Wrong Way? Wall Street Journal February 26, 2007

The following article was published on WSJ on February 26, 2007 and is still very much relevant as of today. Recently, a lot of media attentions were on the anniversary of the September 2008 financial collapse. Yet, this recession did nothing to cure our urge to "play" the stock market.

Investors are trading so quickly they may not see the risks in the market for the speed.

In the stock market, the idea of holding on to an investment for the long term doesn't seem to hold much allure any more. According to Sanford C. Bernstein chief investment officer Vadim Zlotnikov, the average holding period for stocks on the New York Stock Exchange and American Stock Exchange last year was less than seven months. In 1999 -- stereotyped as a time of rapid-fire day trading -- the average holding period was more than a year.

In fact, the last time stocks were being held for as short a period as they are now was 1929, when students of history may recall something happened to the market.

Mr. Zlotnikov's analysis doesn't include the increasingly popular, and complex, derivative strategies that investors use to gain exposure to stocks without actually holding shares. On the Chicago Board Options Exchange, for example, the trading volume on individual stock options was 40% higher last year than it was in 2005.

Technology has a lot to do with the increase in turnover. Increased computing power means strategies that 10 years ago existed only in theoreticians' notebooks now can be put into everyday use. Lower trading costs and the 2001 switch to decimalization -- the pricing of stocks in dollars and cents rather than dollars and fractions -- have let investors profit from price anomalies that used to be too expensive to exploit.

Also driving the increase: the rising prominence of hedge funds. Because they tend to be judged by each year's performance, few professional fund managers have the luxury to ignore short-term price swings and invest for the long haul. Losing your job and then having history prove your investing acumen right is nobody's idea of fun. For hedge-fund managers, the short-term performance pressures can be intense -- first, because the high fees they charge make their investors intolerant of losses, second because some of the trading strategies they use mean the losses they face if a position goes wrong can be steep.

The result is a constant trading in and out of positions to capture returns. In today's marketspeak, hedge funds are emphatically working to "generate short-term alpha." What it boils down to is the age-old practice of stop-loss trading -- automatically buying and selling stocks when they rise or fall to specified levels.

Despite all the moving in and out of stocks, stock-price movements have been remarkably quiescent. Stock market volatility -- as measured by actual price movements, rather than the options price-generated "implied" volatility measured by CBOE's market volatility index -- is at its lowest level in 10 years. (Implied volatility is near a decade low.) It may be that the combined effect of all the sophisticated trading strategies in place today have put the stock market into a state of dynamic tension, where all the tugging and pulling effectively cancels each other out, muffling price movements.

At the same time, investors' intolerance of short-term losses could mean that if the stock market seriously stumbles, the droves of fund managers engaging in stop-loss selling could overwhelm the market. When volatility comes back, it could do it in a grand fashion.

I recommend John Bogle's "The Little Book of Common Sense Investing." The book presents a very persuasive argument on index investing but is hardly followed in the real world. Mr. Bogle simply put it this way: "We investors as a group get precisely what we don't pay for. So if we pay nothing, we get everything."

What's happening in the world is exactly the opposite. One example, optionXpress Holding Inc., a highly profitable online brokerage, has a 80% profit margin and after all operating and tax expenses still produce a healthy 20% net profit margin. Its "Daily Average Revenue Trades", a measurement of expected revenue from commissions or fees, increased from $13,600 in 2004 to $36,500 in 2008 as more users opened accounts with optionXpress.

May the best trader wins.

Warren Watch: Bite into this, Mr. Buffett

http://www.omaha.com/article/20090823/MONEY/708239979

From Warren Buffett Watch - CNBC.com

The Omaha World-Herald relates Buffett's response to a New Jersey nutritional dentist who had written a letter encouraging him to eat more healthy food and take nutritional supplements:

"My diet, though far from standard, is somewhat better than usually portrayed. I have a wonderful doctor who nudges me in your direction every time I see him. All in all, I’ve enjoyed remarkably good health — largely because of genes, of course — but also, I think, because I enjoy life so much every day."

He's also been exercising more in recent years.

Back in 2007, Buffett told CNBC that his doctor had given him a choice two years before: "Either you eat better or you exercise." Buffett said he chose exercise, the "lesser of two evils."

Some Financial Headlines in August 2009

Climate Change

- Officials, who yesterday estimated agricultural damage from Typhoon Morakot amounted to at least 4.2 billion Taiwan dollars (about $130 million at current exchange rates).

- Auto sales in China rose 63.6% in July from a year earlier to 1.09 million vehicles, the fifth straight month of more than one million vehicles sold.

- China's auto sales rose to 7.2 million vehicles in the first seven months of 2009.

- Car sales in India rose an annual 31 percent in July, an industry body said on Monday, as demand was boosted by new launches and increasing availability of cheaper loans.

- India companies sold 115,067 cars during the month, compared with 87,901 cars a year earlier, data from the Society of Indian Automobile Manufacturers showed.


US Mortgage

How to Save an ‘Underwater’ Mortgage WSJ - OPINION By MARTIN FELDSTEIN

- More than three million homes are now in serious default (nonpayment for 90 days or more) or foreclosure, nearly double the number a year ago. Sales of properties in foreclosure or serious default made up one third of all home sales in May and June.

- So far only about 200,000 mortgages have been modified this way, far fewer than the administration’s goal of modifying three million mortgages.

- Nearly half of all modified mortgages go into default within six months. That’s partly because, even when they can afford the reduced mortgage payments, many homeowners default anyway because they owe more on the house than it is worth. Thanks to this “negative equity,” they just walk away.

- Today one-third of all homes with mortgages have mortgage debt that exceeds the value of the home. Among these homeowners, half of the loan-to-value ratios exceed 130%.

- Any homeowner with a loan-to-value ratio over 120% could apply for a reduction in his mortgage balance. The government and the creditor would then share equally in the cost of writing the loan balance down to 120% of the value of the home. But the homeowner who opts for this write-down would be obliged to convert the remaining mortgage to a loan with full recourse that could not be discharged in bankruptcy. Federal legislation would be needed to modify state mortgage and bankruptcy rules to allow homeowners to obtain the new type of mortgage.

- An example shows how this would work. Consider someone with a home worth $200,000 and a mortgage of $280,000, i.e., a loan-to-value ratio of 140%. If the borrower and the creditor both agree, the loan could be reduced by $40,000 to $240,000 (120% of the home value.) The government would give the creditor $20,000 to offset half of the write-down. The homeowner would convert the remaining $240,000 mortgage to a bank loan with full recourse that could not be discharged in bankruptcy.- If this plan succeeds in stabilizing house prices at the present level, the one-time cost to the taxpayers would be capped at $200 billion, even if every homeowner with a loan-to-value ratio over 120% accepted the government-assisted write-down. That $200 billion is less than a 2% fall in house values.

- Existing home sales rose 3.8% to a seasonally adjusted annual rate of 4.76 million units in the second quarter from 4.58 million units in the first quarter, according to the National Association of Realtors (NAR). That is still 2.9% below the second quarter of 2008.

- But foreclosures are rising, and that's pulling down home prices. Foreclosure filings were reported on 360,149 properties in July, according to a RealtyTrac report today. That's an increase of nearly 7% from the previous month and a jump of 32% from July 2008.

- Moody’s latest CMBS Delinquency Tracker (DQT) records the aggregate rate of delinquencies among US CMBS conduit and fusion loans at 2.67%, based on data through the end of June. This represents a 40 basis point increase from the prior month’s 2.27% rate.

- By comparison, the DQT was 0.46% a year ago and is now 245 basis points above the low of 0.22% measured in July 2007.

- Fitch Ratings yesterday said that delinquencies for loans in US commercial mortgage backed securities (CMBS) rose by nearly half a percentage point in July to 3.04 per cent, the highest level since the rating agency began tracking this index of loans in 2001. The loans in the index represent about $480bn in CMBS, or two-thirds of the market.

- To help revive the sector, the Federal Reserve has included CMBS in the term asset backed securities loan facility (TALF), where it lends investors money to buy new deals, though none have been arranged.

- Almost $165 billion in U.S. commercial real estate loans will mature this year and need to be sold or refinanced as rents and occupancies fall, according to First American CoreLogic

US Equities

- Berkshire’s operating earning results for the second quarter and first six months of 2009.

- A Commerce Department report on Thursday showed total retail sales edged down 0.1 percent after increasing 0.8 percent in June, compared with market forecasts for a 0.7 percent gain.

- Initial US Jobless claims 558K and the four week average at 565K. Continuing claims down to 6.202 million from 6.343 million

- AAII Index (American Association of Individual Investors) has risen to the 50% for the first since May 9, 2008 (only 35% are bearish). March 6, 2009 was at 18.9.

- Market Vane Sentiment (a survey of traders) up to 48% now, which is the highest since June 20, 2008.

- The government sold a record $37 billion in three-year notes on Aug. 11 and $23 billion in 10-year notes yesterday. Sales of 3-, 10 and 30-year securities have become monthly, raising $65 billion in July, as the U.S. tries to fund a record budget deficit.

- Today’s sale is the largest-ever offering of the 30-year bond, the prior record being the $14 billion sold in May and February and in February 2006. The U.S. sold $11 billion of the securities in July. At last month’s auction, the notes drew a yield of 4.303 percent.

- Indirect bidders, a class of investors that includes foreign central banks, bought 48.1 percent of the notes at today’s auction. They bought 50.2 percent of the securities in July, the most since February 2006. They purchased 49 percent in the June auction. The average for the past 10 auctions is 32.8 percent.

- The shortfall so far for the fiscal year that ends Sept. 30 totaled $1.27 trillion compared with a $389 billion year-to-date gap in 2008, the Treasury said today in Washington. The excess of spending over revenue for July climbed to $180.7 billion compared with a $102.8 billion gap in July 2008 as the government spent more than in any month in U.S. history.