The NCAA hockey bracket blew up, only one #1 seed made it through, Bemidji was the last team in and made to the frozen four.
Tyler Durden from Zero Hedge gave a rundown of market activity and recent economic data that might send some folks running for the hills. Included in the rundown is a reminder, with some datapoints to back him up, that the biggest up days and the fastest rallies usually occur during bear markets.
We have had some good sized bear market rallies, although I have been expecting a bigger one, and the current one will either keep going or has petered out but it is very likely that the lift that turns out to be the real thing will be met with far less glee than met the start of the November rally and the current one. Michael Kahn and others have mentioned revulsion is an appropriate sentiment to mark a bottom and while there is some of that there is not a lot.
I have no idea if my belief in a monster bear market rally will be correct or not but that is not the point. The point is that if the rally goes from big to monster that you avoid getting overly excited on the way up and if it then fails, turns around and goes right back to 700 on the SPX that you then avoid getting too upset. As this market cycle makes its way to the next bull it is true that more emotion will not make the ride any easier.
On another note Legg Mason may come out with a toxic asset fund. I have no idea if that is true or not but you are no doubt reading about some of the YTMs available on some of this stuff and you might think that sounds pretty good. There is an issue where the banks are probably only interested in selling the worst of the toxic paper versus potential buyers only wanting the best toxic paper. I'm sure this can be worked out but aside from the humorous "do you really want to buy something that is toxic" the decision to buy into a toxic asset fund comes down to one thing, one thing for me anyway.
Why do you have fixed income in your portfolio (assuming you have any)? Are you seeking capital gains or are you looking to manage the volatility of your portfolio? Personally, while I generally believe in spreading out to various parts of the fixed income market I am not looking to make a killing in the bond market.
Can anyone say it would be a black swan event if there was another drop in these prices, more writedowns, capital injections and the like? The potential for big returns carries big risk and the bond market is not the right place for many people to take those risks.
Lastly a rhetorical question; Clearly the misuse of leverage was a huge contributing factor to the financial crisis. In that light is yet more leverage, as put forth in the PPIP, really the best solution?
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5 comments:
Maybe I didn't think about bond markets as a place to make a killing before 2008; but I didn't think I would get killed there, either. But I did (or at least, maimed).
When the rules of the game have changed, it seems sensible to try to play them to some advantage.
All in moderate doses, of course.
Over the past few decades bonds have become more risky as investments IMO but I never thought of them as an effective way to reduce volatility even back in the day, particularly given the kind of interest rate environment we had in the 70's and early 80's; e.g., correlation with equities increased and long-bonds I bought back then were essentially speculative (paid off big-time beginning in Reagan's reign but certainly not before).
For my purposes bonds mostly serve as an essential part of liquidity while planning for relatively near-term cash needs of definable size while longer term bonds serve as a deflation hedge; e.g., offsetting a long mortgage with zero coupon t-bonds of comparable duration to hedge equity in the house during an asset deflation and/or to immunize against monetary deflation.
Otherwise I estimate how much cash I'll need to come out of the total portfolio in the next 3, 5, 7, 10-years and allocate that to the bond portfolio, setting the duration equal to the duration of the cash flows so defined (periodically rebalanced). Pretty much everything else goes into other investments; if some of those throw off predictable cash flows then those can be treated as 'bonds' if they seem reliable enough but I usually treat them as frosting on the cake: Accumulate enough and its time for some travel, a party, a car or what have you.
Your final question would only count as rhetorical among folks who have difficulty understanding the paradox of thrift or who have a tendency to confuse models with the real world: In the real world a credit contraction trumps the business cycle and when contraction reaches a point where it makes more sense for businesses and people to hoard cash instead of investing it then somebody had better start spending to create some investment demand and they would probably be wise to do it on a scale commensurate with the shortfall in demand; that was about one and half trillion bucks in the US the last time I looked but I've been taking care of more immediate and personal business so who knows.
In this interview on Charlie Rose from last Monday (http://www.charlierose.com/view/interview/10165) Tom Steyer essentially makes the argument for the leverage portion of the PPIP (early on beginning right at the 1:00 mark).
Essentially it's a discounted cash flow argument: the banks are currently discounted the cash flows on these assets using a levered debt/equity ratio that results in a lower discount rate and therefore a higher valuation. The theory is that any investor using all equity to finance these cash flows would have a much higher discount rate and therefore a much lower valuation. Thus, the PPIP rationale is that the government adds in the leverage that alters the financing of those purchasing these assets, thereby altering the discount rate of their cashflows - resulting in a discount rate that is similar to the leveraged rates the banks use. The resulting leveraged values should be similar to how the banks are valuing these assets thus narrowing the bid-ask spread on these assets and hopefully making everyone happy.
Not sure if a DCF is really the right way to look at this, but frankly its a rather elegant theory.
The PPiP is logical but I still think attempting to improve the toxic asset picture comes in a long way second to any form of spending that more directly improves the employment picture; big increase in debt either way but the latter is far more likely to have a positive impact on money velocity and economic activity IMO.
Interesting but long read.
http://tinyurl.com/ch72vh
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