Dollars and Jens
Thursday, November 30, 2006
Seasonal Adjustment
In the week ending Nov. 25, the advance figure for seasonally adjusted initial claims was 357,000, an increase of 34,000 from the previous week's revised figure of 323,000. The 4-week moving average was 325,000, an increase of 7,250 from the previous week's revised average of 317,750.
From today's Initial claims of unemployment report.

A lot of the economic data reported in the news are seasonally adjusted to help distinguish actual trends from normal annual variations; sometimes the seasonal adjustments can be substantial. In this case, far fewer unemployment claims were made last week than the week before — but not by as much as is to be expected for Thanksgiving week. The raw number dropped, but the seasonally adjusted number spiked upward.

It may be that there is finally a spate of unemployment that some of us have been expecting from the housing slowdown; if we keep getting 357,000, it's a bigger spate than was expected. Last year there was a bit of a spike Thanksgiving week, but not this bad. It's hard to know quite what to make of the number, but if we get a couple numbers in the 330s over the next couple weeks, the labor market has started to slow; I would even be willing to take a single such number as a sign that this week's number meant something. If it comes back to 315 or so next week, "anomaly" may be the way to bet.

Wednesday, November 29, 2006
longevity derivatives
London is set to become the centre of a potentially huge new global market in trading so-called "longevity" risk faced by pension funds, industry experts predict.

Leading investment banks and insurance companies are working on the design of new securities expected to be launched next year. The moves come as the pension industry is frantically looking for ways to meet its growing obligations.


The market is expected to start in London rather than New York partly because of a favourable regulatory regime. Analysts say prescriptive pensions legislation and the threat of class-action lawsuits make US pension schemes nervous of innovation.


The new securities are likely to include variations of "mortality bonds" (whose value falls if deaths occur earlier than expected) and "longevity bonds" (which move the opposite way). Banks such as Deutsche Bank and BNP Paribas are working on so-called "mortality derivatives".

The move comes as the pension industry is facing a growing asset-liability mismatch, partly because pensioners are living longer, and new accounting rules are encouraging companies to reduce their exposure to pension risks.
What the pension funds are looking to buy was actually sold a couple years ago by a life-insurance company, which faces a risk opposite to that that the pension funds face. The risks don't exactly offset — life-insurance is more concerned with mortality rates in younger demographic than the one to which pensions are more exposed. But risks can be at least partially cancelled through some financial engineering here.

In the article it's compared to the credit derivatives market, and I could see it evolving into a similar sort of thing as CDOs and other basket-like credit derivatives, in which certain broad indices are fairly liquid, while more bespoke derivatives that might more closely match a given company's specific risks would be available but less liquid.

Price controls and non-pecuniary rationing
Various union-backed forces continue to push Wal-Mart to improve its employee health plans, and Democrats in Congress are all but certain to raise the minimum wage next year. When a price is held artificially high, it generally creates a surplus — quantity supplied exceeds demand, and something like rationing in a non-pecuniary way is required.

If Wal-Mart overpays its employees, or other businesses are required to overpay their employees, what kind of alternative rationing mechanism would be likely to come into play? Wal-Mart already — whether for political or other reasons — offers an attractive enough package that new stores attract far more applicants than there are jobs available; presumably they take higher quality employees than they would if they paid less. For a lot of minimum wage payers, some of the rationing might simply be first-come-first-served, in which the available jobs (and associated rents) go to whoever happens to be in the right place at the right time. It seems to me that Tyler Cowen was suggesting that a minimum wage increase is likely to lead to a worsening in work environment; certainly other, less-regulated or -visible or -auditable forms of compensation are likely to be in play.

Any other thoughts? Is there any literature as to which explanations are most significant?

Friday, November 17, 2006
Friedman and Samuelson
I'd like to point out that I went to the University of Chicago and my brother went to MIT.

Thursday, November 16, 2006
Milton Friedman and my brother
Apparently, Dean and I disagree on the stature of Paul Samuelson, who impresses me particularly for having made large contributions to a range of different fields of economics. My pantheon of 20th century economists has the two old-but-living-as-of-yesterday ones, then a large drop.

Other than that, though, I echo what my brother said. The world is a poorer place without Friedman.

Milton Friedman
There were two or three twentieth century economists who towered over the rest, and one or two have been dead for over sixty years. Less than 24 hours ago we lost the other one.

When an important figure dies, significant accomplishments are listed in obituaries. When an epic figure dies, significant accomplishments are left out of the obituaries; Milton Friedman made notable contributions to econometrics fifty years ago, but spent the rest of his career overshadowing himself, to the point that most obituaries haven't even mentioned them, getting hung up on how he and his ideas made the world better for billions of people instead. Much of the very epistemology underlying sophisticated discussions of economic issues today was actually laid by him, things so fundamental that we forget the world could ever have been otherwise.

And he will be missed.

Wednesday, November 15, 2006
The PPI today is lower than it was a year ago, though the core PPI is still up 0.7%.

Bill Poole says the odds of another interest rate hike are about the same as a cut, and today's number was comforting in light of recent labor market data suggesting more hikes would be needed.

Sunday, November 12, 2006
Corporate Governance
NEW YORK, Nov 8 (Reuters) - A leading New York Times Co. shareholder submitted a proposal to the company on Wednesday that would cut the Sulzberger family's longstanding control of the company by changing its voting structure.

Eliminating the Times' dual-class voting structure would provide equal voting rights to shareholders and "foster a culture of accountability," Morgan Stanley's Hassan Elmasry wrote in a letter to the Times' corporate governance officer, a copy of which was sent to Reuters.

Currently, class A shareholders elect four of the company's 13 directors. The Sulzbergers hold class B shares, which represent less than 1 percent of the company's equity interests, but elect nine directors, Elmasry, the managing director of Morgan Stanley Investment Management (MSIM), wrote in a proposal accompanying his letter.
On the one hand, I'm sympathetic to the point that Morgan Stanley is making. But on the gripping hand, it was like that when they got there. If you don't trust the Sulzberger trust to manage the company for you, you shouldn't buy the stock. The fact that shareholders have effectively no control over management probably gave Morgan Stanley a discount on the stock. They certainly should have figured a discount into their valuation.

I don't entirely blame them from whining, mind you. It's at least a way to embarass management, which is all the power they have. But I don't see it doing much good, and I don't feel terribly bad about that.

Thursday, November 09, 2006
Dodge and Cox methodology
An interview with a couple of money managers from Dodge and Cox. I was struck by the emphasis on price to sales ratios. I seem to recall hearing a few years back that, historically, stocks with sub-median P/S ratios have outperformed stocks with sub-median P/E ratios and those with sub-median P/B ratios, but I think of P/E ratios as a better indicator, particularly if the E is over a longer period of time than a year.

Tuesday, November 07, 2006
monopolizing repo markets
Trouble in the bond markets.
Whether or not they are in for another stern warning, traders say they expect an explanation of the limits on them since the Treasury officials who have been expressing concern have given few details of what they want stopped.

James Clouse, Treasury deputy assistant secretary, has cited an increase in instances of companies trying to profit from controlling particular securities and said this could eventually drive investors away from the $600-billion-a-day Treasurys market.

In a speech before the Bond Market Association in September, Clouse said questionable practices had distorted prices in the cash, futures and repo markets.
The repo ("repurchase") market is an interdealer market in which a bond is sold with the agreement that it will be repurchased at a predeterimined price and time, typically a day or a few days later. The seller/repurchaser is essentially borrowing money for a couple days, handing over the bond as collateral, and the market is typically quoted in terms of interest rates -- the interest rate at which the short-term loan is essentially being made.

Most often, the rate is pretty close to other extremely high-grade short-term debt — typically near the federal funds rate. Once in a while a particular issue will be in high demand — sometimes from long-term investors, but sometimes because people want to borrow the bond and sell it short, with the expectation that, by the time of the repurchase the market price will be lower than the price on the repo agreement — and it will go "on special", where the interest rate people will lend in exchange for that bond goes well below short-term rates. A couple bonds a few months ago went heavily on special a few months ago, and it appears much of the issues in question were owned by one bank, stocked up to create a shortage so they could be repoed out at attractive rates.

I'm not sure, though, that such a thing should be that easy to pull off. For one thing, buying up most of an issue is liable to move the market, as is liquidating the issue. You'll also have to fight the fed along the way — the fed lends out bonds when they drop more than 100 or 150bp below market, eating into some of the profits that you're hoping to accrue from this. Further, for most investors there will be other issues that serve as perfectly good substitutes for the one you're cornering — and you may even get hedge funds trying to correct the anomalies you're creating. The market for that one issue may be small enough for you to handle, but the actual market you're contending with is much deeper, as you effectively have to deal with all similar issues as well.

That said, I'm not willing to dismiss out of hand that something like this might have taken place, and it seems reasonable to investigate. As with the traders, though, I hope any ultimate sanctions come with some kind of clarity and specificity as to what kind of behavior is being sanctioned, and I bet, if something was amiss, that there's a market-oriented solution, enabling the catches that I mentioned above to prevent serious distortions from persisting.

Sunday, November 05, 2006
Bill Miller is Bullish
Bill Miller released his quarterly letter a couple of weeks ago:
"Count me somewhere between bullish and very bullish," he wrote in a quarterly letter to shareholders of the $19 billion Legg Mason Value Trust fund, which he has managed since 1982.

"The U.S. stock market remains undervalued, in my opinion," he wrote in the letter dated Oct. 21.
I'm inclined to disagree, but it's dangerous to bet against Miller.

Friday, November 03, 2006
Housing futures based on the Case Shiller indexes and traded on the Chicago Mercantile Exchange have predicted a decline in [housing prices in] the 10 markets around the country of 7.3 percent from August 2006 to August 2007. Prices in all 10 cities are projected to fall.


If the predicted decline happens, however, it may not be as severe as the futures trading indicates. According to Robert Shiller, the co-creator of the indexes, there is a risk premium to be taken into account; at this point, more traders are interested in protecting themselves against loss than are interested in buying into a growing market. That imbalance drives down the futures prices.
Any financial market has hedgers and speculators, and it is a maxim that, in a market with a persistently different mix on one side of the market than the other, the prices will tend to slightly favor the speculators over time. (This was noted by Keynes and Hicks — the latter of whom introduced the IS-LM model — as an argument for "normal backwardization", the idea that commodities futures should generally be lower than the spot price, on the theory that most hedgers are selling the futures.) This is simple risk-aversion — hedgers are willing to pay a bit of a premium to reduce their risk, and the marginal speculator will require a bit of a premium to take on the risk. The speculators are, to some extent, selling insurance to the hedgers, and, as Shiller is pointing out here, they kind of create the market in which hedgers are able to hedge their risks.

Not to get too far afield, but if one is called upon to distinguish trading in a financial market from gambling, I think the presence of hedgers is as good a way as any to do so. Financial markets are ultimately about risk transference, while gambling creates risks for everyone involved.

As they've been saying in the news, unit labor costs were up at a 4% clip while productivity was completely flat. What they haven't noted is that, in manufacturing, productivity gains were phenomenal, and unit labor costs actually declined.

Which, of course, means it was that much worse in the service sectors, where productivity must have actually declined.

While I'm here, I'll note that initial claims for unemployment were the highest they've been since July, and will note that they basically look like 315,000 + noise, and make the last couple weeks look like 315,000 - noise. If you smooth out the weekly fluctuations, it's stuck awfully close to 315,000 since the beginning of June, and the most recent number is not inconsistent with its continuing there. That the job losses haven't really started yet seems to me the most reasonable bet, though I expect the continued tightening of the labor market will end not with a bang, but with a whimper.

Thursday, November 02, 2006
Schumer's on board with the idea of reworking Sarbanes-Oxley.

If this happens quickly, some of international capital that has been lost will return, but the network externality that is one of New York's big draws deteriorates on an on-going basis as long as the expense of being listed in the United States stays as high as it has become.

Wednesday, November 01, 2006
I-bond rates
The real interest rate on new I-bonds is unchanged; Treasury set them to 1.4% again for the next six months.

Powered by Blogger