Some thoughts – My SOTU Address

Life’s difficult right? Bad decisions, regrets?
I’m going to depart from the regular posts here at Stone Street and I’m going to address everyone – the friends, the haters and the skeptics. I take things personally, I’ve never hidden that fact. This week – nay, this month is a time that is difficult for me and a few others. Some of you will mock this – some of you will know exactly what I mean; that’s ok.

1/20/11 Buybacks and Auctions

Good morning:

Today’s auctions: 10Y TIPS (13Bn). Full calendar and updated stats for all auctions as of 1/19/2011 available here (Google Docs)

Today’s Buybacks: 8/15/2028-11/15/2040. You can find the updated SOMA holdings (as of 1/5/11) with auction dates (if available) for each here (Google Docs)

Have a good day.

Week In Review – 1/15/2011

Interesting is one way to describe this week, however I do not think it fully captures the full depth of whathas happened. It’s Deja Vu time in Europe again as the “PIIGS” are once again back in focus; I recall us havingthis very same discussion this time last year with one notable exception this time around – the UK. The UKacted swiftly and decisively confronting their deficit problem, swilling the bitter “Karo” syrup of Austerity.

Click here to read more and view the chartbook (Google Docs)

Jeff Gundlach (DoubleLine) Presentation

On the GM IPO Debacle, Part II

In part I, I explained that even if the online/discount brokers (that serve “everyman,” apparently) had gotten allocated GM IPO shares, no matter what Treasury said about every American having access to buy, in practice, it would never go down that way because of the way brokerage firms go about allocating shares.  I may be wrong, but as far as I know, Treasury (besides threatening not to include an underwriting firm in the deal) has no influence over how underwriters allocate shares (someone please enlighten me as to any other authority Treasury has, if any. Thanks).

Now, I really don’t have anything revolutionary to add here and for the purposes of brevity I’m over-simplifying, but I just wanted to add another thought or two.  Even if Etrade, Schwab, and Ameritrade (major advertiser on CNBC, which I suspect may have a not-insignificant part in the network’s annoyingly persistent coverage of this issue)  received allocations of IPO shares, 1. Not every Tom, Dick, and Harry has a brokerage account nor knows how to open one, 2. even if they did, there’s still the little issue of suitability.  On this 2nd point, generally, equity IPO’s are considered to be amongst the least risky of syndicate trades, at least compared to secondary’s, structured products, etc (but certainly not considered risk-less, not by any stretch of the imagination!)  Suitability may vary from firm-to-firm and even from issue-to-issue (e.g. buying an equity IPO from a bankrupt company still married to the Government may require investors clear a higher threshold than a “vanilla” IPO), as firms seek to CYA.

So, the first impediment to “everyone” having access to the GM IPO: brokerage firms choose to whom they allocate shares, not treasury.  Second: even if Treasury was able to influence Brokers’ allocation methodology (doubtful considering the institutional/HNW client outrage that’d result), firms can’t just sell a risky issue to any schmuck with an account (or else they’d get sued/crushed with arbitration claims) into next century if/when things go “wrong” (e.g. the stock goes bankrupt at some point down the road).

The last thing I want to discuss is that even if Treasury HAD explicitly stated verbatim that every American will be able to buy into the GM IPO (and I’ve yet to see any evidence they did), putting the above aside, why do we think EVERY American should be able to buy the IPO?  1. 40% of Americans don’t have any net Federal income tax liability (i.e. 40% of people don’t pay any Federal taxes), 2. why does anyone think just because someone pays Federal taxes they should be automatically qualified to buy-into a questionable IPO?  Whats driving Joe and Jane Outraged Investor’s motivation to get into the IPO?  Does the average retail investor understand dynamics of public offerings, the auto industry, index/fund “frontrunning,” pension accounting, turn-arounds, or any of the relevant factors affecting the performance of the issue?  Methinks not.

So, instead of all of the (mostly) MSM coverage discussing the outrage from “everyday investors” why don’t we get some insight into why these ‘folks want to get into the deal in the first place.  I’ll bet that the responses won’t be much more informed than the testimony given by the NTC employees about their “Robo-Signing” duties (see my Thoughts & Good Reading post from Monday).

Not only do investors need to be protected from predatory practices, they need to be protected from themselves (and firms need to protect themselves from frivolous lawsuits resulting from “improper” conduct and the like).

Securities Law types, brokers, advisors, etc please feel free to weigh in on the issue.

Stone Chartology

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:

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:

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).