Tuesday, January 13, 2009

The ascent of money (on PBS)

I am watching "The Ascent of Money" on PBS right now. If you missed the show there is a website where you can watch the program online. It's marginally interesting and provides some general snippets of information. But frankly, it's a very unfocused show that bounces from one random finance topic to another, and doesn't provide very much detail or depth. Overall, not that good. But if you've got nothing better to do you might check it out.

Update 11pm - The show has just finished. On second thoughts don't bother watching - it's not worth it - just an hour of mindless rambling.

The problems with rating agencies...

Craig Newmark agrees that rating agencies are due a good amount of the blame...this article from seeking alpha describes some of the problems.

Monday, January 12, 2009

Shouldn't the premium on a US Gov CDS be zero?

Felix Salmon over at Portfolio.com notes that the CDS (credit default swap) premium on US Government bonds is around 50bp. This means that you can buy "insurance" on your US Gov Bonds for about half a percent a year. The question he poses is why is this not zero?

Its an interesting article and well worth a read.

Friday, January 9, 2009

Contango in the oil market

Bloomberg reports that Investment Banks (I thought that they were extinct) are looking to rent super tankers to store oil for future delivery. They want to take advantage of the contango in the futures market for oil. Contango is the amount a futures price exceeds the spot price.

Ordinarily, you shouldn't be able to buy the oil today and sell a futures contract for future delivery and then make money by storing the oil. But apparently, because traders are worried about a severe cut in OPEC supply in the future, the futures price is much higher.

An interesting data point from the article reveals that it costs about 80-90 cents per month to store a barrel of oil on a super tanker. So, given that:
West Texas Intermediate crude oil futures for March delivery are trading at $45.98 a barrel, about $4.78 more than the February contract.
This means that you could make well over $4 a barrel just storing Oil in March. An example of a supertanker mentioned in the article holds a million barrels. Of course there is also the cost of borrowing to pay for the oil up front, but with interest rates as low as they are, this shouldn't be too significant.

How forecasts are made

(Thanks to my colleague Ed)

It was autumn, and an indigenous tribal group asked their Chief if the winter was going to be cold or mild. Since he was a Chief in a modern society, he had never been taught the old secrets, and when he looked at the sky, he couldn't tell what the heck the weather was going to be.

Nevertheless, to be on the safe side, he replied to his tribal group that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.

But also being a practical leader, after several days he got an idea. He went to the phone booth,called the National Weather Service and asked, "Is the coming winter going to be cold?"

"It looks like this winter is going to be quite cold indeed," the Meteorologist at the weather service responded.

So the Chief went back to his people and told them to collect even more wood in order to be prepared.

One week later he called the National Weather Service< again.

"Is it going to be a very cold winter?" he asked. "Yes," the man at National Weather Service again replied, "it's going to be a very cold winter."

The Chief again went back to his people and ordered them to collect every scrap of wood they could find. Two weeks later he called the National Weather Service again.

"Are you absolutely sure that the winter is going to be very cold?"

"Absolutely," the man replied. "It looks like it's going to be one of the coldest winters ever."

"How can you be so sure?" the Chief asked.

The weatherman replied, "The indigenous people are collecting firewood like crazy."

There's an analogy here somewhere....

Stocks are yielding more than bonds..

From Mark Hulbert (who writes excellent columns - well worth reading)

Thursday, January 8, 2009

Fama and French blog

Check it out.... Fama and French are blogging...

Credit rating agencies: on the ball as usual

It must be great running a credit rating agency. You can say the patently obvious months (or years) after the fact and still make headlines...

For example, the Financial Times reports that Standard and Poor's has downgrade several banks...

Part of the problem with the banks was apparently due to :
“lax underwriting standards due to excess competition mean this cycle will be worse than prior cycles”.

Really? So the banks must have just started doing "lax underwriting" because if they were doing it earlier, S&P would have already rated them lower, wouldn't they?

HT:Don Fishback

A new motivation for an IPO

Companies go public for a range of reasons. The good - to raise capital to fund projects, the not so good (perhaps) - to let existing equity holders cash out. But portfolio.com has an example I haven't seen before - to bail out the debtholders who are current being defaulted on. Friendfinder Network has been loosing money, has negative equity and is teetering on the brink of bankruptcy, yet is trying to pursue an IPO. As Felix Salmon of Portfolio.com succinctly states:

If anybody really wanted to own Friendfinder Networks, all they would need to do is buy up its bonds, refuse to modify the covenants, accelerate the debt, and force the company into bankruptcy, where it would be handed over to its creditors, with shareholders being wiped out.

Wednesday, January 7, 2009

Finance/Economics blogs I read

A few of my favorite finance blogs...

Excellent for big picture economics

http://freakonomics.blogs.nytimes.com/ Interesting, often a little more obscure economics related stories

http://financialrounds.blogspot.com/ Finance postings by the "Unknown Professor" - good stuff and often quite humorous.

http://www.portfolio.com/views/blogs/market-movers/ Excellent analysis of financial markets and deals.

Another finance academics blog. More good stuff.

Did I miss any good ones? Please add a comment if you have any suggestions.

A commenter pointed out that I missed this 0ne - this is a great blog that looks at academic research and tries figure out whether the research has investment potential. Well worth a read. Thanks Wesley!

Ivy league endowments

The Economist has an interesting article on problems at some Ivy League school's endowments. Many schools adopted the so called "Yale Model" which basically advocated buying long term illiquid assets because universities presumably have long term holding periods. In recent years these endowments posted fantastic returns.

But there are a couple of problems with this model...First, the past returns are frequently based on estimations of asset value. This is because these illiquid assets don't trade very much (because they are illiquid) and therefore timely market data is unavailable on them. When an endowment spends part of its "returns" it is converting a paper return to an actual cash outflow. Second, when the universities saw other sources of income decline, they decided to try and liquidate some of the illiquid assets of the endowment to make up the short fall. Of course it's very hard to sell illiquid assets in a down market.

This is a clear reminder of the basic rule in finance: higher returns imply higher risk. In this case these endowments enjoyed higher returns due to higher liquidity risk. If you are going to buy illiquid assets, you should have enough money invested in very liquid assets to cover cash short falls. Of course, these very liquid assets will drag down your portfolio return. That brings us to the second rule of finance: there is no free lunch.