This note is a bit alarming. There are three ways to make A LOT of money. One, pick stocks well (Warren Buffett and James Simons. The second is starting an incredible software company. And the third way is real estate -- see what Mort Zuckerman has accomplished.
What they have in common is leverage. Suppose you have a sharp eye and know a good deal -- you buy a piece of property for 100,000 and put 10,000 down. You make some minor modifications, you market the property better, place increase 25% in value in one year. You sell for 125,000. Now your increase on investment is not 25%, it's 250% (your 10,000 is now $25,000). Nice.
I think what happened here is a bunch of hedgies bought MBS securities with two ideas in mind -- one, they thought the MBS securities would give them a nice steady return. Two, they thought the securities could be used as collateral to increase the amount of leverage in purchasing equities.
That's why we see patterns emerging where at some point during the day, a bunch of equities are sold. And then, later in that day, there is a huge rally. The sell off is occurring b/c as the MBS securities start to lose value, the banks are demanding the funds put up more collateral. Plus, I bet the banks are tightening their margin rules and asking for more in the bank to cover the loans. So then you are a hedge fund, you need to have cash on hand to keep your leveraged positions around, there is limited liquidity in the credit markets, so your safest (only) option is to drop your equities.
Now on the other side, I'm a trader -- there is nothing fundamental in most of the market to justify the sell off of these equities. So I start buying up.
The next day, same thing happens, funds need to sell to cover -- so I sell too! And then at the end of the day I buy back the shares. Nice!
Somebody is making a lot of money right now.
Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts
Wednesday, August 15, 2007
High Frequency Trading
This is a cool article on high frequency trading that a colleague sent me. Take a looking
Monday, August 13, 2007
Quant funds being hit
This article for the NYTimes is very interesting. Basically, it says that the major quant focused funds have been hit by the down turn in the equities and structured products market. What is interesting, is that you would think the funds would have models set up to anticipate this correction and would have shorts out to cover their losses. I mean, it's only 800 points that the DJIA has lost! Plus, in general, volatility should be good for a fund as they can make the money on the speed of the execution. You'd expect the mutual funds to lose money.
I'm going to ponder this a little more ...
I'm going to ponder this a little more ...
Thursday, August 02, 2007
More on the state of the market
It is strange that I am reassuring people working on trading desks at major wall street firms. But here's how I see the market:
1) Earnings at US companies continue to be strong
2) Consumer confidence is high
3) the housing market is slowly unwinding -- yet there has not been the predicted fall in consumer spending
4) The dollar continues to be weak, which means that US manufacturing still has room to grow
5) Low unemployment
6) The main non-US economies are very strong -- India, China, and to a lesser extent the Euro zone.
What is going to change any of that? The subprime market was made up of 4 people -- people who were poor trying to buy a house; people trying to flip houses; shady loan shops; wall street speculators betting on subprime using MBS.
The first group, it's sad that they are losing houses, but they don't make up a huge percentage of the population and they were poor, so they weren't spending much money in the market in the first place (harsh, but true). The flippers could be more concerning -- markets need flow to keep them operating and that's what housing flippers provide -- a steady stream of inventory for regular buyers to compare and contrast. I wonder how many flippers were in the subprime market. Or how many people are trying to flip right now, flipping goes counter when inventory stays on the shelf (I wonder if we could come up with a metric for that?)
Now, onto wall street. They shady loan shops (american home) are gone, out of business. People are going to lose money on that (like in your 401k) but I think it's a situation where it's dispersed throughout the market -- everyone subtract a nickel from your portfolio for the loss of American Home shares. Now the wall street speculators who were buying up the securitised products, that will be interesting. B/c now we know you won't be getting the cash flow they were expecting in the future. On the other hand, they were booking that for the next 30 years, i.e. say a loan portfolio was worth 30 million. That's 30 million gone, but the owner of the securities would be looking at it as losing one million dollars every year for the next 30 years. So again, that's a drop in the bucket to most banks.
I don't think it will effect the wider market, it's similar to when Amaranth blew up b/c of their natural gas positions.
In fact, we should call these funds -- Amaranth, Sowood, Bear Credit Strat -- anti hedge funds b/c there was no hedge involved! These were guys playing roulette with their funds. Bizarre.
1) Earnings at US companies continue to be strong
2) Consumer confidence is high
3) the housing market is slowly unwinding -- yet there has not been the predicted fall in consumer spending
4) The dollar continues to be weak, which means that US manufacturing still has room to grow
5) Low unemployment
6) The main non-US economies are very strong -- India, China, and to a lesser extent the Euro zone.
What is going to change any of that? The subprime market was made up of 4 people -- people who were poor trying to buy a house; people trying to flip houses; shady loan shops; wall street speculators betting on subprime using MBS.
The first group, it's sad that they are losing houses, but they don't make up a huge percentage of the population and they were poor, so they weren't spending much money in the market in the first place (harsh, but true). The flippers could be more concerning -- markets need flow to keep them operating and that's what housing flippers provide -- a steady stream of inventory for regular buyers to compare and contrast. I wonder how many flippers were in the subprime market. Or how many people are trying to flip right now, flipping goes counter when inventory stays on the shelf (I wonder if we could come up with a metric for that?)
Now, onto wall street. They shady loan shops (american home) are gone, out of business. People are going to lose money on that (like in your 401k) but I think it's a situation where it's dispersed throughout the market -- everyone subtract a nickel from your portfolio for the loss of American Home shares. Now the wall street speculators who were buying up the securitised products, that will be interesting. B/c now we know you won't be getting the cash flow they were expecting in the future. On the other hand, they were booking that for the next 30 years, i.e. say a loan portfolio was worth 30 million. That's 30 million gone, but the owner of the securities would be looking at it as losing one million dollars every year for the next 30 years. So again, that's a drop in the bucket to most banks.
I don't think it will effect the wider market, it's similar to when Amaranth blew up b/c of their natural gas positions.
In fact, we should call these funds -- Amaranth, Sowood, Bear Credit Strat -- anti hedge funds b/c there was no hedge involved! These were guys playing roulette with their funds. Bizarre.
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