Archive for March, 2008

credit creation

So finally, the Fed is taking home loans onto its balance sheet, a tool Bernanke proposed years ago to combat deflation. (Interesting, the list of reflationary tools proposed were: drop short-term interest rate, cap long-term rate, buy private debt, buy foreign debt, tax cut, and government purchases; so there are just a few more options left.)

Fed Easing Liquidity in Funding Markets

By Jeannine Aversa, AP Economics Writer

The Fed announced the creation of a new tool, called the Term Securities Lending Facility (TSLF), geared to provide primary dealers — big Wall Street investment firms and banks that trade directly with the Fed — with 28-day loans of Treasury securities, rather than overnight loans. They would pledge other securities — including federal agency residential-mortgage-backed securities, such as those of mortgage giants Fannie Mae and Freddie Mac — as collateral for the loans of Treasury securities. Fed officials said that’s the first time they’ll be accepting mortgage-backed securities through this type of lending program.

Unfortunately, that does tend to make the Fed less credit-worthy, say if the banks were unable to repay their 28-day debts. And since the Fed is where the government keeps its money:

U.S. Treasuries Riskier Than German Debt, Default Swaps Show

By Abigail Moses

March 11 (Bloomberg) — The risk of losses on U.S. Treasury notes exceeded German bunds for the first time ever amid investor concern the subprime mortgage crisis is sapping government reserves, credit-default swaps prices show.

“It presented with” the Macbook Air

A hilarious video that slams PC users, Apple, and “unboxing” videos all at the same time.

WHAT?? You can’t take the battery out? What? I do that all the time… Like most users, I switch the battery in and out all the freaking time.

And the comments on Youtube are clearly Mac users parodying themselves, since no one seems to get the joke.

Long the leveraged market portfolio?

This guy proposes the use of a 2x leveraged market ETF to “beat” the market in the long term, assuming the market goes up in the long term (that is, the value of the mean path at a much later time is higher, or, perhaps just the marginal expected value is higher at a much later time).

It seems like a nice idea, but something is off. Firstly, these are leveraged portfolios with forced daily rebalancing, so depending on the amount of daily price variability, there is a non-trivial loss of several percent a year on top of costs. If a long-term leveraged position is wanted, one may as well buy the appropriate derivatives that underlie these ETFs, if that can be done.

Secondly, leverage is not free. This WSJ article nails the fixation on returns …

Until recently, public companies, mutual funds and pension funds generally steered clear of such risks. But the lines between risk takers and mainstream investors are blurring. In part, that’s because stock-market returns aren’t what they were a few years back. Between 2000 and 2006, the average annual return on the S&P 500 stock index was 2.5%, down from 28.7% between 1995 and 1999. Using derivatives and borrowed money is one way to try to boost returns.

… but although the return is better, the risk-adjusted return is more useful to look at. With true 2x leverage, only the risk premium is doubled at best, not the total return. On the other hand, if true 2x total return is supplied as they say, the implied leverage, and hence risk, has to be much higher than 2x. That’s something to look out for. Granted, the amount of leverage can be adjusted by weighting with the 1x portfolio.