This is the shape of the current portfolio. Will post on my current thinking behind this at the weekend.
Cash 47%
Long equities (mostly in 2 names) 18%
Long index equity (Dividend ex financials stocks) 5%
Short equities (inverse financial ETFs) 9%
Long bond ETF (TLT) 17%
Canadian long bond ETF 5%
Currency exposure is USD 46%, GBP 31%, EUR 10%, CAD 5%, AUD 4%, JPY 4%.
Thursday 29 April 2010
Tuesday 27 April 2010
UK Housing
I am trying to sell my apartment in London and I am getting a first hand view of how disfunctional the market has become. We first had a Greek cash buyer who offered the full asking price (which we thought ourselves was too high at 20% over the 2007 peak valuation) but they disappeared with no explanation. We then had an offer at our new reduced price (still 15% above the 2007 peak) which fell through yesterday on account of the person who is buying being advanced another $150,000 by her parents and hence being able to afford a better area. Life is definitely easy for some people.
We now have a new buyer at a slightly lower price who is again a cash buyer bankrolled by her family.
On the other side we are looking at a project on the market for 20% below the 2007 peak valuation which has been reduced twice. It need I am fairly sure that we will lose a bit of money, at least on paper, at some point but it is in a perfect area and near an extremely good state school so has life quality and financial advantages beyond pounds and pence. It also might be a good long term hedge against a monetary over-reaction by the BofE egged on by the next government.
I am not sure what all this means. My initial thoughts are that central London prices are at bubble levels and the lack of "normal" buyers (UK based 20% down types) is symptomatic of the lack of affordability at the bottom of the chain. I have also seen many properties which have been on and off the market a few times as deals fall through and I interpret this as a sign that the banks are unwilling or unable to close deals at these inflated levels (maybe someone has learnt a lesson or two - you can but hope). It would appear that for whatever reason that their is a high degree of instability in the market, like a liquid approaching boiling point and this cannot be a good thing.
We now have a new buyer at a slightly lower price who is again a cash buyer bankrolled by her family.
On the other side we are looking at a project on the market for 20% below the 2007 peak valuation which has been reduced twice. It need I am fairly sure that we will lose a bit of money, at least on paper, at some point but it is in a perfect area and near an extremely good state school so has life quality and financial advantages beyond pounds and pence. It also might be a good long term hedge against a monetary over-reaction by the BofE egged on by the next government.
I am not sure what all this means. My initial thoughts are that central London prices are at bubble levels and the lack of "normal" buyers (UK based 20% down types) is symptomatic of the lack of affordability at the bottom of the chain. I have also seen many properties which have been on and off the market a few times as deals fall through and I interpret this as a sign that the banks are unwilling or unable to close deals at these inflated levels (maybe someone has learnt a lesson or two - you can but hope). It would appear that for whatever reason that their is a high degree of instability in the market, like a liquid approaching boiling point and this cannot be a good thing.
Thursday 22 April 2010
Monday 19 April 2010
Long reality, short morality
I put on a new position today after I saw the early morning bounce in financial names and C up 8%. I don't even need to read the results having read that their balance sheet was up 8% to $2trn and that the earnings were driven by lower credit loss reserves. Mark to fantasy has started to create bottom line profits. In addition, the lack of read across from the GS problems which surely are just the start of a political witch hunt (ok - so they are actually witches so not sure it qualifies as a witch hunt).
Given the charade that is this rally I do not feel comfortable being outright short so I have gone long 7% of the portfolio in DTN (Dividend stock ex financials) against 5% SEF (short US financials). I figure that at some point reality (cash, dividends etc) might be appreciated more by the market than the pipe dream earnings of the banksters.
Given the charade that is this rally I do not feel comfortable being outright short so I have gone long 7% of the portfolio in DTN (Dividend stock ex financials) against 5% SEF (short US financials). I figure that at some point reality (cash, dividends etc) might be appreciated more by the market than the pipe dream earnings of the banksters.
Sunday 18 April 2010
Wisdom I have gained
I was answering a question from Thor at Traders Anonymous last night regarding where I learned what I know about trading/investment. I answered that I did not think I was much of an expert but had worked with a lot of great traders and hoped it had rubbed off on me. Thinking about it though, I realised that I had probably learned as much from the mistakes of poor traders than the successes of the good ones.
Please see if you can spot the connection between these people?
1. Trader at a large European IB who had the biggest corporate bond book in Europe. Not content with this he also took massive punts on US interest rates. Despite predicting the large correction in 2004 coming he did not reduce his book, instead he attempted to hedge using cds. He stopped being profitable that year and was forced out a couple of years later, the bank unwinding some positions which would have been massively profitable (he had tens of millions of 5 year cds on the US broker dealers bought at spread of 20-30 bps).
2. Trader at the same IB who, not content with running a profitable CDO origination desk, levered up massively to buy positive carry AAA CDOs (subsidised by poor funding charge allocation by the bank).
3. Trader who bought extremely cheap equity (0-2.5%) protection from unsuspecting investors in European ABS (including Allied Irish Bank if memory serves). However rather than waiting for this protection to pay out, which would have been a great trade, he tried to monetise the theoretical day 1 gain by entering into a large portfolio on which the present value of the carry was shown to massively outweigh the protection payment. The bank let him have his pnl on day1, never considering the possibility that the assets could fall more than 2.5% below par (hey they are AAA!).
4. Brazilian and Swiss hedge fund managers who made massive leveraged bets on mid caps, hedged with large caps and indices. They made hay in the bull markets of 2005-2007 before being wiped out in 2008.
5. Another Brazilian hedge fund who stopped their relatively successful strategy of buying reverse convertibles with floors when equities became “too cheap” in mid 2008. They bought the bargain stocks (C! AIG! Lehman!) and took out the floors on the RCNs on their usual names to get “more return”.
6. Big name prop desk head at big name bank who tried to apply his previously stellar performance in trading relative values in listed equities to investing in private equity based on the same kind of analysis. He wiped out three years of profits in a private equity book which was only 30% of his portfolio.
Lessons learned:
1. If in doubt, reduce risk, don’t try to hedge by adding more positions. It’s no use entering a great trade early if you are not around to see it to conclusion.
2. Short term greedy generally makes you a long term loser and if you don’t assess people’s performance relative to gross as well as risk adjusted capital, they will act in their own interests, not those of the firm.
3. See 2. And don’t fall in love with one product just because it has not hit a bad patch in the last few years. Everything has a spell on the ropes at some point.
4. Earnings multiples matter about as much as the colour of the paper in the Annual Report when liquidity disappears. Never leverage bets on illiquids, even if you “hedge” the market risk with shorts. The shorts can turn round and gobble up your capital in a flight to quality just when you need them most. The NAVs of these two fund went down in almost perfect correlation despite them operating in completely different markets – liquidity tends to be a global phenomenon in a crisis.
5. Not saying that their original strategy would have been a winner in 2008 but sticking to what you know and not getting tempted by bargains in areas you know less about is vital to riding out a storm.
6. Again stick to what you know. Private investment is all about timing and the ability to back and influence the right management. Investing blind and sitting back to await your payday only cuts it in a debt fuelled bubble. There are no shortcuts even for the best trader.
The answer to the connection is that all of them are fabulously wealthy and all (except number 6 who is about level) have cost their employer enormous sums of money. Perhaps the main lesson is that you should make your mistakes with other people’s money.
Please see if you can spot the connection between these people?
1. Trader at a large European IB who had the biggest corporate bond book in Europe. Not content with this he also took massive punts on US interest rates. Despite predicting the large correction in 2004 coming he did not reduce his book, instead he attempted to hedge using cds. He stopped being profitable that year and was forced out a couple of years later, the bank unwinding some positions which would have been massively profitable (he had tens of millions of 5 year cds on the US broker dealers bought at spread of 20-30 bps).
2. Trader at the same IB who, not content with running a profitable CDO origination desk, levered up massively to buy positive carry AAA CDOs (subsidised by poor funding charge allocation by the bank).
3. Trader who bought extremely cheap equity (0-2.5%) protection from unsuspecting investors in European ABS (including Allied Irish Bank if memory serves). However rather than waiting for this protection to pay out, which would have been a great trade, he tried to monetise the theoretical day 1 gain by entering into a large portfolio on which the present value of the carry was shown to massively outweigh the protection payment. The bank let him have his pnl on day1, never considering the possibility that the assets could fall more than 2.5% below par (hey they are AAA!).
4. Brazilian and Swiss hedge fund managers who made massive leveraged bets on mid caps, hedged with large caps and indices. They made hay in the bull markets of 2005-2007 before being wiped out in 2008.
5. Another Brazilian hedge fund who stopped their relatively successful strategy of buying reverse convertibles with floors when equities became “too cheap” in mid 2008. They bought the bargain stocks (C! AIG! Lehman!) and took out the floors on the RCNs on their usual names to get “more return”.
6. Big name prop desk head at big name bank who tried to apply his previously stellar performance in trading relative values in listed equities to investing in private equity based on the same kind of analysis. He wiped out three years of profits in a private equity book which was only 30% of his portfolio.
Lessons learned:
1. If in doubt, reduce risk, don’t try to hedge by adding more positions. It’s no use entering a great trade early if you are not around to see it to conclusion.
2. Short term greedy generally makes you a long term loser and if you don’t assess people’s performance relative to gross as well as risk adjusted capital, they will act in their own interests, not those of the firm.
3. See 2. And don’t fall in love with one product just because it has not hit a bad patch in the last few years. Everything has a spell on the ropes at some point.
4. Earnings multiples matter about as much as the colour of the paper in the Annual Report when liquidity disappears. Never leverage bets on illiquids, even if you “hedge” the market risk with shorts. The shorts can turn round and gobble up your capital in a flight to quality just when you need them most. The NAVs of these two fund went down in almost perfect correlation despite them operating in completely different markets – liquidity tends to be a global phenomenon in a crisis.
5. Not saying that their original strategy would have been a winner in 2008 but sticking to what you know and not getting tempted by bargains in areas you know less about is vital to riding out a storm.
6. Again stick to what you know. Private investment is all about timing and the ability to back and influence the right management. Investing blind and sitting back to await your payday only cuts it in a debt fuelled bubble. There are no shortcuts even for the best trader.
The answer to the connection is that all of them are fabulously wealthy and all (except number 6 who is about level) have cost their employer enormous sums of money. Perhaps the main lesson is that you should make your mistakes with other people’s money.
Banksternation weekly pnl review
Flat on the week. GBP short, TLT and bank shorts went down then up, Equities went up then down. Did nothing except the experimental long GBPZAR. Going too see how we open tomorrow before doing anything. I did not get the feeling there was any genuine fear on Friday as the buck barely moved as financials sold off, even though Treasuries caught a bid.
Fraudman Sachs
There are two key questions for me which draw the line between outrageous ruthlessness and wholesale, management endorsed fraud.
1. Did Tourre genuinely, whether explicitly or implicitly, tell ACA that Paulson would be long the equity in the structure.
2. Were the losses on the deal incurred by GS as a result of a good faith backing of their sponsorship of the vehicle or did they inconveniently run out of negligent idiots to sell the rest of the tranches to.
1. Did Tourre genuinely, whether explicitly or implicitly, tell ACA that Paulson would be long the equity in the structure.
2. Were the losses on the deal incurred by GS as a result of a good faith backing of their sponsorship of the vehicle or did they inconveniently run out of negligent idiots to sell the rest of the tranches to.
Friday 16 April 2010
Northern Rock
Interesting report published recently from the independent valuer of Northern Rock. He looks like he made a good, honest appraisal of how much NR was worth when the UK government took control and how much it would be worth now without government support. C and BAC are you listening?
The shareholders are predictably furious but I agree fully with most of what he says in the report - a bank without liquidity is worth nothing.
http://www.scribd.com/doc/30051240/Northern-Rock-2
The shareholders are predictably furious but I agree fully with most of what he says in the report - a bank without liquidity is worth nothing.
http://www.scribd.com/doc/30051240/Northern-Rock-2
Wednesday 14 April 2010
Experiment - Is ignorance bliss or is a little bit of knowledge a dangerous thing?
I have only recently been introduced to EW analysis. My knowledge comes only second hand from reading Prechter’s Perspective and from reading Andy T, I-Man, CV et al on Traders Anonymous. After a complete lack of exhaustive study I have gleaned 2 insights – movements tend to happen in 3 and 5 waves and waves tend to retrace to Fibonacci ratios before continuing with trend.
Armed only with this knowledge I am going to experiment with some trade ideas on the GBPZAR cross in which I detect an EW type pattern. Apologies for the bad chart – still trying to work out the technology.
I have 3 scenarios in mind ranked in order of likelihood:
1. The recent move down to 11 completed 4 waves down from the Dec08 high. I therefore expect a retrace from 11 to around 11.8 before commencing a further wave down below 11. A close above 11.7 followed by a close below 11.5 would suggest this is what is happening.
2. The recent move down to 11 completes 5 waves down from the Dec08 high and the recent move off 11 is the start of a new uptrend. A close above 12 would suggest this is the case.
3. The move down to 11 was the bottom of a second wave down from the 13.54 high in Aug09. We would therefore expect a retrace to around 12.3 before commencing a strong P3 type wave down to well below 11.
The confusion between 1 and 2 is caused by the move between the Aug09 high at 13.54 and the Mar10 bottom at 11. There were 2 down waves ending at 11.58 and then 11.68. Given that the second low in Jan10 was higher than the Oct10 low I am not sure whether to count this as one wave or two.
The third scenario looks a bit unlikely as it would imply a blow off top in risk assets, although with the right circumstances in gold prices and UK elections for example, we could see a big move in this cross independent of a risk on blow off. A risk off trend in other markets would probably kill this scenario and given the recent congestion near the highs I see this as high probability and hence scenario 3 is low probability.
However I think there is a limited risk trade for all 3 scenarios so I have gone short ZAR 11,300 v GBP 1,000. Stops are set at 11. At present the plan would be to take half the position off at 11.7 but re-establishing at 12 if we continue up above 11.7. If instead we bounce off 11.8 like scenario 1 I will close the ZAR short at the second visit to 11.7 and initiate short GBP 1,000 v ZAR at 11.5 with stops at 11.8. If we continue to go up above 12 I would stay short ZAR until we hit 12.3 where I would tighten the stops to 12. A close above 12.3 followed by a close below 12.1 would bring scenario 3 into play so after a stop out of the short ZAR at 12 I will initiate a long at 11.8.
Let’s see how this little experiment works.
Tuesday 13 April 2010
Market manipulation - surely not
Anyone else see how the 7x bid covered Greek notes today headed South at the same rate of knots as a Greek shipping magnates yacht but one hour after the auction. Its almost like the bid cover number was a made up pile of crap. Unless the Greek fiscal situation took a massive dive in the hour between the auction and the start of the price descent causing a logical reassessment of the required yield. No? Thought not.
Going Concern
Came across a great site today http://retheauditors.com/. She goes into some very impressive detail to undress the incompetent cartel called the big 4. Having worked for one of them I can confirm that the incompetence, deliberate ignorance and concern for legal liability rather than accuracy and transparency is all true.
Ironic that these partnerships issue going concern opinions when they are so clearly living on borrowed time.
Ironic that these partnerships issue going concern opinions when they are so clearly living on borrowed time.
Monday 5 April 2010
Banksternation weekly pnl review
Crap week this week, down 1.5%. GBP rallied on short covering, long bonds sold off and short oil is approaching my $87.50 stop. Expecting more of the same next week but going to hold steady apart from monitoring my oil stop as I think a bucky bounce is due at the end of net week.
Thursday 1 April 2010
Mark to Market
There have been many words, most of them ill informed, written regarding the amendments to FAS157 which have allowed financial institutions to carry their assets at “fair value” i.e. a mark to model price.
Before the amendments were made in 2009 things seemed to work quite nicely, from an accounting perspective at least. An asset would be initially held at cost and would remain there until there was either a transaction at a different value or there was clear evidence of impairment or an increase in value. Due to the accounting principle of prudence, there would be a higher burden of proof for marking up than for marking down. This may have meant that there was a little too much scope for downward earnings manipulation but as far as I am aware no financial system ever collapsed due to overly conservative accounting.
I do not subscribe to the view that mark to market accounting was a cause of the financial crisis. Once the decline in asset values began there was undoubtedly a negative feedback effect of writedowns forcing further sales. However I strongly maintain that the problem was under-capitalisation, not mark to market. If an institution is too highly leveraged to hold the asset to maturity then what possible justification is there for not marking to a tradeable exit price.
The answer of course is that in order to maintain the illusion of solvency in the zombie banks, the FASB caved and allowed objective evidence of value to be replaced by model based mark to fantasy. I have no problem with this approach if accompanied by stringent capital requirements for assets not marked at current trade levels but there has been no linkage established between accounting treatment and capital. Quite the opposite in fact – these marked to fantasy assets increase the optical solvency of the institution and potentially decrease the required capital held.
It gets even worse. In my day job I deal with a number of auditors, rating agencies and independent valuation agencies. Far from being watchdogs, they have become cheerleaders for this new “fair value”, forcing financial institutions to write up illiquid assets which are unlikely to be held to maturity to values where there are no willing buyers in anything like the sizes required. As their “analysis” is often based on “comparative asset values” and they are against liquidity discounts (too subjective!!!!!!) this is causing a spiral in the paper valuation of assets, with no liquid market transactions to back them up. Does this sound familiar?
We appear to have come full circle from the purpose of FAS157 which was amended after Enron’s mark to market excesses to make sure that assets reflected their exit price. What is certain is that the assets of the big banks, in aggregate if not on a case by case basis, are wildly in excess of their exit prices. Let’s hope that they are sufficiently capitalized to see this through or 2008 will look like a walk in the park.
Before the amendments were made in 2009 things seemed to work quite nicely, from an accounting perspective at least. An asset would be initially held at cost and would remain there until there was either a transaction at a different value or there was clear evidence of impairment or an increase in value. Due to the accounting principle of prudence, there would be a higher burden of proof for marking up than for marking down. This may have meant that there was a little too much scope for downward earnings manipulation but as far as I am aware no financial system ever collapsed due to overly conservative accounting.
I do not subscribe to the view that mark to market accounting was a cause of the financial crisis. Once the decline in asset values began there was undoubtedly a negative feedback effect of writedowns forcing further sales. However I strongly maintain that the problem was under-capitalisation, not mark to market. If an institution is too highly leveraged to hold the asset to maturity then what possible justification is there for not marking to a tradeable exit price.
The answer of course is that in order to maintain the illusion of solvency in the zombie banks, the FASB caved and allowed objective evidence of value to be replaced by model based mark to fantasy. I have no problem with this approach if accompanied by stringent capital requirements for assets not marked at current trade levels but there has been no linkage established between accounting treatment and capital. Quite the opposite in fact – these marked to fantasy assets increase the optical solvency of the institution and potentially decrease the required capital held.
It gets even worse. In my day job I deal with a number of auditors, rating agencies and independent valuation agencies. Far from being watchdogs, they have become cheerleaders for this new “fair value”, forcing financial institutions to write up illiquid assets which are unlikely to be held to maturity to values where there are no willing buyers in anything like the sizes required. As their “analysis” is often based on “comparative asset values” and they are against liquidity discounts (too subjective!!!!!!) this is causing a spiral in the paper valuation of assets, with no liquid market transactions to back them up. Does this sound familiar?
We appear to have come full circle from the purpose of FAS157 which was amended after Enron’s mark to market excesses to make sure that assets reflected their exit price. What is certain is that the assets of the big banks, in aggregate if not on a case by case basis, are wildly in excess of their exit prices. Let’s hope that they are sufficiently capitalized to see this through or 2008 will look like a walk in the park.
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