Market Disconnect

When stocks rise bonds drop right? Wrong! Through September and early October we have seen a nice recovery in the stock market, but yield levels continue to fall:

These should be moving in the same direction...

One line of thought could be that the prospect of Fed induced inflation is destroying the dollar, raising gold and raising the price of stocks. We could rationalize that by saying that growth expectations are slowing, so the real value of stocks is not rising but the nominal value is. Lower growth would imply a lower expected yield on bonds. The problem is that the former argument suggests that there is a rise in inf lation expectations which should raise the inflation premium built into treasury yields. We have seen a slight increase in breakeven US inflation rates from TIPS, if we believed in higher inflation then why would you lock in your money today for 10 years at a yield of 2.4%?

The second line of thinking is that the Fed treasury purchase program is having a large and meaningful effect on yields. It does not necessarily mean that the Fed is driving the treasury market, but the fact that investors believe that the Fed will continue to purchase gives investors the comfort that even at today’s low interest rate levels they can purchase treasuries under the assumption that the Fed will drive the yields even lower via Quantitative Easing 2.0.

I guess I am tired of trying to make investment decisions based upon potential political and policy actions. 2008 was the game of “who’s going to get saved?!” and since then it has been a game of guessing how long interest rates are going to be kept low and which markets are going to be manipulated.

In my opinion, if the investment does not feel right, then do not invest in it. Locking in a rate for 10 years at 2.4% does not feel right to me. The only outcome where I truly benefit is a Japanese deflationary spiral. If I believed the probability of that outcome was high, then I guess I would jump on board. If instead I am playing a game of hot potato and front-running the fed’s purchases, then I would prefer to sit out. Eventually that potato is going to get hot enough to burn your hand. The game will work until it doesn’t.

Posted in Markets, Politics.

Tagged with bonds, equity, Fed, inflation, interest rates, quantitative easing, stocks, treasury yields, yield.

1 comment

By SurlyTrader – October 6, 2010

Rogue Trader Jérôme Kerviel Jailed

As is the case with most corporations, someone needs to take the fall when bad events transpire. In Goldman Sach’s case it was Fabrice Tourre, and in Société Générale’s it was Mr. Jérôme Kerviel. The story for SocGen is an old one, a rogue trader who accrued large positions, large losses and was able to conceal the losses from the bank’s naive eyes. In Jérôme’s case it was about €50 billion of positions with total losses of €4.9 billion. To put that in perspective, SocGen’s current market cap is about €30 billion today.

As a result, the courts and SocGen had their say when Mr. Kerviel:

“was sentenced to three years in jail by a Paris court on Tuesday for his role in a trading scandal and ordered to pay the French bank 4.9 billion euros ($6.8 billion)“

Mr. Kerviel received a salary of €74,000 in 2006 from SocGen with a bonus of €60,000. How he had the clout to hoodwink one of the world’s largest banks is anyone’s guess. Mr. Kerviel suggests that all of his superiors knew of the hidden trades, but I find it more frightening if no one at the bank actually knew about the trades. If the media is correct and everyone was caught off guard then the board of directors, all executives, and the entire trading compliance department should have been terminated.

The story does not stand on firm ground, but the fact that a court would fine an individual an amount that would take 170,000 years to pay off is highly amusing…or disturbing. This court action does not seem very French.

If you would like to watch a highly entertaining look at a rogue trader in action, then I suggest that you watch “Rogue Trader” with Ewan McGregor. It is a much underrated and under-appreciated movie.

Posted in Markets, Media.

Tagged with Fabrice Tourre, Goldman Sachs, Jerome Kerviel, rogue trader, SocGen, Societe Generale.

1 comment

By SurlyTrader – October 5, 2010

Billionaires and Taxes

In most ways, I like the character of Warren Buffett. He sticks to his principles and is willing to go against the trend. What annoys me about Buffett is his hypocritical nature. He is often quoted as saying that derivatives are “weapons of mass destruction” and yet he is one of the biggest writer of long-dated put options. During the crisis he was very vocal about bank regulation, but only so long as it did not hurt his investments in Wells Fargo and Goldman Sachs. When over the counter derivatives were put on the table for oversight, he certainly wanted his derivatives to be grandfathered in under the old rules so that he would not have to post large amounts of collateral.

Lately, Warren has been telling taxpayers to get over their anger, “Sentiment has turned very sour in the last three or four or five months…I hope we get over it pretty soon, because it’s not productive”. That seems to be like a pretty easy statement to make when you are one of the wealthiest men in the world and can single-handedly influence political outcomes.

Likewise, Warren is very public about the fact that he pays only 17.7% on his taxes and suggests that the politicians should raise taxes on the rich already! Raise income taxes or unrealized gains on stock Warren? A person making a $250,000 salary is leagues away from someone worth $50B who can keep all gains tax free by not selling shares and by transferring wealth tax free to the Bill & Melinda Gates Foundation. Warren even mocks the underclass by making a friendly little bet with his billionaire buddies: “I’ll bet a million dollars against any member of the Forbes 400 who challenges me that the average (federal tax rate including income and payroll taxes) for the Forbes 400 will be less than the average of their receptionists.” Warren, I’m just dying laughing.

So why don’t you put your money where your mouth is Warren – go ahead and write a big check covering your back taxes because I am sure that Uncle Sam and the IRS would love to receive it.

Posted in Economics, Politics.

Tagged with Berkshire Hathaway, taxes, unbelievable, Warren Buffett.

2 comments

By SurlyTrader – October 4, 2010