Quantitative Contemplations

Health Cooperatives

2010-01-09T22:39:00.001-06:00

One of my favorite college professors has an opinion piece on health cooperatives in the Christian Science Monitor. Here's the money quote:

The solution is to abolish Medicare and Medicaid, abolish the favorable tax treatment of employer-provided insurance, impose a one-price rule on procedures, and issue a voucher to every single American citizen. The creation of a voucher program would certainly take less than 1,990 pages of legislative language. This will solve the problem of the uninsured completely, immediately, and permanently in a transparent way that works with, rather than against, competition. The big losers will be special interest groups because a transparent voucher system will rob them of their ability to manipulate the system. They know this all too well, which is why they oppose it.

And this article further explains his voucher-based solution.

Fiscal Haiku

2009-11-21T21:17:00.002-06:00

After sharing one of my favorite haikus:

Haikus are easy,
but sometimes they don't make sense.
Refrigerator.

with a friend, he pointed me to fiscalhaiku.com. This prompted me to create my very own fiscal haiku, but I decided to post it here rather than on their site. It's based on the writings attributed to Alexander Tyler.

Vote the treasury
and destroy fiscal restraint.
Vote the nation's fall.

Interview Questions

2009-11-11T20:18:00.001-06:00

Most of the interview advice I've read focuses on how to answer the interviewer's questions. It is very important to learn how to present yourself to a potential employer, but the interview is also the best time seriously investigate whether the position would suit you.

I've used the questions below to gain insight into the details of a job opportunity as well as the dynamics of the group of people I would be working with. You'll notice that I ask the same questions of management as I do co-workers. I generally hope to hear the same answers from each group because divergent answers can signal trouble.

Of every interviewer:

What is your education and employment experience?
Of your education and prior professional experience, how much do you use those skills in your current position?
Why did you choose to work here, and what keeps you here?

Of your potential manager:

How long have you managed this team?
Is this a new position? If not, why did the last person leave and where did they go?
What is your "growth plan" for my first six months? What skills will I develop that I don't currently have?
Do you have any questions or concerns about my ability to perform this job?
Can you give me examples of how you've dealt with employee's frustration and how you've dealt with your frustration with them?

Of your potential co-workers:

How would you describe your organization's and manager's personality and management style?
How does communication flow between you and upper management? How often do you talk with people several "rungs" above you?
When an urgent matter comes from your manager, how is it delivered and managed?
Can you give me examples of how management deals with employee's frustration and with their frustration with you?

Of both your potential manager and co-workers:

How many meetings a week does your team have? How long do last? What is their purpose? How productive are they?
What skills are required to be successful at this job?
When top performers leave the company why do they leave and where do they usually go?
How are new ideas, procedures, tools, etc. received?
What kind of work are people with analytical backgrounds involved in?
What kind of people get promoted?
How are project assignments decided?

Please feel free to make your own suggestions in the comments. I'll add worthy contributions to the post.

Office 2007

2009-10-27T12:47:00.000-05:00

My employer just "upgraded" to Office 2007. Among all the new annoyances, this is my favorite:

I open a file and I'm greeted with a message box that reads, File error: data may have been lost.

Could they have possibly come up with a more ambiguous and vague error? Data may have been lost? That seems like something important enough to provide more than a message box with an "OK" button to press. No "click here for more information", just a button to acknowledge that something bad may have happened.

Office 2007, the Vista of office suites.

Chuck Norris Facts

2009-05-05T08:47:00.005-05:00

If you're not familiar with Chuck Norris Facts, I suggest you check them out. These were sent to me by Dirk Eddelbuettel via email.

Chuck Norris, investment banker
from Felix Salmon by Felix Salmon

If you haven't subscribed to The Epicurean Dealmaker's twitter feed, do so now. This morning he decided he was going to go all Chuck Norris Facts on us, and came up with some absolute classics:

Little-known Chuck Norris Fact: Chuck Norris does not mark to market. The market marks to Chuck.

Chuck Norris does not go bankrupt. Chuck Norris ruptures banks.

Source of hedge fund survivorship bias?: Funds that pay Chuck Norris 2 and 20 survive; others don't.

Private equity: Chuck Norris does not believe in leverage. Chuck Norris believes in crowbars.

Investment banking: No-one defers Chuck Norris's compensation.

Capital structure: No-one subordinates Chuck Norris. All his equity is preferred.

If Chuck Norris devised the bank stress tests, not even the Treasury Department would survive.

Mixed Freight Indicators

2009-03-19T21:13:00.005-05:00

Over the past few weeks, Calculated Risk has several posts on freight activity, here, here, and here. The highlights:

Container shipping is at an all-time low.
ATA truck tonnage ticked up in March.
LA port traffic took at 35% year-over-year nosedive in February.

The charts below show three ETFs - the iShares Dow Jones Transportation Index (IYT) and the Claymore/Delta Global Shipping Index (SEA), respectively. They both have rebounded off recent lows but IYT - which has more significant volume - has shown declining volume as the rally has progressed.

The ETFs seem to be responding to the recent news, not discounting the future continued/likely declines in transportation companies.

The Best Policy

2009-03-17T08:45:00.000-05:00

No Follow-Through

2009-03-11T21:49:00.002-05:00

Today's market was interesting. Lots of movement, but didn't really get anywhere. Volume was about as heavy today as it was yesterday.

This is a bad sign for those hoping for the rally. I expect a bear-market rally, but to at least test this market's lows.

The Cap-and-Trade Tax

2009-03-03T22:06:00.003-06:00

John Mauldin raises an interesting point about President Obama's cap-and-trade proposal. I'm not convinced the proposal would cause utility companies to raise prices though - mainly because most have government-regulated prices.

If the costs aren't borne via higher prices to consumers, John's conclusions won't follow. That said, the increased costs will have to be dealt with somehow.

And I definitely agree that GDP is going to be *way* below the 4% forecast. The economy has been above the natural rate of growth for many years and tends to revert to the natural rate, which means we should anticipate years of sub-3% real GDP growth.

Obama wants to create a cap-and-trade program for carbon emissions. This is expected to generate $79 billion in 2012, $237 billion by 2014, and grow to $646 billion by 2019. These will be payments by energy (primarily utility) companies to the government. That will cause utilities to have to raise the prices they charge customers for energy. Such a level of taxation is eventually 4-5% of total US GDP. That is not small potatoes. And since the wealthy do not use all that much more power than the rest of us, it will affect the lower incomes disproportionately.

It will take money out of consumers' pockets and transfer it to the government. You can call it cap-and-trade, but it is a tax. And a huge one. Anything that will take 4% of GDP away from consumer spending is not business friendly. And by driving the cost of energy up, it will drive high-energy-using businesses away from the US to developing countries where energy is cheaper. It will make it even harder for people to save money and drive up costs for the elderly and retired. But it will make the environmental lobby happy.

Further, Obama's accounting magicians assume that the US economy is going to grow by 1.2% this year and 3.2% next year and at a blistering 4% pace after that. Since that is not likely to happen, the deficits will be far worse than projected. Since large taxpayers can see the tax increase coming, it is likely that they will shift behavior, and tax revenues will be less than projected.

Source:
Buy and Hope Investing
John Mauldin
Thoughts from the Frontline Weekly Newsletter, 2/27/2009

Tracking the Recession

2009-02-27T09:33:00.013-06:00

The Saint Louis Fed recently created a brief report that tracks the current recession via the behavior of GDP components and four economic indicators: industrial production, real income, employment, and real retail sales.

The report graphs multiple business cycles, by aligning the months in which each business cycle peaked. This allows you to compare the months leading up to, and following, peaks in the business cycle. In addition to the current series values, the average, highest, and lowest series values are displayed.

During this recession, the US has experienced the worst declines in industrial production and real retail sales, and is close to showing the worst decline in employment.

The GDP numbers do not appear quite as dire. Personal consumption expenditures are showing a historically severe decline, which aligns with the real retail sales data. Real imports have also shown a significant decline during this recession.

R/Finance 2009: Applied Finance with R

2009-02-20T13:03:00.004-06:00

The International Center for Futures and Derivatives at UIC, REvolution Computing, Windows HPC Server 2008, insight algorithmics, and members of the R finance community are pleased to announce:

R/Finance 2009: Applied Finance with R
April 24 and 25, 2009, in Chicago, IL, USA

Scheduled Keynote Speakers:

Patrick Burns Burns Statistics, London, UK
Robert Grossman Director, National Center for Data Mining, UIC, USA
David Kane Kane Capital, USA
Roger Koenker University of Illinois, USA
David Ruppert Cornell University, USA, Statistics and Finance, an Introduction
Diethelm Wuertz ETH Zurich CH, Rmetrics
Eric Zivot University of Washington, USA, Modelling Financial Time Series with S+

The conference website has details on:

the agenda and speakers,
travel accommodations,
registration, and
sponsors, who made the conference possible.

Hope to see you there!

Will US Bancorp cut its dividend?

2009-01-27T08:40:00.004-06:00

I've been following US Bancorp (USB) pretty closely through this credit crisis -- thanks to Jim Jubak. He thinks it is one of the few banks that will emerge from this crisis victorious, and I tend to agree with him.

The stock currently yields ~12%, but much of that is due to the fear of a dividend cut caused by the most recent earnings release. Jim Jubak's comments are below.

Will US Bancorp follow the lead of so many of its peers in the banking industry and cut its dividend? The question isn't academic to me: I had added this stock to Jubak's Picks in April 2008 because it then paid better than 5%.

Since the company's Jan. 21 announcement on fourth-quarter earnings, a majority of investors on Wall Street have been thinking the dividend is headed for a cut. A stock-price drop of 12.5% on Jan. 22 left the yield on the shares at 12.1%. You don't see that kind of a yield on a bank stock unless the market is convinced the company will cut its payout.

I can certainly see why investors think that. The bank didn't exactly give a ringing defense of the dividend in its earnings conference call. Executives said the company believes it will be able to cover the dividend from earnings in 2009 but noted that it reviews the dividend every 90 days -- which puts the next review in March -- and that the bank has no intention of continuing the current dividend if earnings don't cover the payout.

The real issue then, as the company said in its statement, is earnings for the rest of 2009. On Jan. 21, US Bancorp reported earnings of 15 cents a share. That's a profit -- unusual for a bank these days -- but still 7 cents a share below what Wall Street had expected. The problems? There were $253 million in losses on securities and a $635 million increase in provision for credit losses. All in all, charges and losses chopped 34 cents a share out of earnings.

It's also clear that the bank's business, like that of all banks I know of, is still getting worse. Nonperforming assets climbed to 1.14% in December, and the bank said it anticipated that nonperforming assets -- that is, loans that the bank can't collect on in a timely fashion -- will continue to climb in 2009. It's cold comfort to investors that the bank's performance continues to be so much better than other banks'. The increase in nonperforming assets to 1.14% in December is only a modest increase from the 0.88% in September. That indicates the bank's lending standards continue to hold up to a very difficult economy.

The bank's operating results, in fact, were quite impressive. Loans grew 17% (12.7% excluding acquisitions) and deposits 15.2% (9.6% excluding acquisitions) from the fourth quarter of 2007. (In November 2008, the company acquired Downey Savings and Loan and PFF Bank and Trust from the Federal Deposit Insurance Corp.) Net interest income grew 22.6%. Tier 1 capital remained at a strong 10.6%.

So will US Bancorp cut the dividend or not? Unfortunately, it's a danger and, also unfortunately, uncertain. It depends on how long the economy struggles and how big the losses get on the bank's portfolio of loans. I still think US Bancorp will be a winner in the current crisis, and this quarter's results are evidence that the bank is picking up loan and deposit volume as customers opt for the bank's relative safety.

Source:
Fed looks like one more shaky bank
Jubak's Journal, 1/23/2009 12:01 AM ET

10-year Treasury at 2.995%

2008-11-26T09:50:00.002-06:00

The 10-year Treasury briefly dipped below 3% this morning. Is this a reflection of fear, deflation, or a result of all the money being poured into the system over the past few months?

Stock Surge Off New Lows

2008-11-13T21:17:00.006-06:00

Both the S&P500 and the Nasdaq Composite registered fresh 52-week lows around 1:00EST during today's session. Soon after, they both began rallies and would close a massive 10% higher than their intra-day lows. Volume surged on both the NYSE and the Nasadaq (see charts below - or links in the blog's right-hand column) as the rally progressed.

NYSE:

Nasdaq:

The charts above show that volume picked up during the rally and was much higher than the past several days on both exchanges. (The bottom portion of the chart shows today's volume relative to yesterday.)

Further, breadth was impressive: advancing issues outnumbered decliners on both the NYSE (2,650/919) and NASDAQ (2,089/799). Up volume accounted for 77% of the NYSE volume, while 89% of the Nasdaq volume was positive.

Could this rally mark the end of this devastating - in both speed and magnitude - bear market? Stay tuned...

Fed Holds Rates Steady

2008-10-29T21:00:00.003-05:00

The opening sentence of today's FOMC statement reads:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

Decided today, really? By looking at the effective federal funds rate, it looks like this policy action was decided two weeks ago.

Last-Minute Rally

2008-10-23T18:54:00.007-05:00

With one and a half hours left in today's session, the S&P 500 rose from its intraday low of 860 to 908 at the close. That's a 5.6% intraday move to close the session up 1.26%. That's quite an impressive rally, but how was volume and breadth?

The chart above shows NYSE volume was much heavier today than the past couple days. The bottom portion of the chart shows today's volume relative to yesterday.

Cumulative volume compared to yesterday increased steadily all day, as stocks fell, until the last couple hours of trading. This suggests buying was sparse even though the price movement was strong.

Further, breadth was not at all impressive: declining issues outnumbered advances on both the NYSE (2,152/1,291) and NASDAQ (2,032/824).

New Blog - FOSS Trading

2008-10-23T09:50:00.003-05:00

I've started a new blog to focus on trading and quantitative finance using free open source software. I will post updates on my R packages on that blog instead of Quantitative Contemplations.

You can find the new blog at http://blog.fosstrading.com.

September Inflation

2008-10-22T22:36:00.006-05:00

The chart below shows headline and core CPI have climbed sharply since mid-2006. Headline CPI is currently near 5% year-over-year, while all measures of core CPI are at 3%.

Why, even though inflation is high and has been increasing, does the Fed consider inflation expectations to be contained? The Fed noted the fall in commodity prices, which will dampen inflation in coming months, in their October 8th statement. They also noted inflation expectations have diminished.

The following chart shows inflation expectations via the spread between the 10-year constant maturity Treasury rate and the corresponding TIPS rate. Expectations currently stand at an average of 1% per year for the next 10 years. I seriously doubt this will be realized; it's more likely a function of the current market pessimism.

Two important caveats: (1) the spread has two components - expected inflation and inflation risk premium, and (2) TIPS yields have a liquidity premium. Given the short-term nature of our comparison, neither of these caveats should be too problematic.

Short Sale Ban Lifted

2008-10-09T19:28:00.004-05:00

Today was the first day since September 19 that many financial stocks could be sold short. And there was certainly a lot of selling today. The Financial Select Sector ETF (XLF) dropped 10.4%.

If you only consider today's action, you may conclude that the short-selling ban was working. That could not be further from the truth. Financials rose nearly 12% on the day the ban was instituted, but it was almost all downhill after that. Only 4 of the next 13 days were positive. Over the whole period the ban was in effect, the XLF fell 23.6% (from the close on 9/18 to the close on 10/8).

The major indices have seen declines, many of them severe, in the last 7 consecutive trading sessions. We most certainly would have seen a short-squeeze within that period, had short sales been allowed.

Surprise Fed Cut

2008-10-08T08:27:00.006-05:00

From this morning's press release:

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.
Federal Reserve Actions
The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

The futures market initially shot up in response to this news. Within an hour, however, they had fallen back to their pre-release levels. Perhaps the market realized this crisis has not been due to restrictive monetary policy, but rather deleveraging of financial institutions and ignorance of where those institutions' risk lies.

The spot markets gapped slightly lower but have been making gains since the open.

opentick now on CRAN

2008-10-07T18:56:00.002-05:00

The pre-alpha version of the opentick package I mentioned previously is now on CRAN. The package provides a native R interface to the opentick data servers, which include both real time and historical market data.

(Disclaimer: This software is not endorsed in any way by opentick corporation. The author(s) of this software are not affiliated with opentick corporation.)

The package currently includes a limited R implementation of the otFeed API. Its current functionality enables access to historic data from the opentick servers. Future additions will include access to:

real-time data feeds (for most U.S. stock, option, and futures exchanges).
real-time option chains.
real-time and historical book data.

I will use other's interest to gauge the priority of these additions.

Please note that opentick is not currently accepting new users, but current users will retain their access. This has been the case since April and it is not clear when new users will be allowed. You can sign up to be notified once new users will be accepted.

It's a great time to invest!

2008-09-28T14:03:00.000-05:00

Botched Bailouts

2008-09-20T21:41:00.003-05:00

I've been following the government's many recent financial bailouts (Fannie and Freddie, AIG) and interventions (Term Lending and Auction Facilities, short selling rules, RTCII) fairly closely.

There has been much discussion of how deregulation of the financial industry lead to this crisis - especially in the case of the (former) five firms that 'enjoyed' net capital exemptions from the SEC - and how the government's recent actions smack of socialist policies.

Until Friday, I had not read anything about how these actions may have exacerbated the financial crisis. Jim Jubak does a superb job of outlining how these rescues have actually made some things worse. The whole article is worth reading, but the highlights are below.

[I]n the name of creating an orderly liquidation of a company such as Lehman Bros., they create a mad scramble to get paid before the bankruptcy court can act.

By wiping out the Fannie Mae and Freddie Mac preferred stock, the Fed and Treasury killed off any possibility that some other financial institution in need of capital could raise cash by selling these dividend-paying shares.

[T]he Treasury and Fed have ensured that no conservative, income-seeking investor in his or her right mind would buy preferred stock from a troubled financial company looking for capital.

After drawing a line in the sand and saying no more bailouts, the Fed and Treasury ponied up $85 billion in taxpayer cash to go into the insurance business. Their excuse for the about-face: Though the Fed had planned for a Lehman bankruptcy, it hadn't modeled a failure at AIG and couldn't predict the consequences of letting the company go into bankruptcy. That's not reassuring.

Source:
Botched rescues are killing markets
Jubak's Journal 9/19/2008 12:01 AM ET

No Longer Seeking Alpha

2008-09-08T22:29:00.002-05:00

I will stop frequenting and reading Seeking Alpha because of this:

UPDATE: It appears Seeking Alpha and Barry Ritholtz reached an agreement, as Seeking Alpha has renamed "The Big Picture" as "The Macro View".

Lehman Finds Suitor

2008-09-02T09:22:00.004-05:00

Breaking News: Lehman To Be Acquired by Tooth Fairy
The market responded with enthusiasm to reports that the Tooth Fairy has agreed to acquire Lehman. The purchase price has not yet been determined and will be set by Dick Fuld wishing upon a star, clicking his heels three times, and being transported back to that magical place where Lehman still sells for over $70 per share.

In related news, Lehman has agreed to sell all of its level III capital, including CDOs, ABSs, pet rocks, baseball cards, slightly used condoms, and credit default swaps written by MBIA and Ambac. Lehman’s level III capital will be acquired for 150% of its face value by Tinkerbell, who will carry it off to Neverland to be fed to a crocodile. Lehman is financing 90% of the acquisition at an interest rate that has not been announced; Tinkerbell’s up-front payment consists of a handful of pixie dust, three crickets, and a bullfrog. Analyst Dick Bove estimates that the bullfrog could eventually be transformed into three princes and a pumpkin coach. The deal gives Lehman no recourse to any of Tinkerbell’s assets other than the Level III capital. If Tinkerbell defaults, Lehman’s successor entity will stick its hand down the crocodile’s throat and attempt to get it to regurgitate. The firm’s historical value-at-risk analysis shows that sticking your hand down a crocodile’s throat is completely safe.

Treasury Secretary Hank Paulson issued a statement: “I am delighted that SWFs (Sovereign Wealth Fairies) continue to express confidence in the terrific values represented by American financial institutions. As I have been saying since August of 2007, this shows that the crisis is now over.”

Meanwhile, the SEC has announced an investigation of mean, evil, bad short-seller David Einhorn. While out for a beer with a friend, Einhorn reportedly suggested that the Tooth Fairy does not exist and that wishing upon a star is not a wholly reliable price discovery mechanism. Christopher Cox, chairman of the SEC, said, “Vicious rumors attacking the Tooth Fairy will not be tolerated. Our entire financial system and indeed the American way of life depend on the Tooth Fairy and wishing upon a star. How else could one value level III capital appropriately?” The SEC is reportedly planning to set up re-education camps for short-sellers.

Source:
Lehman, the Tooth Fairy and the Revenge of the Short-Sellers
Posted by Heidi N. Moore
Deal Journal, August 25, 2008, 10:56 am

Quantitative Contemplations

Health Cooperatives

Fiscal Haiku

Interview Questions

Office 2007

Chuck Norris Facts

Mixed Freight Indicators

Related Stories

The Best Policy

No Follow-Through

Related Stories

The Cap-and-Trade Tax

Related Stories

Tracking the Recession

R/Finance 2009: Applied Finance with R

Will US Bancorp cut its dividend?

10-year Treasury at 2.995%

Stock Surge Off New Lows

Fed Holds Rates Steady

Last-Minute Rally

New Blog - FOSS Trading

September Inflation

Short Sale Ban Lifted

Surprise Fed Cut

opentick now on CRAN

It's a great time to invest!

Botched Bailouts

No Longer Seeking Alpha

Lehman Finds Suitor