kdo

An Autopsy of the Glass-Steagall Act

Glass Steagal is a straw man. I'd love to hear an explanation why the European banking system has never ever had such a regulation enforcing the separation of IBs and banks and does not have a history plagued by crisis.

The reality is that the problem is one of the "shadow" banking system or "bank like entities". Glass Steagal did not have anything to do with the fact that IBs could directly securitize mortgages from mortgage brokers and sell them to institutions, hedge funds and money market funds, effectively completely bypassing the banking system. How come there is no screaming about how we needed to regulate money market funds more closely as a bank like entity, or highly leveraged institutions like GE finance? Glass Steagal did not allow GE finance to happen. Most of the bank like entities or shadow banks existed because they morphed from investment vehicles towards using short term paper to leverage returns. The world changed faster than the regulatory framework and the regulatory framework must catch up. That is not the fault of Glass-Steagal.

Jeremy Siegel's Silly P/E

BTW - I don't mean to say ownership. I mean to say when you own the S&P 500, your own implied PE is changing with every market wiggle of the individual shares down below because those wiggles change each indivual companies PE ratio. When you buy the S&P 500, that is effectively what you are buying and that is what Siegel is trying to show. So yes, the denominator is always changing as a buyer of the S&P 500.


On Feb 25 06:13 PM kdo wrote:

>
> Actually Siegel is right.
> You say:
>
> Earnings don't change according to market capitalization. The p/e
> ratio is an interesting animal: the numerator changes from day to
> day and even from second to second, while the denominator changes
> only once a quarter. It's an indicator of how the market (the numerator)
> is reacting to reality (the denominator). But under Siegel's method,
> the denominator changes every second as well. And rather than dividing
> the market by reality, we end up dividing the market by itself. Which
> is much less useful.
>
> You're ownership of those earnings is changing with every individual
> wiggle of individual shares too. You just don't know it.

Jeremy Siegel's Silly P/E

Actually Siegel is right.
You say:

Earnings don't change according to market capitalization. The p/e ratio is an interesting animal: the numerator changes from day to day and even from second to second, while the denominator changes only once a quarter. It's an indicator of how the market (the numerator) is reacting to reality (the denominator). But under Siegel's method, the denominator changes every second as well. And rather than dividing the market by reality, we end up dividing the market by itself. Which is much less useful.

You're ownership of those earnings is changing with every individual wiggle of individual shares too. You just don't know it.

Profiting from Risk Aversion

Sorry Geoff, my comments were actually a little more pointed towards other comments on the board. My comment was basically to point out the idea, that if there is no way to make money in options, there is also no way to make money in stocks either. A pure random walk making options impossible to make money at indicates that there is in fact zero return to stocks as well. It wasn't really meant to be a trends mantra or anything to slight your idea. I certainly am not one to claim that all prices are equal at all times. I think it's an insightful thing you've picked up on. But what I will add, is that a real trend may skew what volatility says the range of outcomes theoretically should be and what may actually happen. If the return comes on average from both being long the call and short the put, a real trend may skew where the return is coming from one that you expect "shorting the put" to one that you do not expect "long the call", because that excess volatility you are noting may be a signal of change to come, not just a volatility anomoly to be taken advantage of by selling vol.

I remember seeing some study a while back from some investment bank about running a covered call strategy. What was interesting is that the study said you should not sell the call under volatility extremes and that history shows you do better by just retaining the long position temporarily. What that would indicate is that under those extremes, you get more return on average from owning the call, than from selling the put.

You wrote: "Thoughts on Market Volatility". So you've already laid out exactly what I'm talking about in many ways.









On Nov 28 06:30 PM Geoff Considine wrote:

> To Greg Harris:
>
> Yes, being net long the call (whether you are long the stock or just
> the call) allows you to grow when the broader economy makes money.
> You don't need to believe that there are no trends--i.e. that the
> market is a pure random walk to make my case here. BUT, when market
> volatility becomes irrationally high, I will believe that the call
> value exceeds the true growth potential for certain stocks---THAT
> is my whole point. This does not detract or even bear on put-call
> parity. The long-term expected return for the S&P500 is positive
> over the long-term---but the implied vol is SO high on some stocks
> that this is priced in.

Profiting from Risk Aversion

I have a couple of comments:

1) Options are sort of theoretically a 100% zero sum game. Arguing that no money can be made on them is the equivalent of saying there are no return to stocks. The law of put-call parity gives:

+(long)Call -(short)Put + (strike/rfr for time x) = long stock.

So, a long stock position is derived from being long the call and short the put and what you can get by putting the rest of the money at the RFR. So short call, long put is synthetically the same as being short. If this was not true beyond transaction costs, it would give rise to arbitrage opportunitites. It is a zero sum game only in the sense that someone has essentially swapped with you the future value of the underlying security which is really not extraordinarily different than someone simply selling the security, sitting on cash instead and banging their head on a wall when the security goes up in value. Except in this case, if they didn't hedge their exposure to you they truly are a loser in the transaction. But many options positions are taken to hedge exposures in the first place and thus are very useful even if/when they are the loser. In the case of option dealers, they are of course hedging their underlying exposures and making their money from spreads rather than bets.

What put-call parity would suggest to me, is that if there is an underlying trend to the position (say upwards), you are likely to gain some amount of your gain from owning the call and some amount from selling the put and of course the reverse is true if the trend is down.

If we are going to claim there is no trends anywhere and that market volatility determines everything, then I suggest you look at a graph of the S&P 500 over the last 100 years. Or banks in the last one and a half. Citigroup volatility in 2007 did not predict it could come anywhere near $3/share within the next year. I am not claiming one should follow trends, the much harder thing is to identify them and understand why they will continue or break down. Sometimes the easiest thing is to simply understand why they will reverse and to prepare for the reversal. But to argue they don't exist is to put your head in the sand. The long term trend of money supply and earnings power from that money supply, is up.

In fact, I like to think about this when making any of my own positions, because the option positions are actually the components that derive the long or short position. Do I like selling the put? Do I like buying the call? Sometimes a desire to go long will suddenly find a disagreement emotionally at the idea of being short the put and realizing that I only like the call, but in fact I also may not like the price of the call, since it has to be supplmented by selling the put I don't feel comfortable selling. It has helped keep me out of trouble on occasion.

Protecting Your Portfolio: A Look at Four Safe Haven Investments

I would simply point out, you list two completely opposing strategies: buy puts, vs. selling covered calls.

Selling covered calls is the exact opposite trade of buying puts, it's synthetically a position of selling a put. Something to keep in mind in attempting to figure out which position you actually want.

Bill Poole: A Fed 'Put' Exists

btw - second point, wasn't the bailout for LTCM completely funded by the banks themseves? The Fed played the role of facilitator. Woe to the world to have a facilitator help devise settlements between a mass consortium of banks to ensure an orderly drawdown of an entity with massive worldwide exposures. In fact, I can't think of a better role for the Fed to play in such a situation.

Bill Poole: A Fed 'Put' Exists

I'm not sure I caught you quite right there... LTCM survived intact w/o any consequences to their actions!? Are you really arguing that? So it really was so horrible that a bailout was devised in order to handle an orderly drawdown of their assets so that the enormous amounts of counterparty risk could be handled in a contained way? I cordially suggest that history would show that major criticism of how LTCM was handled is extremely misguided. Let's look at the final results of the '98 crisis. Not a damn thing macroeconomically happened and LTCM is gone. The problem in the 30s was the Fed stood by with a smirk on their face as banks failed and people lost or took out all of their money from the system. Sounds like great fun, let's try it again!!

Is the Market Misreading the Fed?

And he'd (Bernanke) be right, thus you will be too.

Are Share Buybacks Actually Good For Investors?

Neither buybacks nor dividends actually increase any value of anything for the shareholder. Dividend payments are often accompanied by -- share price drops. If you understand how to value equity, you understand these are just capital allocation decisions. Over time, share buybacks are an investment in themselves, which should hopefully beat the return on cash. Share buybacks may prove to be a great thing for the company to have done. They may not. They should return somewhere close the cost of equity - just like dividends redeployed into the stock market would. Both have their use and misuse.