Volume 3 Issue 47: Two-Cent Economics

Pity The Wall Street?

This particular story makes the Wall Street bankers sound so sad:

Earlier this fall, Steve Ferdman celebrated getting a job offer from Credit Suisse in the usual Wall Street fashion. Over expensive oysters and dark rum cocktails at a trendy Manhattan restaurant with his parents, he toasted landing the full-time position after working six months as a consultant without benefits. 

A week later, Mr. Ferdman, 28, sat alone at the same place and ordered a gin and tonic to lament getting laid off by the bank, for the second time since 2008. When he told the bartender about his misfortune, his next round was on the house. 

... 

The mood is even darker outside the Ivy League. Matthew Slotnick, a senior economics major at Boston College, said that he had sent more than 100 résumés to contacts on Wall Street and received several interviews. But he has not gotten any offers. Mr. Slotnick, who has wanted to work at an investment bank since entering college, is now applying to smaller banks and firms outside of New York. 

“People are saying it’s sort of a 2007, 2008-type hiring climate,” he said. “I haven’t given up, but it’s a bit depressing.” 

Any sympathy for Wall Street’s huddled masses yearning to get rich should be tempered by the fact that financial sector recessions often deal a soft blow. Laid-off financial workers typically get large severance packages, including the use of outplacement services. During their job hunt, many can draw on substantial savings built off past bonuses, on top of collecting unemployment. 

But for those laid-off Wall Street workers whose golden tickets have vanished, the disillusionment is real.

It is always difficult to sympathize with the big bonus-guzzling junkies on Wall Street. There is a reason for Occupy Wall Street. It is an industry which has been "lightly regulated" (more like unregulated) while they make tonnes of profit. As with all "frauds", as long as they keep making money, we allow them to keep doing it. Just ask Nick Leeson or Jerome Kerviel.

Even those who do not have the intention to cheat are given a huge benefit of the doubt, despite taking excessive risks, as long as they continued to make huge profits. Ask LTCM. The excessive risk-takers were probably allowed to roam free because the regulators themselves were possibly having a small piece of the action. With so much money piling up, there is bound to be some spilled over.

As for the smarties who were not able to procure jobs on Wall Street, perhaps in many years to come, they may consider it a blessing in disguise. Because on Wall Street, in the pursuit of the millions and billions of dollars, many of these geniuses lose themselves instead of finding what they were looking for.

Source: Dealbook

Volume 3 Issue 47: Intelligent Investing

Buffett's Insider Advantage Revisited

I wrote about the special treatment that Warren Buffett was given in the previous issue of the Main Streeter.

Here is more: 

The Securities and Exchange Commission usually doesn’t let investors keep many secrets. Except if you’re a major player like Warren Buffett. 

On Monday, Mr. Buffett disclosed that his company, Berkshire Hathaway, had bought a 5.5 percent stake in International Business Machines, his first big investment in a technology company ever. 

But Mr. Buffett didn’t build his $10 billion-plus stake in I.B.M. overnight. He started buying eight months ago, beginning in March. You wouldn’t have known that if you had been studiously reading Berkshire Hathaway’s filings — known as 13Fs — in which companies must disclose stock holdings. There was no mention of I.B.M. in Berkshire’s quarterly filing in April, nor in August. Instead, if you were looking carefully, you might have found an odd footnote that said: “Confidential information has been omitted from the form 13F and filed separately with the commission.” 

Translation: Mr. Buffett received special permission from the S.E.C. to keep secret his investment in I.B.M. — and possibly keep secret stakes in other companies that he is building positions in that we have yet to learn about.

... 

Over the decades, questions have been raised about the S.E.C.’s confidentiality rule, but have been quickly mooted. Back in 1997, Larry N. Feinberg, the founder of Oracle Partners, memorably told BusinessWeek: “I do not think confidential filings are fair. If I’m going to pull down my pants in public I want everyone to pull down their pants, too.”

Isn't demand and supply what the stock market is about? If Buffett wants to increase the demand of a certain stock, then inevitably, he has to pay a higher price. Why does he get the advantage of getting "insider" prices by having the SEC "hold down" the prices for him?

Source: Dealbook

The Wisdom of Warren

Just a couple of days ago, I embarked upon a mini Warren Buffett bashing session. But as everybody knows, it is difficult to hate a man like Warren Buffett. So here is me, repaying my dues, with a timeless quote from the man himself:

"Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway."

The Mootness of Rating Agencies - Part 2

Not too long ago, I wrote about rating agencies are incentivized by incentives. This means that the credit ratings assigned are correlated with the amount the rating agencies get paid. The higher the rating agencies get paid, the higher the rating they will assign to the borrower.

Here is more evidence of the destructiveness of rating agencies:

West Haven, Connecticut, which has closed four school buildings over the past two years and fired 14 teachers to help cut its budget deficit, is about to pay Moody’s Investors Service almost double what it cost six years ago for a credit rating. 

Joseph Mancini, finance director for the city of 55,000 near Yale University, says he has no choice other than to meet the demands of Moody’s after the municipality’s bonds were downgraded to Baa1 in January, three levels above junk, from A2. 

“The market’s going to punish us for the rating we’re at,” Mancini said in a telephone interview. “If we didn’t get it rated, we would be punished even more.”

Connecticut is about to pay  double what it paid six years ago. The compounded growth is approximately 12% per annum. And one wonders why US corporate profits are at record levels. Here is why the rating agencies can exploit the borrowers:

“It’s very hard to convince someone to stop using S&P and Moody’s ratings because they’re such a market norm,” James Gellert, chief executive officer of Rapid Ratings, which charges investors rather than issuers for its grades, said in a telephone interview. “If you don’t have one, people will wonder what’s wrong with you.”

...

“There are very few businesses that have the competitive position that Moody’s and Standard & Poor’s have,” Buffett said. Berkshire is an “unwilling customer” of Moody’s when it issues bonds, Buffett said. “We pay for ratings, which I don’t like.” 

Moody’s raised its standard fee this year on corporate bond offerings to 5 basis points, or 0.05 percentage point, of the amount being raised with a minimum of $73,000, from 4.65 basis points in 2010, according to Michael Meltz, a JPMorgan Chase & Co. analyst in New York. S&P asks for 4.95 basis points with an $80,000 minimum, up from 4.75 basis points and a $72,500 minimum last year. It would cost $497,500 to have both companies evaluate a $500 million debt sale. 

S&P and Moody’s haven’t lost business as a result of their increases, said Peter Appert, an analyst at Piper Jaffray & Co. in San Francisco. 

“Pricing has no bearing on whether somebody is going to issue debt or not,” Appert said in a telephone interview. The extra interest a borrower would have to pay on an unrated bond is a “whole lot more” than the cost of a rating, he said.

And here is why rating agencies are a giant extortion scheme:

“They are extorting the cities of this country,” Frank said in a telephone interview. “By the criteria they use for the private sector, every full faith and credit municipal bond should be AAA.” 

Bonds from cities and countries are rated “more harshly” than those of banks and corporations, according to the academic study, which was released in August by Jess Cornaggia of Indiana University, Kimberly J. Cornaggia of American University, and John E. Hund from Rice. There’s “virtually no chance” of default on bonds backed by the ability to tax, Frank said.

Source: Bloomberg

Hiring People To Gamble (Singapore)

Shocking, but true. There are people who actually just hire Bangladeshi's to gamble on their behalf:

A hard day's work for Bangladeshi construction worker Salim used to mean toiling under the burning sun. But nowadays, at least once a week, he finds himself assigned to a very different kind of 'job' - playing the jackpot machines in the cool air-conditioned comfort of Resorts World Sentosa. 

The 29-year-old is one of a number of foreign employees being sent to the casino to gamble on behalf of their employers to feed their own habit, a Straits Times investigation has found.
Five bosses - some with exclusion orders against them - told The Straits Times that they have been handing workers cash, notebooks and mobile phones, then dispatching them to the casino. They claimed to know several other employers doing the same thing. 

The 'proxy gamblers', dressed mostly in company polo T-shirts and jeans, get a cut of the winnings, but if they lose too much, their pay is docked.

Classic case of benefits exceeding costs?

HT: Marginal Revolution

Volume 3 Issue 46: Two-Cent Economics

Price of Women's Underwear - Part 2

Two issues ago, I wrote a post attempting to explain why the price of women's underwear has kept on rising. It is all quite academic. There is no obsession with women's underwear. I received a comment on something that I actually missed out in my analysis.

But before that, here is a picture of Miranda Kerr and the US$2.5 million "Fantasy Bra" that's going to be released:

I had claimed that I could not think of goods that are related to women's underwear but I had totally forgotten about the models that parade those very garments. While it may be true that the models are being paid for their looks, this article here reveals that it is a lot more than just that:

So here's what it really takes to be an Angel: Lima, 30, has been working out every day with a personal trainer since August. For the last three weeks, she's been working out twice a day.

"It is really intense, it's not really the amount of time you spend working out, it's the intensity: I jump rope, I do boxing, I lift weights, but I get bored doing that. If I am not moving I get bored very easily." 

She sees a nutritionist, who has measured her body's muscle mass, fat ratio and levels of water retention. He prescribes protein shakes, vitamins and supplements to keep Lima's energy levels up during this training period. Lima drinks a gallon of water a day. For nine days before the show, she will drink only protein shakes - "no solids". The concoctions include powdered egg. Two days before the show, she will abstain from the daily gallon of water, and "just drink normally". Then, 12 hours before the show, she will stop drinking entirely.

"No liquids at all so you dry out, sometimes you can lose up to eight pounds just from that," she says. 

"It's like they're training for a marathon," says Sophia Neophitou, the British fashion editor who is chief stylist for this year's show. 

"Adriana works really hard at it. It's the same as if you were a long-distance runner. They are athletes in this environment - it's harder to be a Victoria's Secret model because no one can just chuck an outfit on you, and hide your lumps and bumps.

I mean, I knew that it wasn't easy being a model. But this is what it takes to be a world class model. It is no surprise that the models get paid A LOT. It is becoming clearer why women's underwear have shot up in price.

Volume 3 Issue 46: Intelligent Investing

Insider Trading At Its Best

This is crazy:

"In mid September 2008 with the Dow Jones Industrial average still above ten thousand, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke were holding closed door briefings with congressional leaders, and privately warning them that a global financial meltdown could occur within a few days. One of those attending was Alabama Representative Spencer Bachus, then the ranking Republican member on the House Financial Services Committee and now its chairman. 

Schweizer: These meetings were so sensitive– that they would actually confiscate cell phones and Blackberries going into those meetings. What we know is that those meetings were held one day and literally the next day Congressman Bachus would engage in buying stock options based on apocalyptic briefings he had the day before from the Fed chairman and treasury secretary. I mean, talk about a stock tip. 

While Congressman Bachus was publicly trying to keep the economy from cratering, he was privately betting that it would, buying option funds that would go up in value if the market went down. He would make a variety of trades and profited at a time when most Americans were losing their shirts."

Even though the Congress is exempt from insider trading law, many of 60 Minutes’s findings are hugely damming, which you can tell just by looking at the stunned faces of John Boehner and Nancy Pelosi when Steve Croft questions them about their special dealings. The video is here.

With such insider deals going on day in and day out, it is very demoralizing as an individual investor. Is stock market investing (speculating/trading) all about insider information now? I can't help but feel disillusioned. And then here is Warren Buffett cutting a deal with the SEC:

How do you buy $10bn worth of stock in a big blue chip like IBM without alerting the market?

Check out the footnote to Buffett’s latest disclosures of his investment holdings released by the SEC:

“Confidential information has been omitted from the Form 13F and filed separately with the Commission.” 

In other words, Buffett got permission from the SEC to keep some of his stock holdings secret. This isn’t unusual for Buffett. Most big investors have to publicly reveal their stock investments every three months. 

Problem is, when other investors get wind that Buffett is buying a stock, the price tends to zoom up — meaning the price goes up for Buffett to buy more. So Buffett periodically asks the SEC to keep some of his stockholdings a secret.

Isn't this what efficient markets is all about? Warren Buffett may be every value investor's hero, but even that doesn't warrant him special treatment by the SEC.

HT: Marginal Revolution, Alphaville

Weekend Laughs

Just can't help it