Just seen on youtube: Myron Scholes on liquidity, risk transfer, chaos, the role of hedge funds and how they are interelated (Stanford Graduate School of Business, April 2004):


Definitely worth watching. Of course, if we could travel back in time and take part in the Q&A, we would have asked him what he thinks about the principal-agent problem (HFs und especially prop desks who have at best a medium term view vs. ignorant investors, shareholders, and management) and short to medium term market distortions due to crowded trades / traders riding the bubble.

Agcapita via FSC:

The ratio of the Commodity Research Bureau Total Return Index and the S&P 500 (TR) is basically the value of a standardized basket of commodities compared to the value of a basket of stocks - in simple terms how much stock you can buy with a fixed amount of commodities. It is noteworthy that:

• The 50-year average for this ratio is around 1.1 times
• During the commodity bull market in the 1970s, the ratio peaked at over 3 times
• The ratio is currently at a 50 year low of around 0.2 times far below the long-term average and just slightly higher than the low reached around 2000. In other words, we are still at a very low relative valuation between "hard assets" vs. "stocks."
• Logically, the ratio of hard assets to stocks should move higher before the commodity bull market is over
• If this occurs, it will be as a result of either stock value falling and/or commodity prices rising - most likely it will be a combination of both as investors rotate out of stocks into commodities as the bull market unfolds

Here is a chart of the ratio since 1994 (no earlier data from BBerg for CRB TR Index):

My take: Even if it's not actually a long-term downward trend, what help is a mean-reversion that takes longer than you can stay solvent?

Dealbook:

Altman predicted that the default of high-yield debt would fall 4.3 to 6.7 percent.

That jibes with a study released Monday by Moody’s Investor Service, which found from its own records that just $21 billion of debt is coming due this year. The next few years could prove more problematic: more than $700 billion will come due between 2012 and 2014 (emphasis mine).

Defaults in 2009 rose to 10.7 percent. <> How bad was 2009? Mr. Altman pointed out that 43 companies with more than $1 billion in liabilities filed for bankruptcy then, more than in recent years. About 56 percent of companies that offered debt exchanges to investors, offering to swap bonds for newer ones in an effort to gain breathing room for maturities, still ended up filing for bankruptcy.

But since the economy rebounded last year, so did the debt markets, with Mr. Altman pinning the turning point around June or July. Companies that faced tough choices for their debt found themselves able to refinance their obligations, usually by issuing newer bonds.

That the credit markets have led to a new sea of debt could have ramifications for companies that have now taken on too much debt, Mr. Altman warned. As Moody’s also warned, if economic conditions improve, most borrowers will be able to cover their debts. That’s a big if, however.

via Abnormal Returns

Bloomberg (Terminal): Goldman and JPM will find it tough to reproduce last year's record trading revenue as the difference between bid and offer prices in credit markets narrows to the tightest in almost 19 months.

The chart of the day (right) shows how bid-ask spreads on North American companies have shrunk to 6 bps, from as high as 20 in October 2008 and 16 in March.

NB: The graph shows the average CDS bid-ask spread of the 125 companies in the CDX NA IG Index and not the bid-ask spread of the index itself (which is currently lower than 1 bps).

Financial News: Investment bankers in the US have begun using equity derivatives to convert restricted shares paid as bonuses into cash, side-stepping new guidelines on remuneration which were designed to prevent bankers cashing out for at least three years, according to a headhunter.

„Rather than wait three or five years fort he restrictions to pass, bankers would rather take a discount of up to 50% now just to get out and do something else“. [Source]

Bloomberg: [B]rokerages are adding technology and services to help them execute large orders for customers.

Goldman Sachs Group Inc. ousted JPMorgan Chase & Co. as the firm that got the best prices for its institutional clients during Bloomberg’s 12-month ranking period from July 1, 2008, to June 30, 2009, according to data compiled by Ancerno Ltd.

Goldman customers lost an average 27.52 basis points when they bought or sold through the bank, according to Ancerno’s world ranking:

Full Story

Ever wondered how a portfolio of corporate bonds with the same rating* (monthly re-balancing) performes after adjusting for the "risk free" rate?

The first graph shows the BofA Merrill Lynch 1-3 year Euro Corporate Indices (AAA,AA,A,BBB) after adjusting each with the 1-3 Year AAA Euro Sovereign Index. The second graph (different scale) does the same with European Currency High Yield Indices (portfolios have a slightly higher duration).


The last graph compares the excess return of the Eurostoxx 50 TR index with the excess return of the "CCC and lower" bond index:


NB: The BofA Merrill Lynch indices are re-balanced (rating) on a monthly basis. Keep in mind that fluctuation in the time series can be due to the low number of issuers, high number of financials vs. non-financials, etc.

* based on an average of Moody’s, S&P and Fitch