Posts filed under “Really, really bad calls”
Two quick non MSM pieces worth reading this morning:
• The Reformed Broker: Sometimes It’s Just a Black Duck
“The trouble with the Recency Effect is that everyone all of a sudden thought they were Nassim Taleb, orinthological experts on the spotting of Black Swans. Every blip on the screen or blurb in the newspaper was fresh evidence of the next hundred years’ storm. Forget being fooled by randomness, people have become obsessed with randomness.
But as we’ve learned, not every aberration is a Black Swan in the making. Sometimes, it’s just an ordinary Black Duck. A negative event or possibility that is processed and dealt with, that doesn’t necessarily lead to contagion, panic and meltdown.”
• Hedgeye Blog: The St. Petersburg Paradox:
“The mathematical expectation of the speculator is zero.” -Louis Bachelier was a French mathematician who was, well after the fact, credited with founding the Efficient Market Thesis. In 1900 Bachelier published his Ph.D thesis titled “The Theory of Speculation.” In his paper, Bachelier discussed the use of Brownian motion to evaluate stock prices. Unfortunately, his thesis was “not appropriately received”, which resulted in academic black-balling and the concept being buried for more than sixty years.
Almost sixty-five years later Professor Eugene Fama from the University of Chicago was officially credited with developing the Efficient Market Thesis after publishing his Ph.D thesis. His paper was titled “The Behavior of Stock Market Prices.” The core tenet of his paper and the Efficient Market Thesis is that an investor “cannot consistently achieve returns in excess of average of market returns on a risk-adjusted basis, given the information that is publicly available at the time the investment is made.”
Is it not somewhat ironic that the determination of who founded the Efficient Market Thesis was not efficient?”
“May 6 was clearly a market failure, and it brought to the fore concerns about our equity market structure.” -Speech by SEC Chairman Mary L. Schapiro > What a surprise! The SEC has acknowledged that the flash crash was a structural issue: As the Securities and Exchange Commission finalizes its report on the May 6…Read More
Last week, we noted Robert Prechter’s Dow 2,000 forecast. Today, we are going to the other end of the scale: A wild Dow 38k forecast from the usually sedate Jeff Hirsch of Stock Trader’s Almanac (UPDATE: Full report here) Bloomberg: “The Dow Jones Industrial Average will surge to 38,820 in an eight-year “super boom” beginning…Read More
As if we need further evidence of the gross and willful malfeasance of Moody’s S&P’s and Fitch: The latest evidence of their criminally irresponsible behavior comes to us via the Financial Crisis Inquiry Commission. This was not, as the narrative has been reconstructed, a case of good loans gone bad. Mere incompetence does not explain…Read More
“Normal distribution curves — if I would submit to you — do not exist in financial markets. Its not that they are fat tails, they don’t exist. I keep hearing about fat tails, and Jesus, it’s only supposed to occur every 100 years, and it appears every 10 years.” -Former Federal Reserve Chairman Paul Volcker…Read More
Some years ago when I was on the sellside, I would occasionally got dragged into these banking meetings to discuss funding new and existing companies. I had a good understanding of Tech, and apparently lent gravitas (ha!). These sorts of meeting request went up after the media exposure increased.
I got into a bit of hot water at some of these for saying what I thought. I recall one of these meetings was with a group that had made a large previous investment into Blockbuster (I don’t recall if they bought via public or private equity).
Curious, I asked what the value was: This wasn’t a turnaround play, it was more of a sell off the whale oil and meat to recoup what was left from the carcass play.
“You describe this as if its a dying industry.”
Well, duh. “Isn’t it? Isn’t Netflix and internet delivery going to make driving to a store and renting plastic discs ancient history? You could no more turnaround a steam engine company once gasoline engines came around.”
The bankers were not happy with me, but I certainly saved them (or their investors) money, as Blockbuster just filed for Chapter 11, wiping out shareholders, and reducing their debt load 90% from nearly a billion dollars to about $100 million or so.
Somewhere between then and now, we rec’d shorting BBI, but it was a tough borrow, and a regular squeeze play.
CrowdQuery: Who is the next major company, business, or sector to go belly up?
Let’s consider 3 categories:
1) who goes down in 2010 or ’11
2) who is in danger between now and 2015.
3) Whose long term prospects are clouding up?
What say ye?
video after the jump
The following is from independent banking analyst XXX, who has been accurately forecasting the crisis and its structural underpinnings. He wonders why (generally nice guy) Mark Zandi has become a favorite of public policy makers, despite his rather lackluster track record. ~~~ The Fed, Treasury and the Senate Budget Committee appear to have a favorite…Read More
From today’s WTF file, the Florida Mortgage Mill Machinery, hard at work: “When Jason Grodensky bought his modest Fort Lauderdale home last December, he paid cash. But seven months later, he was surprised to learn that Bank of America had foreclosed on the house, even though Grodensky did not have a mortgage. Grodensky knew nothing…Read More
“What were the alternatives to the bailouts?” In light of the Summer’s resignation, its worth looking at the question I still hear from time to time. This article, Stopping a Financial Crisis, the Swedish Way, published exactly 2 years ago today, provides an answer: “A banking system in crisis after the collapse of a housing…Read More
Karl Smith is a Professor at UNC-CH and blogger at Modeled Behavior. He was a graduate fellow at the Institute for Emerging Issues, where his work was focused on state and local tax reform. Smith holds a BA and a PhD in economics from North Carolina State University.
The Conservator’s Report on Fannie and Freddie is out.
Fannie Mae and Freddie Mac are members of a long list of individuals and entities including Gary Condit, Tom Delay, Michael Jackson, Rod Blagojevich and JonBenet Ramsey’s parents. These are folks who were unjustly tried and convicted in the popular press essentially on the grounds that they were creepy or otherwise unsavory characters.
As I hope to continue to argue, being creepy, a bad person, or even a usual suspect does not make one automatically guilty of any particular crime. In this case government subsidies in the housing market are a bad idea for a host of reasons and have been for years. I will testify to this with vigor and passion.
However, that does not mean that Fannie or Freddie caused the housing bubble. Indeed, by my count they were among the biggest victims of it.
The proper question is not: What story is consistent with my general philosophy or worldview?
The proper questions is: What story is consistent with the facts?
Fact One: Fannie and Freddie’s primary business of subsidizing conventional loans was not a driver of the housing the bubble.
Indeed, conventional loans represented less than a third of all mortgage originations during the peak price acceleration years.
This was a phenomenon of private-label non-conventional loan securitization.
1.1 Peaking in 2006 at a third of all mortgages originated, the volume of Alt-A and subprime mortgages was extraordinarily high
between 2004 and 2007. In 2005 and 2006, conventional, conforming mortgages accounted for approximately one-third of all
[ . . .]
1.2 Private-label issuers played a large role in securitizing higher-risk mortgages from early 2004 to mid-2007 while the Enterprises
continued to guarantee primarily traditional mortgages.
Fact Two: Fannie and Freddie lost market volume during the boom.
That is, during the boom not only did the fraction of loans securitized by Fannie and Freddie fall, but the absolute number fell. At the same time the absolute number of private-label securitizations rose.
There is a simple and obvious reason for this. The development of structured products meant that for many consumers the free market offered a more attractive loan than the government subsidized one.