Thursday, May 31, 2012

Is It Just an Expression?

Investors incessantly say:
"Sell in May, and then go away,"
And stock market nerds
Who heeded these words
Are 6% richer today.

Via the FT's Alphaville blog, we learn that May 2012 was a very bad month indeed for US equities:
The Dow Jones Industrial Average had its worst month in two years in May. The index fell 6.2 per cent, the largest decline since dropping 7.9 per cent in May 2010 (Wall Street Journal). Closing down 0.23 per cent at 1,310 on Thursday, the S&P 500 had its worst month since last September (Reuters).
A strict observance of the "Sell in May then go away" rule, executed on the first of the month, would therefore have yielded the best results.

Bloomberg vs the Big Gulp

Mayor Bloomberg despaired of obesity:
"What's fattening up NYC," said he,
"Is the public presumption
That soda consumption
Is better in servings of three," said he.

In a city known for swelled skylines and clogged vehicular arteries, Mayor Michael Bloomberg aims to slim waist lines and clear cardiac arteries. The mayor announced that New York would soon ban extra-large servings of sweet soft drinks in public places, having found that their consumption is linked to the city's growing obesity problem. Brushing aside criticism of the "nanny city", Mayor Bloomberg declared that New York City would not "wring its hands" over the obesity epidemic, but rather "do something."

Wednesday, May 30, 2012

Loss of Face in the Options Market

An Internet social sensation
Went to market with high expectation;
Before many fortnights,
The traders had bought rights
To sell it (without obligation).

The Wall Street Journal's options reporter Kaitlyn Kiernan writes that the put-call ratio on shares of Facebook turned decidedly bearish on the first day of options trading after the company's controversial IPO. Options traders bought 20.3 millions puts (the right, but not the obligation, to sell shares at a fixed "strike" price) but only 16.2 million calls (the right, but not the obligation, to buy shares at the strike price). The preponderance of puts indicates the prevailing sentiment that the price of $FB shares will continue to fall. The stock market took note, and Facebook shares slid another 9.6% to $28.84, a 24% drop from the initial public offer price of $38.

Monday, May 28, 2012

More Made in the USA

Though more work on the factory line
Is always a positive sign,
Manufacturing's rise
In the US belies
That wages are on the decline.

The headline in The Wall Street Journal reads: Flat US Wages Help Fuel Rebound in Manufacturing," but, looking a little behind the headline, it becomes apparent that the rebound is fueled by a sharp decline in starting wages. Two-tier wage agreements have become a common practice in union factories, with new hires earning $8-10 an hour less than "legacy" workers. Coupled with the strong rise in Chinese manufacturing wages, as well as increases south of the border, this development has led to the migration of factory jobs back to the US, and a 4.3% overall increase since 2010.

Friday, May 25, 2012

Economic Driver

Sales of new vehicles, typically,
Recede in recession terrifically,
'Til recovery beckons,
And that's when, we reckon,
They amplify upswings pro-cyclically.

Courtesy of FT Alphaville, we learn that auto sales have comprised 30% of GDP growth in the last two quarters of our tepid, ongoing recovery. Mining a gem from the research of Credit Suisse economists, Alphaville spotlights an interesting insight:
Motor vehicle output is less than 3% of GDP. But its standard deviation is more than nine times the overall GDP’s standard deviation. So in the world of growth rates, the auto sector will tend to punch well above its weight in expansions (and well below during recessions).
To all those who would worry that the surge in US auto sales is unsustainable, Alphaville points out that, as shown in the accompanying graph, the seasonally adjusted auto sales volume is still below the level of typical recessions such as that of 2001.

Wednesday, May 23, 2012

Own to Rent

Said a real estate vulture from Texas,
Buying properties out of his Lexus:
"Though it hardly may seem
The American Dream,
It's a help in reducing the excess."

Over at The Wall Street Journal, Dawn Wotapka and her colleagues on the real estate beat had a busy Wednesday, as they dug into the implications of strong increases in both new- and existing-home sales in the USA. New homes are now selling at an annualized rate of 343,000, 9.9% higher than a year ago. It's "another sign that the long-beleaguered housing market is in recovery mode," and suggests that "the industry's improvements are widespread." Existing home sales increased 3.4% in April, to an annual rate of 4.62 million, and the median home price has risen 10.1% in the last year, to $177,000. It almost goes without saying that sales volumes and prices are far lower than in the pre-crisis times.

Meanwhile, the Journal's Real Time Economics blog shows the cloud behind the silver lining: "Investors have accounted for about 20% of existing-home sales over the past few years. Speculators are taking advantage of falling home prices and low borrowing rates, as well as the shift from owning to renting. With demand for rental properties rising, landlord incomes increased 15% in the year ended in the first quarter." If losing your home and renting a new one is The New American Dream (as Dr. Goose put it), then investors have been quick to turn the dream into a reality.

On the Down Low at the Roadshow

Facebook $FB price chart for Monday, May 21, 2012
An analyst had a quick word
With investors his bankers preferred:
"We've cut our projections
For those with connections,
But won't tell the rest of the herd."

The fallout from the Facebook IPO continues. On Tuesday a spotlight was shown on the practice of IPO underwriters' not disclosing their analysts' estimates of companies' earnings, except to a small group of large institutional clients. Already a troubling practice, these quiet revelations appeared to skirt the letter of the law in the Facebook case. Analysts for Morgan Stanley and the other underwriters all made substantial cuts in their Facebook earnings forecasts during the pre-IPO roadshow, evidently based on information quietly provided by the still-private company. Joining Goldman Sachs in contempt for the retail "muppets" clamoring for $FB shares, the Morgans - J.P. and Stanley - have still not disclosed their estimates, as indeed they may not until 40 days after the IPO date. Reuters finance blogger Felix Salmon gives a full explanation of the issues and facts of the case, in a post that is worth the time of those who would like to gain insight into the world of stock underwriting.

Tuesday, May 22, 2012

Can You Have It All?

Politicians who like popularity
May advocate "growth with austerity",
An odd formulation
Of vague calculation,
But perfect political clarity.

European growth vs. fiscal austerity? "We need both," says ECB Executive Board member Jörg Asmussen. Mr. Asmussen, who recently joined the European Central Bank from the German finance ministry, maintained in a speech in Berlin that "the fiscal compact can be complemented by growth-enhancing measures." However, it is clear that, as a good German, he advocates fealty to fiscal discipline first and foremost; growth measures "make sense as a supplement, but the fiscal compact cannot be renegotiated or softened." Most likely Mr. Asmussen is just doing his bit to calm the political waters that have recently swept away such austerity advocates as Nicholas Sarkozy, as well as his own Christian Democrats in a recent regional election. After all, even an elite central banker would have trouble explaining how a government could simultaneously grow the economy while shrinking itself.

Monday, May 21, 2012

A Whale of a Tale

Said the boss of a trading facility,
Whose job was to crimp volatility:
"While I'm away jettin',
Be sure you don't threaten
The global financial stability."

Though much has been written about JP Morgan's "London Whale" and the $2-billion-and-growing loss that arose from his credit index trades, there has not been much focus on the interpersonal management dynamics of the case, until yesterday. The New York Times' Jessica Silver-Greenberg and Nelson Schwartz looked into the story and concluded that "Discord at J.P. Morgan Unit is Faulted at Loss." In a modern, highly-leveraged twist on "when the cat's away, the mice will play," it appears that the egos and ambitions of Bruno Iksil (the Whale) and his boss Achilles Macris could not be contained once the bank's chief investment officer, Ina Drew, was out sick for an extended period. Without Ms. Drew's "coolheaded, steely resolve", the internecine tensions between the CIO's New York and London offices devolved into daily screaming matches with no clear leader to to set limits and keep discipline.

Thursday, May 17, 2012

A Facebook Underwriter's Confession

"Before I'd put retirees in 'em,
I've got to confess my unease in 'em;
The shares would be splendid
If they were still friended
In one or two months, just to season 'em."

Facebook has finally priced its IPO at $38 a share, valuing the social networking company at $104 billion. The global frenzy for $FB was so great in the weeks leading up to the initial pricing that US demand alone would have bought 30 times the 421 million shares on offer. Under such circumstances, a double-digit "pop" in the price is to be expected on the first day of trading, and those who did not count themselves among the fortunate few to receive allocations of IPO shares had better wait for the hysteria to die down before "liking" Facebook stock with their retirement savings.

No Exit to Athens

Said the Austrian Minister Fekter,
Alarmed at a Greek exit specter:
"For leaving the 'zone,
The course is unknown"
(A point on which few would correct 'er).

"For Greece, any expert you dial up
On making a roadmap worthwhile up,
Most likely expects it
Is less like an exit
And more like a 20-car pile-up."

"If I go there will be trouble; if I stay it will be double."

So sang The Clash 30 years ago, in a eerie presentiment of the dilemma facing eurozone policymakers today. Should Greece stay in the euro, as Angela Merkel now advocates in a newly full-throated campaign? This would underpin European unity and lessen the contagion risk for Spain and Italy. It would also shackle the Greek economy to an overly strong currency and obligate the "core" countries to provide an indefinite flow of subsidies, as Hans-Werner Sinn, chief economist of Germany's IFO Institute, recently complained. And yet, the exit from the euro is not only uncertain and fraught with risk, it isn't even legal.

Thus, Austrian Finance Minister Maria Fekter told inquiring reporters flat out: "It isn't possible to leave the eurozone." Though such legal hurdles might be surmounted, experts who have studied the situation voice concerns about uncontrollable bank runs in Greece, as savers there fear the replacement of their euro nest eggs with cheaper New Drachmas. Indeed, such fears provoked the withdrawal of €700 million from Greek banks on Monday. It seems that the one thing that cannot be tolerated in the eurozone is more uncertainty.

"So you've just got to let me know, should I stay or should I go?"

Wednesday, May 16, 2012

Delayed Gratification

Said a young man without a home loan,
Back at home with his folks in Bayonne:
"While household formation
Is met with frustration,
My wild oats are sitting unsown."

Might there be demographic implications in the US economic data and outlook? A couple of current posts in The Wall Street Journal's Real Time Economics blog leave one to wonder if a "baby bust" may be developing. First, stagnant wages are limiting consumer spending; since October 2010, real wages have declined 1.2%, and consumers have limited capacity to tap their already tapped-out credit card lines to propel domestic spending. Secondly, RTE reports that the Conference Board has looked into the future of housing and seen a wave of renting and downsizing; actually, that sounds like the present if you add living at home with the parents. It all adds up to less room for the pitter-pattering of little feet, and less money to keep them in baby booties, in the foreseeable future.

Tuesday, May 15, 2012

Reversal of Fortune, Part II

There once was a trading technician
Who failed in his primary mission;
The bank, for this drawback,
Attempted to claw back
The bulk of his trading commission.

In reading of the fallout from the $2 billion derivative trading loss at J. P. Morgan & Co., and the bank's closing ranks around embattled CEO Jamie Dimon, I was struck by the mention of possible clawbacks in the compensation of those, such as the "London Whale" Bruno Michel Iksil and his erstwhile boss Ina Drew, who had direct responsibility for the loss. This got me to wondering: in our world of Too Big To Fail, moral hazard and golden parachutes, is the clawback of ill-gotten bonuses something that actually happens? I put the question to you, oh ye denizens of Wall Street!

Sunday, May 13, 2012

The Oracle of Limerick

Said the Irish economist, Kinsella:
"Our economy isn't quite insular;
We may seem like a rock
'Til we're hit by a shock
From Madrid or the Roman peninsula."

This weekend marked Limerick Day, otherwise known as the birthday of Edward Lear, who first popularized the limerick. On that day, the thoughts of an economic limericker naturally turn to Limerick's economist Stephen Kinsella. Professor Kinsella of the University of Limerick recently wrote a blog post asking "What Is The Important Thing No-One Is Saying?" His answer:
Irish people, I think, see that we really aren't the masters of our own destiny: that events in another country anther state could spell the end for us regardless of the choices we make. Were Spain or Italy to default, if the bond markets do not recover sufficiently from their current turmoil, and if the European authorities do not recognize the need for growth in the periphery to offset unsustainable increases in private debt that have been made public, we are sunk.
We can only hope that our next Limerick Day will find less anxious times for the citizens of Limerick.

Friday, May 11, 2012

Betting One's Hedges

There's a false sense of immunization
In many a hedge operation;
Positions one places
On ill-conceived bases
May end up as wild speculation.

JP Morgan Chase CEO Jamie Dimon stunned investors on Thursday with the announcement of a $2 billion trading loss in the bank's risk management unit. Some reacted with schadenfreude, in view of Mr. Dimon's previously dismissive attitude toward reports of the firm's massive credit default swap positions. The Chief Investment Office's head trader, Bruno Michel Iksil, had been dubbed "the London Whale" for his huge, market-distorting CDS bets on the so-called CDX IG 9 index of the credit risk of 125 companies. Mr. Iksil sold protection on the index during the first quarter, essentially writing an insurance policy that the indexed companies' credit would not deteriorate.

Based on his limited knowledge of this case, Dr. Goose is at a loss to explain how the selling of credit protection constitutes a risk management function for a bank (one would sooner expect them to be buying credit protection). Nevertheless, even the most well-intentioned hedge position can go awry if the underlying assumptions do not hold, and many a "hedge" entered into on the basis of a particular market outcome is just speculation by another name.

Thursday, May 10, 2012

An Evolving Position

"On marriage, this great institution,
My views underwent evolution,
Where once I believed
That for gay folks aggrieved,
Civil unions remained the solution."

Said Obama: "I could not neglect
The wish for regard and respect,
Above and beyond,
For the family bond
From the children they love and protect."

President Barack Obama electrified the nation Wednesday with the statement that he now supports the right of same-sex couples to marry. This "evolving position", as he put it, represents a significant shift from his long-held view that the rights of same-sex couples could be addressed through civil unions, and comes at a time of upheaval on the issue. Where, on the one hand, polls show public support generally moving toward marriage equality, the President's announcement came one day after North Carolina voters ratified a constitutional amendment to define marriage as a contract between a man and a woman, and ban same-sex civil unions. Cynics may note that President Obama's public support, which he restricted to a non-federally-binding statement of his personal views, comes after heavy lobbying from the pro-marriage-equality CEOs of big banks, on whom Democrats are dependent for political contributions. Nevertheless, this is a historic first for an American President.

Tuesday, May 8, 2012

Where the Wild Things Live Forever

A writer of passion and heart
Made picture books into an art,
With bold exhortations
To three generations:
"And now, let the wild rumpus start!"

Rest in peace, Maurice Sendak 1928 - 2012

Stimulus at the Pump

A fall in the fuel price enhances
The state of the nation's finances,
And the drag it removes
Most likely improves
The incumbent's electoral chances.

Most Americans have likely noticed a fall in the price of gasoline over the last month. The US Energy Information Administration reports that the price at the pump now averages $3.79 a gallon, down 3.8% from the 2012 peak of $3.94 on April 2. Some of the causes of this happy development include: softer demand due to the weaker economy, a drop-off in perceived tensions with Iran, additional refinery capacity and improvement in crude oil distribution logistics. As the incumbent's political fortunes seem to rise and fall inversely with the price of oil, one may now expect joy and consternation respectively in the Obama and Romney camps. Though, aside from the conduct of Iranian relations, the White House has little impact on short-term petroleum price movements, they may nevertheless reap some political benefit as the price of gasoline backs away from the feared $4-a-gallon threshold.

Sunday, May 6, 2012

Constructive Solutions

What should we have done if we craved
That America's middle be saved?
Researched and retooled,
Retrained and reschooled,
Reinvested, rebuilt and repaved.

Financial Times' Washington correspondent Edward Luce has written a book that nobody wants to hear, but everyone needs to read: Time to Start Thinking: America in the Age of Descent. In it, Mr. Luce discusses the causes, and some solutions, to the declining state of American affairs. One of the difficulties in winning public investment in the renewal of American competitiveness, as in the verse above, is that neither party is willing to admit the state of decline. Thus, where the government has addressed our problems, it has generally made them worse. The solutions, however, are fairly clear, once we acknowledge the issue.

Friday, May 4, 2012

Mr. Blankfein's Politics

"There's belief among Washington's polity
That Wall Street's Republican - solidly,
As we bankers assent
To the GOP bent
To fight against income equality."

"But on social concerns, it appears,
We set such belief on its ears,
In our scorn for the fringe
That would tend to impinge
On the rights of our gay Muppeteers."

According to, Goldman Sachs CEO Lloyd Blankfein's gay-rights stance "shows Wall Street's dilemma": whereas the financial titans might like Republicans to regulate banking and labor unions, they'd prefer the Democrats on contraception and marital unions. Mr. Blankfein took part in the "Out on the Street" LGBT Leadership Conference on Tuesday at Bank of America's New York office. As he noted in his earlier, robust endorsement of marriage equality in New York (see the video below), Mr. Blankfein believes that such policies are "just good business," facilitating the recruitment and retention of talent around the world. On the other side, the North Carolina legislature is considering a constitutional ban on same-sex marriage, which Bank of America expects will make it yet harder to attract employees to its Charlotte headquarters.

Wednesday, May 2, 2012

The Trouble With Chen

Said Wen: "Mr. Chen has offended,
With the shelter the Yanks have extended,
And no other gent
In the ranks of dissent
Has quite so offended as Chen did."

US Secretary of State Hillary Clinton's visit to China has been overshadowed, and nearly derailed, by the case of Chinese human rights activist Chen Guangcheng. Mr. Chen, a self-taught lawyer who has campaigned against China's policy of forced sterilization and abortion, escaped house arrest in his native Shandong and sough asylum in the US embassy in Beijing. Evidently trying hard not to anger their nationalistic hosts, US diplomats worked behind the scenes for Mr. Chen's "voluntary" exit from their protection, with solemn warnings to Beijing to respect his human rights. For his part, the activist now openly fears for the safety of himself and his family, and wants to leave the country. It's just one more example of how things are never simple when two big trading partners with radically different political systems attempt to negotiate both commercially and politically.

So-So Employment Consensus

The employment report's understood
To say the economy could
Adroitly provide ways
To move along sideways,
But not ever get any good.

The ADP Employment Report will be released Wednesday morning at 8:15 and, though hotly anticipated, is not expected to be so hot. As shown in the graph, the disastrous employment losses of 2008-2009 have reversed and begun to recover, but not at a rate that would bring back full employment. The economists' consensus is for a gain of 183,000 jobs in April, down from the 209,000 increase in March. So-so, and trending lower. There is a possible upside surprise, though: Tuesday's better-than-expected ISM manufacturing survey, as well as recent regional surveys, point towards manufacturing job creation exceeding expectations.

Tuesday, May 1, 2012

Manufacturing Madness

The ISM has a surprise
For all of those pessimist guys:
The data extend
The positive trend
Of the previous few PMIs.

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