Wednesday, July 23, 2014

Fed's Letter to Deutsche Bank

"In reviewing your earnings per annum,
We're less than impressed, and we pan 'em.
The bank may have gains,
But this letter pertains
To the haphazard way that you ran 'em."

The Wall Street Journal reports that the Federal Reserve Bank of New York has vented its frustration with the sloppy reporting of Deutsche Bank's US branches and subsidiaries.  In a December 2013 letter to the bank, senior Fed supervisor Daniel Muccia complained  that the bank's reports "are of low quality, inaccurate and unreliable. The size and breadth of errors strongly suggest that the firm's entire U.S. regulatory reporting structure requires wide-ranging remedial action."  It's a problem long in the making, wrote Mr. Muccia: "Since 2002, the FRBNY has highlighted significant weaknesses in the firm's regulatory reporting framework that have remained outstanding for a decade."

Of course, it's not only the Fed that should be concerned.  Investors too rely on firms' financial reports to value their securities and decide when to buy, sell or hold.  Lest we forget, the feeling that "you can't trust the numbers" was a factor in the global financial meltdown of not so long ago.

Friday, July 18, 2014

New Home Starts and Stops

Housing construction has had
A month that's exceedingly bad
And the drop may be due
To Millenials who
Live at home with their Mother and Dad. 

The trouble of this generation
Finding jobs after their graduation
Has certainly stalled 
The stat that is called
The rate of new household formation. 

It's up to America's young
To climb on the opening rung;
From the nest you must fly
So the housing supply
Will not be so much overhung. 

Two loosely related statistics came out on Thursday: first, that the number of US multigenerational households had climbed to a new high; and second, that the number of housing starts had fallen off dramatically in June.  The first datapoint indicates less demand for homes and the second, less supply.

The Pew Research Center, in an analysis of US census data, determined that 57 million Americans, or 18.1% of the population, are living in households that combine young adults and their parents or even grandparents.  This is the largest proportion of such households since the '50s.  Pew sees the trend thusly: "The declining employment and wages of less-educated young adults may be undercutting their capacity to live independently of their parents."   While such arrangements may serve a few purposes, they do directly reduce the demand for housing.

Meanwhile, the Commerce Department announced that housing starts across the USA had fallen by 9.3% in June; in the South, they fell by 30%.  In spite of my poetic license above, most industry people interview by the Wall Street Journal did not blame stay-at-home Millenials for this development, which actually flies in the face of a more broadly upward trend over the last few years.  Many factors were cited, including the lingering effects of wet winter and spring weather; lack of skilled construction labor in some markets; and persistently weak consumer confidence.

However, the multigenerational household trend is not a flash in the pan; it has been building since the '80s, and over the long term it must impact the housing market in a fundamental way.

Monday, June 23, 2014

High-Frequency Trade-Off

An HFT trader named Cunningham
Remarked on the skeptics confron'ing 'im:
"The spreads I've compressed
Make it cheap to invest,
So it's okay that I am front-running 'em."

The issue of high-frequency trading won't go away, and positions are hardening like the western front in the 1st World War. On the one side are journalists and many investment managers who say that these ultra-fast trades simply skim income off the top of the market; on the other, HFT firms and other market participants who say that such lightning-fast activity is benign and makes markets cheaper and more liquid. Sure, says the first group; HFTs supply all the liquidity you want until you actually need it. 

In the latest salvo, The New York Times and the Guardian's Heidi Moore editorialized yesterday that HFTs have rigged the market, as the exchanges and policy makers have allowed them to do over the last several years. This provoked a furious counterattack, adding a number of industry participants to Ms. Moore's already-formidable list of blocked Twitterers. 

Meanwhile, the US Senate has held inconclusive hearings on the issue, evidently deciding to leave it to the SEC.  The Commission, for its part, is looking into the issue but playing its cards close to the vest. One can only hope that the commissioners keep investor protection uppermost in their minds, even if the harm to investors from HFT is not blindingly obvious. 


Thursday, June 12, 2014

A Cupful of Troubles

As the World Cup begins there are millions
Of poor and disgruntled Brazilians,
Whose new soccer venues
Have certainly been used
In misallocation of billions. 

It's not that there is any shame
In hosting The Beautiful Game,
But if chances were lost
To gain from the cost,
The political class is to blame. 

For fans there is some consolation,
Amidst economic frustration,
That statistics predict -
When the last ball is kicked - 
A victory for the host nation. 

What's more, you should not find it strange
How the World Cup makes sentiment change,
That a home-country win
Makes an up-trend begin
On the Bolsa, the Bourse or Exchange. 

But investors more seasoned than callow
In London, New York or São Paulo 
Never try to fill up
All their hopes in a Cup;
For that, it's a little too shallow. 

Every four years, I join with most of the world in a bout of football fever. Even the hard-working economists at Goldman Sachs get the bug, and publish their statistical analysis predicting the outcome of the World Cup.  As you probably know, Goldman predicts a home-country win this year. They also show how World Cup victory is also correlated with positive investor sentiment and a bullish stock market in the winning country, at least for a few weeks. After that, it's back to the grind. 

Unfortunately, the hosting experience this year is marred by the disappointment felt by many Brazilians that the billions of reais spent on new stadiums and related World Cup infrastructure are over budget, overly late and under-delivering on promised general economic benefits. 

Oh, well. Good luck to the Seleção today in their home opener against Croatia!

[Here is the link to the Goldman Sachs economic report on the 2014 World Cup: ]

Thursday, May 29, 2014

Dreaming of Streaming

Said Timmy to Jimmy & Dre:
"Whether Apples keep Dr.s away,
It sweetens the tones
On iPods & -Phones
If revenue streams when they play."

Said the Dr. & Jimmy to Tim,
On the music they're making with him:
"Without some new Beats,
One's coolness depletes
And the revenue outlook is dim."

Said Timmy: "A streaming solution
May not be the next evolution,
But it's better I blew
3 billion on you
Than a shareholder cash distribution."

In a move that was so long anticipated, many investors forgot about Dre, Apple yesterday confirmed its intention to buy Beats Electronics LLC.  The $3 billion acquisition brings with it Beats co-founders Dr. Dre and Jimmy Iovine.  Though best known for its high-end, sexy headphones, Beats is thought to be more valuable to the provider of iTunes, the leading online music store, for its nascent music streaming service.  As Heidi Moore reports in the Guardian, music downloads have peaked, and actually declined 2% to $3.9 billion last year, while subscription-based revenues rocketed up by 50% to $1.1 billion.

Mr. Iovine, a long-time record industry leader, "was one of the first industry executives to anticipate the download business's decline and advocate for subscription and streaming services as music's future," according to one analyst.  Mr. Iovine has also maintained a long and friendly relationship with Apple and iTunes, going back to the origins of online music sales under Steve Jobs.

Apple CEO Tim Cook must certainly hope that the combination with Beats will once again put the company in the position of knowing what the consumer wants before the consumers themselves do. 

Tuesday, May 13, 2014

Central Bankers Respond to the Employment Crisis

"Our house is foreclosed on in days,
And we can't find employment that pays; 
Pray what can you do
To carry us through
Our long economic malaise?"

"Central bankers are touched by your trouble,
So our efforts we'll boldly redouble
To keep money soft
And hold you aloft
On a frothier stock-market bubble."

These were my thoughts on reading yet another article on the likelihood of more ECB stimulus to address that continent's deflationary dangers.  Not that I have anything against ECB (or Fed) stimulus  per se; it's just that I'm skeptical that the management of inflation and deflation will do very much to address the serious long-term unemployment problems in the Old World and the New, and I'm not sure that the risk of frothier markets is worth it.

Thursday, May 1, 2014

Nothing Is Better Than Something

The Fed stirred up market festivity,
In spite of low business activity,
From the joy that relates
To their keeping the rates
At zero, as is their proclivity.

With rates so depressingly low,
Fixed income has nowhere to go
So the stock market beckons
To each one who reckons
The chance that their nest egg may grow. 

It highlights how hard to discern it is
To know when the bond market's turn it is,
But with rates to be found
At the null lower bound,
The Dow lacks investment alternatives.

Tuesday, April 22, 2014


Fed Chairmen (paternal or motherly)
Have made a depressing discovery:
If demand isn't great,
You can lower the rate
But you can't cut your way to recovery.

Thursday, April 3, 2014

ABCs of HFTs

Of late we have heard much verbosity
Expressing the Street's animosity
Toward traders who trade
With programs they made
To profit by rapid velocity. 

Indignant stock-pickers confront one
With evidence (and it's a blunt one)
That HFTs aim
To rig the whole game
By trading so fast they can front-run. 

HFTs claim, in defense,
Their volume may lower expense 
And help to enrich
The others from which
They're skimming off fractions of cents. 

My view may be non-analytical
But in this matter tends toward the critical,
For it's hard to ascribe
A positive vibe
To a practice at heart parasitical. 

High-frequency trading represents a sort of "rise of the machines" over Wall Street, in which powerful computer algorithms are dedicated to exploiting market information almost literally at the speed of light. The practice has long been controversial among market professionals, where opinions differ as to whether such machines personify R2D2 or the Terminator. 

Michael Lewis, author of Moneyball and Liar's Poker, has written a new book called Flash Boys, which comes down on the side of "hasta la vista, baby."  In an interview on 60 Minutes, Mr. Lewis brought this Wall Street issue on a perp-walk down Main Street. 

"The stock market is rigged," declares Mr. Lewis, by a combination of HFTs, big banks and the exchanges themselves. The HFTs are allowed to see everyone else's trades a split second before the general market does, giving their lightning-fast algorithms time to get out in front of market-moving order flows. This amounts to small-scale theft, repeated so often and so quickly that it becomes large-scale. 

However, some knowledgeable insiders disagree, and say that HFTs have been good for the small investor. Their big volume of small trades has lowered the bid-ask spread, reducing everyone's cost of execution. Much of the complaining, says Cliff Asness of AQR Capital Management, comes from money managers who can no longer place large orders without moving the market. "Well, sorry," counters Mr. Asness, "but prices responding quickly—and traders not being able to buy or sell a ton without the market moving—is what is supposed to happen in a well-functioning market."

A compelling counterpoint to be sure, but the fact remains that some firms trade with high frequency while losing with rarity, or not at all.  "How is it possible that one of the largest high-frequency trading firms executes millions and millions of orders for four years without ever having a down day?" asks Barry Ritholtz.  "The short answer is what they do is not trading -- it is skimming. I call it legalized theft. High-frequency trading is a tax on investors, encouraged by the exchanges, allowed by the SEC."

Are we ready to prosecute the Terminator for algorithmic inside trading?

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