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Finance

More on the crash

May 11, 2010

The Big Picture provides an excellent review of the crash-that-must-not-be-named which echoes my thoughts from this weekend: Do you notice how we’re unwittingly restricting our analysis to what the sellers did? The offer side of the trading that saw the S&P 500 lose -5% of its value in the span of about 3 minutes – that [...]

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The trade that broke the market's back

May 11, 2010

In a thoroughly ridiculous analysis, the WSJ is trying to pin Thursday's crash on a single options trade. Conveniently, the trade was made by Universa, the fund advised by black swan devotee Nassim Taleb. The body of the article uses phrases like "contributed" and "along with likely dozens of other trades", but the title's unanswered [...]

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On crashes, briefly

May 9, 2010

Congress will be looking into Thursday's stock market plunge, with the likely outcome that we are forced to admit that we didn't actually learn much from twenty years ago (1987) or two years ago (2008). In all three cases, sudden selling was aggravated by algorithmic trading of one form or another. In only one (2008) [...]

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Cancel all orders!

May 8, 2010

I can't stop watching this. A guy chooses the worst possible moment for a stock market webinar. He loses his mind around 1:10; by 2:35 he's talking like a robot. We call this a capitulation! Every time he says "this is what happens," I think of Walter's rant in The Big Lebowski (which I will not [...]

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On fat fingers

May 7, 2010

I don't believe that a trader error kicked off yesterday's crash. I do believe that computers exacerbated it. I also believe that there were transactional errors following the initial collapse. I would like to point out that when I say "computers exacerbated it," I include both HFT, algorithmic trading, and every retail investor's trailing stop-loss. [...]

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The end of the world, relatively speaking

May 7, 2010

Bloomberg has a story today which takes a close look at an Apple investor who was caught in yesterday's turmoil. Apple traded down more than 15% on the day before snapping back to a -4% finish. This particular investor first purchased his 26 shares of Apple in late 2007, for $189. He sold them in [...]

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From the "Stories That Aren't Getting Nearly Enough Attention" file

May 5, 2010

On page A4 of Monday's paper, the WSJ revealed that Congress Members Bet on Fall in Stocks: In February, Sen. Johnny Isakson (R., Ga.) argued on the Senate floor that "we don't need those speculating in the marketplace to take unfair advantage of the values of equities that are owned by Americans all over this country [...]

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The emperor's clothes

April 29, 2010

One of the problems with the latest mess is that the financial press and more specifically financial bloggers have built up a considerable amount of “[wall] street cred” through accurate and intelligent reporting on the financial crisis. In one sense, it’s amazing that they were able to gain such a foothold (I humbly include TGR) [...]

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Don't touch that Sortino ratio

March 2, 2010

Analyzing different -- and potentially misleading -- ways of calculating a Sortino ratio.

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I have the hammer

February 26, 2010

Apologies for the slow posts... but the NYT explains: Wall Street trading is often described as a blood sport. But inside the great investment houses, the sport of the moment is, of all things, curling — that oddball of the Olympics that is sort of like shuffleboard on ice. This slow-poke game, which originated in 16th-century [...]

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Viva la banker

January 3, 2010

Coldplay's Viva la Vida could be Wall Street's anthem: I used to rule the world Seas would rise when I gave the word Now in the morning I sleep alone Sweep the streets I used to own I used to roll the dice Feel the fear in my enemy's eyes Listen as the crowd would [...]

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Progressive taxation

December 9, 2009

The UK's plan to tax banker bonuses at 50% is really quite clever. The tax is borne by the employer, not the employee, and so the following results: Bankers keep their bonuses, and the incentive structure (for better or worse) remains intact... Taxpayers extract value from the bank, and populist rage (somewhat) subsides... Shareholders suffer. [...]

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Another day, another article demonizing CDS

November 28, 2009

Bloomberg has a new article up about how the CDS market is starting to crumble - the sort of piece that looks like it's been sitting on a back burner waiting for an excuse to stoke the flames of derivative fear (thanks, Dubai!). One of the article's chief arguments is that "credit-default swaps tied to Thomson [...]

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We don't want no interest-free loans!

November 18, 2009

A long time ago, when I was first learning to manage my finances, my dad instructed me to prepay my credit card. This effectively transformed the credit card into a debit card by running a positive balance on the account. It was a great learning mechanism because it still required me to make monthly payments, [...]

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Philosophies of risk management, briefly

November 18, 2009

My last post made me think of a common question in risk management: "what is risk?" A lot of time is spent deciding the various metrics, exposures, values, sensitivities, etc. that are considered "risks." In the previous post, a simple change of perspective - is risk defined by dollars invested or shares controlled? - resulted [...]

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Stock is more efficient than options are more efficient than stock

November 18, 2009

Investment decisions can hinge on how risk and exposure are defined. Here, the choice determines whether an insider should trade in stock or options.

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More derivative witch hunts

November 17, 2009

Going through the FT's original post on exchange traded currency notes, I saw a couple of sentences that really bothered me. One thing we do not need right now are witch hunt statements without basis (a point especially compounded by the fact that the FT completely misunderstood how these products worked, even as they wrote [...]

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Stepping back from the ETC confusion

November 17, 2009

Following the lead of an FT article last week, FT Alphaville went exploring ETC's (exchange traded currencies) and noted (emphasis mine): As for the investor... it means a potential upside scenario of receiving all of the performance of a currency index, for relatively low management fees, but without any interest or dividend (no carry trade here [...]

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QOTD: asset allocation edition

November 10, 2009

After finding former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin not guilty of misleading investors, one juror revealed just how convincing the defense had been: [Juror] Hong said that if she had money, she would invest it with Cioffi and Tannin.

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A major international airport deals in derivatives...

November 10, 2009

Contrary to what you might expect, the WSJ reports that San Francisco International has had great success in their adventures with interest rate swaps, providing a breath of fresh air amidst the media's usual "swaps ruin the economy" fare.  SFO has taken on interest rate exposure in 2005 and 2008 has two more contracts that [...]

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The regulation bubble

November 10, 2009

Breaking down Senator Dodd's financial reform bill.

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Things you should know before you invest

November 2, 2009

The WSJ's top story this morning was one titled "The Cruel Math of Big Losses" - an article written as if it were an eye-opening expose into a little-known piece of financial wisdom rather than a blatantly obvious restatement of basic math: when you lose X%, it takes a gain of more than X% to [...]

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Keeping heads out of textbooks

November 2, 2009

Wall Street & Technology briefly discusses some survey results and concludes: "Wall Street's Quants Feel Misunderstood." There's the obligatory quote from Dr. Wilmott: "These numbers are alarming," said Dr. Wilmott. "They indicate that even with the events of the past year, financial institutions are still not taking the importance of financial education seriously, especially as it [...]

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Fuzzy AIG math

October 28, 2009

A bit of out-of-context math from a recent Bloomberg article on AIG: The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer. The government’s commitment to [...]

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More Zero Hedge nonsense

October 26, 2009

Via Naked Capitalism: I just came across a post on Zero Hedge called “An Overview Of The Fed’s Intervention In Equity Markets Via The Primary Dealer Credit Facility.” Now, that’s a mouthful. As far as I can discern, the post’s purpose is to expose alleged equities market manipulation by the Federal Reserve. However, I found [...]

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First rule of trading is you don't talk about trading

October 16, 2009

In a post that caught my eye because it was titled "Smart Risk, Stupid Risk" - but then failed to elaborate in any way - CNBC chimes in with a few caveats about investing during earnings season: You snooze, you lose If you're waiting to find out the earnings before you make an investment in [...]

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Because a little marketing goes a long way

October 16, 2009

From the WSJ's back page: Why bother? Despite posting a strong third quarter, Goldman Sachs Group went to extra lengths to put gloss on the results. The first bullet point in its earnings release says the firm ranked No. 1 in global mergers and acquisitions announced in the year through Sept. 25. That's according to [...]

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Haven't we seen this movie before?

October 14, 2009

In a recent profile of KKR, Breakingviews.com (via the NYTimes) attempted to value the company by taking a look at Blackstone's operations. I don't have any comment on the analysis itself, but two excerpts stood out in my mind: [Blackstone] didn’t do as well collecting performance fees and investment gains because its holdings have been [...]

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Felix takes on Tyler Durden

October 2, 2009

Felix Salmon calls out the Zero Hedge crowd. Bravo!

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The rise of VaR

October 1, 2009

Simon Johnson and James Kwak take a look at how VaR got to be so popular in the first place. They make the insightful observation that a bad (or at least an incomplete) model can gain acceptance not only because of its simplicity but, oddly, because of its output as well. Indeed, VaR succeeded not [...]

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