Archive for April, 2008

• Volcker at the Fed
  Eddy Elfenbein, April 29th, 2008 at 12:47 pm

  Megan McArdle has a smart post on her choice for the most underrated and overrated presidents of the 20th century. She says that Jimmy Carter’s economic policies are underrated and she cites his appointment of Paul Volcker to head the Federal Reserve as an example.
  I agree that Volcker was a good choice and Carter deserves credit for it, however I’m not willing to give him much credit. According to William Grieder’s wonderful book, Secrets of the Temple, Jimmy Carter was almost comically illiterate on monetary policy. Plus, the Volcker selection hardly signaled any policy shift from the Carter administration, and if Carter had realized what he was doing, he probably would have had second thoughts.
  Carter’s selection of Bill Miller for Fed Chairman was disastrous, and it made Volcker’s job that much harder. When it came to replace Miller, Volcker was actually Carter’s second choice. His first choice was Tom Clausen, who was the president of Bank of America (he later became head of the World Bank). Also, Volcker was already an important voice on the Fed. He was president of the Federal Reserve Bank of New York, which in the Federal Reserve system, is first among equals. The president of the New York Fed also has a permanent seat on the interest-rate-setting Federal Open Market Committee. The other bank presidents have to rotate. In fact, at the time of his appointment, Volcker was serving as vice-chair of the FOMC.
  So Carter’s choice was a natural elevation more than taking a major gamble, or boldly separating himself from a previous path. Still, he did make the right choice and that’s worthy of praise. The point that I find interesting is how often we give credit to people for doing something that really had no intention of doing. Instead, circumstances came to them, and they made the best of it. Perhaps, that’s a good definition of leadership.

• Investors Are Basically Crazy
  Eddy Elfenbein, April 29th, 2008 at 11:06 am

  I’m a bit skeptical of this, but I’ll pass this along from the Genetic Engineering & Biotechnology News website (I know, like you don’t have it under your favs):

  ‘Emotional inflation’ leads to stock market meltdown
  Investors get carried away with excitement and wishful phantasies as the stock market soars, suppressing negative emotions which would otherwise warn them of the high risk of what they are doing, according to a new study led by UCL (University College London). Economic models fail to factor in the emotions and unconscious mental life that drive human behaviour in conditions where the future is uncertain says the study, which argues that banks and financial institutions should be as wary of emotional inflation as they are fiscal inflation.
  The paper, published in this months issue of the International Journal of Psychoanalysis, explores how unconscious mental life should be integrated into economic decision-making models, where emotions and phantasies unconscious desires, drives and motives are among the driving forces behind market bubbles and bursts.
  Visiting Professor David Tuckett, UCL Psychoanalysis Unit, says: Feelings and unconscious phantasies are important; it is not simply a question of being rational when trading. The market is dominated by rational and intelligent professionals, but the most attractive investments involve guesses about an uncertain future and uncertainty creates feelings. When there are exciting new investments whose outcome is unsure, the most professional investors can get caught up in the everybody else is doing it, so should I wave which leads first to underestimating, and then after panic and the burst of a bubble, to overestimating the risks of an investment.
  Market investors relationships to their assets and shares are akin to love-hate relationships with our partners. Just as in a relationship where the future is unexpected, as the market fluctuates you have to be prepared to suffer uncertainty and anxiety and go through good times and bad times with your shares. You can adopt one of two frames of mind. In one, the depressive, individuals can be aware of their love and hate and gradually learn to trust and bear anxiety. In the other, the paranoid schizoid, the anxiety is not tolerated and has to be detached, so the object of love is idealised while its potential for disappointment is split off and made unconscious.
  What happens in a bubble is that investors detach themselves from anxiety and lose touch with being cautious. More or less rationalised wishful thinking then allows them to take on much more risk than they actually realise, something about which they feel ashamed and persecuted, but rarely genuinely guilty, when a bubble bursts. Again, like falling in idealised love, at first you notice only the best qualities of your beloved, but when everything becomes real you become deflated and it is the flaws and problems that persecute you and which you blame.
  Lack of understanding of the vital role of emotion in decision-making, and the typical practices of financial institutions, make it difficult to contain emotional inflation and excessive risk-taking, particularly if it is innovative. Those who join a new and growing venture are rewarded and those who stay out are punished. Institutions and individuals dont want to miss out and regulators are wary of stifling innovation. If other investors are doing it, clients might say why arent you doing it too, because theyre making more money than we are.

  You can find the full paper here.

• Markets In Everything
  Eddy Elfenbein, April 29th, 2008 at 8:57 am

  From Bloomberg:

  A pair of dinosaur turds, about 140 million years old, will go on the block tomorrow at Bonhams in New York. The rusty-brown mounds, known in scientific circles as “coprolite,” are estimated to fetch more than $350.
  Coprolite comes cheaper than other dinosaur fossils.
  “Most people think of dino dung and think, ‘Why would I want to have that on my shelf?'” said Thomas Lindgren, the Bonhams specialist in charge of the natural history sale. On the plus side, Lindgren said, the dung “no longer smells.”
  The seller is a Utah private collector who found the 5- and 7-inch, 2-pound specimens in the Morrison Formation, a layer of sedimentary rock dating back 150 million years, spanning several Western states and known for dinosaur fossils. To the untrained eye, coprolite resembles an ordinary rock.
  “The appeal is that it’s from a dinosaur,” Lindgren said. “This is one of those items that strikes a curious nerve. It’s just a great conversation piece.”

  I’m not sure if that’s a good investment. It took 140 million years just to get to $350. Of course, that’s starting from a low base.

• Making Millions in Milliseconds
  Eddy Elfenbein, April 29th, 2008 at 12:22 am

  This seems pretty cool, which probably means that I’m not all that cool. At UVA, Professor Stefano Grazioli has an investing tournament at the end of “Financial Systems Engineering” class.

  A team wins the tournament by minimizing their ‘tracking error’ – the difference, measured weekly (i.e. every seven minutes of tournament time), between the value of their portfolio and a portfolio value target that would reflect an ‘ideal’ rate of return (2.5 percent).
  Many of the 15 teams spent 40 hours or more preparing for the event, said Grazioli. “Virtually everybody that I ask tells me that this is the most complex problem that they have solved in their entire academic career. Not necessarily the hardest, but certainly the most complex — the most data, most moving parts, fastest moving, and so on.”

  If you run a hedge fund and you return 12% a year, you’ll be a millionaire. But if you can return 1% a month, every month with very little deviation, then you’ll be a billionaire. Many times over.
  Read the whole article. Best line: “About 10 percent of them in the anonymous class comments tell me this is the best class they have taken.”

• Intrade on the Electoral College
  Eddy Elfenbein, April 28th, 2008 at 10:47 pm

  I went to Intrade to see the latest results on outcome for each state’s vote in the electoral college. The table below shows each state, the latest price for Democratic and GOP candidate to win the state, the number electoral votes and the projected number for the GOP candidate (sorry Dems, it just seemed easier that way).
  The projected number is the GOP contract times the number of electoral votes. The total comes to 251.65, which indicates a Democratic victory. Let me add the usual caveats that this is far from scientific, and the trading volume is very light.
  State…DEM…….GOP…….EV……Proj. GOP
  AL……..7.5……….92.5……..9……..8.33
  AK……..10.0……..90.0……..3……..2.70
  AZ……..6.2……….93.8…….10…….9.38
  AR……..26.0……..74.0……..6……..4.44
  CA……..91.5……..8.5………55…….4.68
  CO……..60.5……..39.5…….9………3.56
  CT……..93.0……..7.0………7………0.49
  DE……..90.0……..10.0……..3……..0.30
  DC……..96.3……..3.7……..3……….0.11
  FL………20.0……..80.0……27……..21.60
  GA……..12.0……..88.0……15……..13.20
  HI……..93.0……..7.0……….4……..0.28
  ID……..5.0……….95.0……..4……..3.80
  IL……..92.2……..7.8……..21……..1.64
  IN……..24.0……..76.0……..11……..8.36
  IA……..66.0……..34.0……..7………2.38
  KN……..12.0……..88.0……..6……..5.28
  KY……..8.7……….91.3……..8……..7.30
  LA……..13.2……..86.8……..9……..7.81
  ME……..80.0……..20.0……..4……..0.80
  MD……..92.3 ……..7.7……..10……..0.77
  MA……..92.0……..8.0……..12……..0.96
  MI……..78.0……..22.0……..17……..3.74
  MN……..79.0……..21.0……..10…….2.10
  MS……..10.5……..89.5……..6………5.37
  MO……..42.5……..57.5…….11…….6.33
  MT……..10.2……..89.8……..3……..2.69
  NE……..15.0……..85.0……..5……..4.25
  NV……..50.0……..45.0……..5……..2.25
  NH……..53.5……..43.0……..4……..1.72
  NJ……..81.0……..19.0……..15……..2.85
  NM……..64.0……..36.0……..5……..1.80
  NY……..92.5……..7.5……..31……..2.33
  NC……..24.0……..76.0……..15……11.40
  ND……..15.0……..90.0……..3……..2.70
  OH……..61.9……..38.1……..20……7.62
  OK……..10.0……..90.0……..7……..6.30
  OR……..85.0……..20.0……..7……..1.40
  PA……..70.0…….. 33.5……..21……7.04
  RI……..94.0……..6.0……….4………0.24
  SC……..19.5……..85.0……..8……..6.80
  SD……..15.0……..85.0……..3……..2.55
  TN……..10.0……..90.0……..11…….9.90
  TX……..14.0……..86.0……..34…….29.24
  UT……..7.5……..92.5……..5……….4.63
  VT……..89.5……..10.5……..3……..0.32
  VA……..44.5……..55.5……..13……..7.22
  WA……..90.0……..10.0……..11…….1.10
  WV……..18.0…….. 82.0……..5……..4.10
  WI……..72.5……..27.5……..10………2.75
  WY……..7.5……..92.5……..3………..2.78
  A few observations. Once again, Ohio is the Middle C State. The states that are more in the GOP column than Ohio added up to 258 electoral votes, the states that are more Democratic add up to 260. You need 270 to win, so as goes Ohio, so goes the nation. At least, according to Intrade.
  Currently, five Bush states are in the Democratic column; Nevada, Colorado, Ohio, New Mexico and Iowa.
  It seems like there are just few battleground states: Nevade, New Hampshire, Colorado, New Mexico, and most importantly, Ohio. So if you don’t live in one of those states, you really don’t need to vote.

• Looking at High-Yield Bonds
  Eddy Elfenbein, April 28th, 2008 at 3:30 pm

  Thanks to the credit crunch, the market for high-yield bonds is in the toilet. For example, I called Vanguard to see what the yield is on its Vanguard High-Yield Corporate (VWEHX) fund is. The fund is currently yielding 8.3%, and it has rallied a good ways off its mid-March low.
  
  Please note that I’m not recommending this fund, I’m just using it to show you the state of the high-yield market.

• Golman Sachs’ Top 10 Stocks to Benefit from Rebate Checks
  Eddy Elfenbein, April 28th, 2008 at 12:50 pm

  Drum roll please:

  Cheesecake Factory
  Best Buy
  Darden Restaurants
  Home Depot
  JC Penney
  Kroger
  Kohls
  Royal Caribbean
  Safeway
  Wal-Mart

  Eh, call me unconvinced. I think it’s a mistake to over conceptualize investing ideas. (By the way, investing in something due to demographics is another good example.) There really aren’t many better ideas than to find great companies going for decent prices.

• The Crash Of Zoe Cruz
  Eddy Elfenbein, April 28th, 2008 at 12:06 pm

  NY Mag has a long article on the career of Morgan Stanley’s Zoe Cruz. At one point, it looked as if she would be Wall Street’s first female CEO. But she was fired in November. Here’s a sample:

  If that meeting in Mack’s office had been the meeting she was hoping for, Cruz would have made history: No woman has ever been CEO of a Wall Street firm. Now it looks like that won’t change for a very long time—there are no other high-ranking women in serious contention for a top job. If women across Wall Street viewed Cruz’s firing as a blow, there were men at Morgan Stanley who seemed almost gleeful about it. The woman they had nicknamed the “Czarina,” the “Wicked Witch,” and, most famously, “Cruz Missile” was out of the picture. They joked that it was worth the $9 billion loss to have her gone. In her rise through the company, Cruz had become not just one of the most powerful women on Wall Street but also the most loathed. It’s a matter of opinion whether those two things are inextricably linked, but for Cruz the same qualities that propelled her almost to the top also prevented her from reaching it.

• Introduction to Mamajuana Energy
  Eddy Elfenbein, April 28th, 2008 at 11:24 am

  I really don’t know what to say about this, but here’s Mr. Meredith Whitney’s herbal supplement.
  
  (Via: Timothy Sykes)

• Yahoo Finance Malfunction
  Eddy Elfenbein, April 28th, 2008 at 11:03 am

  If you use Yahoo Finance to track your portfolio, except for a small number of tickers, it doesn’t seem to be listing current articles this morning.
  Update: It looks like it’s back up.