Stone Chartology

28 Mar

After graciously accepting the invite to become a contributor to Stone Street Advisors, I couldn’t let the opportunity go to waste (plus it was a wonderful exercise in firing back up LiveWriter and dusting off the old R chart functions).

Before I begin my inaugural post, I’ll give you a little background about me. I officially started in Finance, circa 2003~2004 before hitting paydirt and landing a job at Bear Stearns in Chicago. From there, I moved on to the fancy NYC digs that JPM now owns at 383 Madison where I stayed for a year or so. I’ve been at a lot of firms in the NYC region, mostly concentrated away from the Disneyland effects of Midtown. I’ve always had a keen interest in all things Fixed Income which my mentor at the CBOT picked up on almost immediately and gave me a plethora of things to study on. That’s where I find myself today. I am part geek/part finance and even after the crisis of 2008, I still have a full head of hair. I hope that you will engage in the discussions here, feel free to challenge my assumptions. I tend to look at things in a slightly different manner, sometimes it’s the absolute wrong way to look at a situation or problem, but it is a unique way, nonetheless.

Ok, now that I suck at writing introductions, on with my inaugural post. Oh. I have one thing to mention: I tend to write short pieces that include lots of graphs most of the time. I believe that a picture sometimes is worth more than someone rambling. Nevertheless, it’s 12:36AM, so I’m going to ramble.

I, along with probably everyone stuck in our little corner of the globe, saw CNBC and the perpetual cheerleading machine on today giving a blow by blow account of the minute movements of the Dow and S&P today. Normally I tune out such banter by turning on Drum and Bass, but today, for the first time since 2008, CNBC actually piqued my interest and got me thinking. I present the following chart, which shows yield performance (on an absolute basis, not taking into account actually owning a bond and the math behind cashflows,etc.) vs. the S&P 500:
Yield - SP500 Performance

The lows for most of US bond yields with the exception of the 2Y was reached around mid-December 2008. I’m pretty sure you, Joe The Plumber and even Christina Romer know why yields were so depressed in the latter part of 2008, so I will save you from myself. Continue to look carefully, you will see that even though most of the yields began to rebound heading into the end of the year and into 2009 as people begin to shift assets around, the S&P did not bottom until nearly 3 months later (almost to the day that bonds reached their lows). Even then, once the S&P did rebound, in terms of price (yield movements) the majority of the action did not go into the S&P. Consider this:
Yield - SP500 Performance ROC Lag 10

Albeit a lagged ROC series, 10’s and 30’s in this realm continue to outpace the S&P 500 and are set to almost reverse the yield losses pre-crisis (at least the 30Y is).

This was just yet another idea that I was thinking about yesterday. Obviously one event does not have any significant meaning, so once I can whittle down my to-do list, I’ll dust off the historical yields and prices dating back to the early 80’s and 90’s and try to compare former “crises” to see what, if any effects the FI market had before/during/after the event. Fire away with your comments, and thanks to Anal_yst for the invite.

PS: A question I get asked a lot is how did I make my charts? I use R (+ a ton of packages, some self-built, others from CRAN).


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