Quotations

Thanks to Barry Ritholtz at The Big Picture


"Markets can remain irrational longer than you can remain solvent."
— John Maynard Keynes

"The only thing that can console one for being poor is extravagance."
— Oscar Wilde

"It is pretty hard to tell what does bring happiness; poverty and wealth have both failed."
— Kin Hubbard

"The key to making money in stocks is not to get scared out of them."
— Peter Lynch

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."
— JP Getty

"You try to be greedy when others are fearful, and fearful when others are greedy."
— Warren Buffett

"A cynic is a man who knows the price of everything, and the value of nothing."
— Oscar Wilde

"Do you know the only thing that gives me pleasure? It is to see my dividends coming in."
— John D. Rockefeller

"A gold miner is a liar standing beside a hole in the ground."
— Mark Twain

"There was a time when a fool and his money were soon parted, but now it happens to everybody."
— Adlai Stevenson

"It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of Stock Exchanges."
— John Maynard Keynes

"The safe way to double your money is to fold it over once and put it in your pocket. "
— Frank Hubbard

"Save a little money each month and at the end of the year you'll be surprised at how little you have."
— Ernest Haskins

Monopsony?

Friday 27 May 1664 (Pepys' Diary):

"This morning my taylor brought me a very tall mayde to be my cook-mayde; she asked 5l., but my wife offered her but 3l. 10s. — whether she will take it or no I know not till to-morrow, but I am afeard she will be over high for us, she having last been a chamber mayde, and holds up her head, as my little girle Su observed"

Reserves and liquidity

Brad Setser identifies one of the links between Asia and energy-producing central bank FX intervention and the supply of funds to financial markets. The BIS (table 5c) show a $53.5bn repayment by central banks of borrowing from private banks. Of course, this opens the way for lending to other institutions, like private equity firms.

Manufacturing or service sector

Inside a much longer item about The quiet rebirth of the manufacturer: Jonathan Guthrie talks about the blurred line between manufacturing and service sector industries.

"In time, the negative connotations of the word “manufacturing” may simply be bypassed because the term itself is obsolete. Rolls-Royce, for example, is these days primarily a service business that happens to make some rather good jet engines. At the other end of the size scale, Powerlase, a West Sussex business I visited on Monday, designs and markets high-tech laser systems. Which, incidentally, it builds itself."

Credit and private equity

Maybe I am wrong already - some evidence here that the Chrysler and Boots deals may be facing indigestion and that banks will be less keen to providing financing deals in the future now that they are less certain about unloading this in some sort of package to others.

The big uncertainty remains Asian and energy-producing central banks. Will then step up to purchase these assets at higher yields?

Credit outlook

Evaporation of liquidity in the CDO market is becoming more evident. The risk now is that this starts to affect the financing of other projects.

Concerns about the credit markets were exacerbated by a JPMorgan report that said sales of collateralised debt obligations – complex debt instruments that have helped fuel the global credit boom – have plummeted from $50.6bn in June. As of July 20, there had been $19.9bn in sales of CDOs, which pool loans and bonds into securities. Since then there have been no new deals. The diminishing demand for CDOs is raising fears that banks will be left with debt that has been used to finance leveraged buy-outs, affecting their appetite for future deals.

It is not clear if this just takes some of the steam out of the private equity market or becomes a more pronounced drying up of credit. Given the flow of finance from central banks in Asia and energy-producing countries, the softer landing still seems the more likely for now.

Tony Dye

I finally found something from Motley Fool on Tony Dye.

This is the article that announces his departure from Phillips and Drew. Here, before the benefit of hindsight, we have an idea of the loneliness of standing out from the crowd of "noise-traders".

Mr Dye's supporters say that he will eventually be proved right. In fact, they've been saying it for so long that it has become a bit of a cracked record. In any event, it would require one hell of a crash now to prove him right. Even if that occurred, I bet he wouldn't take the opportunity for a belated entry to the technological band wagon and it would be everyone else's turn to explain how they will end up being right.

There is also an interview with Tony Dye one year later.

Diversity and productivity

From Science
An unexplained combination of diversity and productivity that echoes New York and London and many others.....

This is an important paper because it demonstrates genetic diversity can lead to a marked increase in performance," says entomologist and neuroscientist Gene Robinson of the University of Illinois, Urbana-Champaign. Previous studies of the impact of diversity on hive function had yielded inconsistent results, he notes, but the new one is the longest and most comprehensive. It's not clear why diverse hives would be more productive, but one theory is that the bees are more sensitive to work-related stimuli and thus more likely to take on various tasks. As for the reported disappearance of honey bees and collapses of hives (Science, 18 May, p. 970), Robinson says that lack of diversity isn't thought to be a cause. The queens in most commercial beekeeping operations are mated with multiple drones.

Core vs headline

John Berry at Bloomberg

In a commentary sent to Citigroup's clients July 13, economist Robert V. DiClemente at Citigroup Global Markets Inc. called the issue of overall or ``headline'' inflation versus core inflation ``a false debate.''

``The Fed's commitment to price stability does not entail choosing one over the other,'' he said. ``History has demonstrated that so-called core measures are a good guide to headline inflation's ultimate path.''

DiClemente noted that from 1984 until 2005, the cumulative increase in core prices was consistently a bit greater than that in overall prices. Then the surge in energy prices tipped the balance the other way.

In the short run, the overall measures are much more volatile. ``Policy that responded to such short-run deviations in overall prices would not only put the economy on a roller coaster, it would risk distorting important relative price signals, possibly undermining economic efficiency and policy's own credibility,'' he said.

The old same story. It is not about the level of prices, it is about the rate of increase in prices; not the cost of living, but the change in the cost of living. There are problems with the traditional core because food and energy have been particularly buoyant recently. However, the subdued nature of the core rate suggests that these increases have not YET fed back into other prices. The timmed-mean core measure is probably better
More here.

Rumours in the insurance market

Tuesday 19 April 1664 (Pepys' Diary):

"‘Change full of news from Guinny, some say the Dutch have sunk our ships and taken our fort, and others say we have done the same to them. But I find by our merchants that something is done, but is yet a secret among them."

From CDOs to CDS

The problems in the CDO market are now having an impact on the cost of insuring against default. The FT reports that the financial institutions with a number of different links to the CDO market have been hardest hit.

Along with other areas of the CDS markets, these groups recovered some ground on Thursday, but BoA for instance was still trading at a spread of about 20 basis points – which means it costs $20,000 annually to insure $10m worth of its debt over five years. This is up by about one-third since the start of the week.

BoA has direct lending home owners, a business in packaging CDOs and holdings of CDO products. Other financial institutions have less exposure.

Credit tightening

A couple of stories in the FT point towards some tightening in the credit market. The first looks at a general tightening of credit condition while the second concentrates on the Spanish market. The spread of this caution could cause a moderation in business activity in the coming months. However, with abundant global liquidity this is not likley to be sufficient to affect the whole economy. More important will probably be the reaction of consumer spending in developed countries to the increase in domestic interest rtaes that is taking place.

Who holds CDOs?

The FT has a report on Citibank information on the owners of CDOs.

Similarly, I guessed that those buying the so-called “equity” tranches (which are wiped out first if the value of the underlying assets falls) would be hedge funds or investment banks.

Not so. Measured on a global basis, Citigroup’s data suggests that its hedge fund clients hold about 50 per cent of their CDO exposure in equity tranches. But, asset managers who are not classic hedge funds have more than 40 per cent of their CDO exposure in equity tranches too.

Indeed, these asset managers hold less than 20 per cent of their CDO exposure in the form of AAA-rated, senior tranches. And – most striking of all – that proportion of senior debt is actually lower than at hedge funds, insurance companies or banks. (Banks have a whopping 60 per cent of their CDO exposure in senior tranches, although this pattern varies sharply across regions.)