shed, and don't expect that the head of research is watching that outflow too closely,

If a firm left Bill's name on a recommendation six months after Bill left by mistake, should that be corrected post-facto?

If the firm fired the lowly admin who sends that data to Bloomberg/Ibes/ThomReut six months ago and no one sent any data since, should that be corrected post-facto? The vendors don't "blank it out" just because there's no update.

The article here is quite valid - I'm not defending any of these goofballs, but the stats utilized here are a little squirrelly.

Whether data is good or bad, at the end of the day, at least half of the analysts are below average anyway. Take it all with a very large grain of salt...

--rq