Dollars and Jens
Thursday, April 30, 2009
stop-loss orders and portfolio insurance
A "stop-loss" order is an order to sell a stock if it drops below a certain price; as with "portfolio insurance" of the eighties, the idea is to limit your downside. Of course, it doesn't work so well if you're selling at the same time as a bunch of other people, especially when there are few buyers, perhaps ahead of a major announcement.

I've read that stop-loss orders give up as much in rebound gains as they curtail in prevented losses, which is what the EMH would tell you, and doesn't mean they can't sculpt other moments of your returns' distribution, and so possibly add value. Don't think, though, that by selling as soon as the price breaches $20, that you're going to get $20 per share. Stock prices are not continuous.

Wednesday, April 29, 2009
FOMC statement
The FOMC statement, as revised:

Information received since the Federal Open Market Committee met in January March indicates that the economy continues to contract has continued to contract, though the pace of contraction appears to be somewhat slower. Job losses, declining equity and Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and , fixed investment, and staffing. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater As previously announced, to provide support to mortgage lending and housing markets , the Committee decided today to increase the size of the Federal ReserveĆ­s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve and to improve overall conditions in private credit markets, the Committee decided to purchase Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of longer-term Treasury securities over the next six months Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate is facilitating the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.


The advanced report:
IV 06I 07II 07III 07IV 07I 08II 08III 08IV 08I 09
Gross domestic product1.
Nondurable goods.
Durable goods.
Change in private inventories-1.41-
Fixed investment-1.27-.57.47-.15-.97-.86-.25-.79-3.36-6.04
Net exports of goods and services1.33-1.201.662.03.94.772.931.05-.151.99
Government spending.

The consumption figure is about what I expected, which makes the headline rather worse than I anticipated; that's some pretty phenomenally bad investment data. I really didn't expect that there would be an even bigger drawdown (writedown?) of inventories than in previous quarters. I didn't expect the boost from net exports, either, though.

The headline is somewhat worse than most guesses I had seen, but the worst may be behind us. I sure hope so.

Update: By the way, that was over $100 billion in inventory reductions.


Wednesday, April 08, 2009
how bank regulation exacerbated the crisis
Felix Salmon picks up a report from Goldman Sachs that gets concrete about some points that have been made elsewhere:
On the left hand side is the amount of capital that a bank would need to have if it had $100 of mortgages on its balance sheet: 5%, or $5. Once it securitizes those mortgages and they become RMBS, however, the capital needed drops to $4.10.

Of the $4.10, 40 cents is comprised of capital provisions against the triple-B tranche of the RMBS. But if the bank then repackages that triple-B tranche into a CDO, that capital requirement drops still further, to 35.5 cents.
Arnold Kling has suggested that securitization would not have happened were it not for these perverse incentives, and I have disagreed; I think there's a lot of good to be done in pooling loans and tranching them up to target different investor risk preferences. I don't at all think that justifies bad regulation to promote it; if anything, I'd like to see more stringent requirements for the securities than the loans to encourage banks to keep exposure to the loans they originate.


Wednesday, April 01, 2009
Geithner plan subsidy
The biggest problem I have with John Hempton's writing is often its punctuation. I certainly disagree with much of what he has to say, but I don't find it as annoying as having to parse most of his sentences more than once. Anyway, the essence of a very good point he has today is that
it is simply illogical to believe that

(a). The banks are largely insolvent,

(b). The right or actual government policy is guarantee big banks (ie no more Lehmans) and

(c). The subsidy to the Geithner Funds is a real problem.
If it's not immediately obvious why this is true, go look at his post.

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