Wednesday, October 1, 2014

Bond Market Liquidity

We typically think of Treasuries as being very liquid - by which we mean that an investor can buy and sell a large quantity of the asset with little impact on the price.  We're also implicitly assuming that there is no new information about the asset's fundamental value.

So look what happened recently for TIPS (Treasury Inflation Protected Securities) when Bill Gross, Chairman of PIMCO (one of the biggest fixed income management shops) quit.  

The day Gross left Pimco to join Janus Capital Group Inc. (JNS), Mexican government bonds declined 0.3 percent, inflation-protected U.S. bonds lost 0.4 percent and debt of Verizon Communications Inc. (VZ) -- one of his bigger company holdings -- dropped 0.3 percent. That compares with a 0.05 percent decline on the Bank of America Merrill Lynch Global Broad Market Index.
and

“Less liquid sectors such as TIPS continued to weaken as a result of Pimco concerns,” Leduc wrote in a Sept. 30 note. “There has not been measurable impact in most liquid sectors.”


Article here;  http://www.bloomberg.com/news/2014-10-01/gross-exposes-42-trillion-bond-market-s-key-flaw-in-pimco-exit.html


If we look at the real rate of return on TIPS since they were first issued, we can see that the real return has declined over the years.   This could be due to a secular decline in real rates, but is also, at least in part, consistent with some liquidity premium being present in the TIPS yield.






Monday, July 28, 2014

"Close the business schools!!" says English Professor.

An amusing rant from a humanities professor who seems to have an axe to grind with B-Schools and Finance Profs in particular.  Whenever you read an article in which the market is referred to in quotes, as in: "the market", you know that what follows is going to be a complete failure to understand the basics of supply and demand.  



Thursday, July 17, 2014

Finance research summarized for non-academics

Check out this new online journal/magazine that reproduces summaries of top finance research targeted at a broader audience.   This is an excellent idea and the first two issues contain some really good papers.

http://fame-jagazine.com/

It comes at a time when some people are questioning whether academic research in business is a positive NPV project. 


Friday, June 27, 2014

More on Dark Pools - fascinating stuff.

A 45 minute radio program from NPR.   Well worth a listen if you want to understand why stock trading is now dominated by professional insiders who are able to game the operations of markets to exploit other traders.

However, when the other traders are large institutions, it isn't clear that anything wrong is going on here.  These are big multi-billion dollar companies playing in a big market.   What is clear is that individual investors should steer clear (and index)!

http://www.thereformedbroker.com/2014/06/27/talking-dark-pools-and-hft-on-npr/

Thursday, June 26, 2014

Picking Pockets in Dark Pools

Josh Brown has a fascinating bit on how Barclays allegedly set up a dark pool so that informed traders to make money of the institutions suckered into trading there.  

http://www.thereformedbroker.com/2014/06/26/rolling-the-drunks/

At this stage these are just allegations, but still.




Sunday, June 8, 2014

An Uber valuation

Uber, the "find a taxi" app, has been priced at around $18bn based on a recent funding deal.  Now, while I have an awful track record for pricing the latest internet fad, $18 bn does seem a little steep for a company that will, perhaps, earn $200 million in a good year.

Using the flawed Price/Sales ratio as a valuation metric, Uber's valuation is about 90 times revenue.   To put this in perspective, Facebook and LinkedIn are around 12 times.  

It will be entertaining to see how this one plays out.