Levine on Wall Street: Ditch Your Index Funds
Stock-picking is back
Actively managed mutual funds have been so maligned for so long that I guess they were due for a good year, and so Reuters reports that "Some 57 percent of U.S. funds run by active managers are beating their benchmark indexes this year." This seems to be attributable to the fact that stocks are moving less together and doing more of their own thing: Implied correlations "have fallen to their lowest since October 2007 after peaking in 2011. "It's a stock-picker's market," as they say, and boy do they ever say that. (Not Reuters, I mean, just the generic "they." Though Reuters too.) One lesson here is that investing success is built on a series of meta-skills and meta-judgments: Sometimes it is nice to be able to pick stocks (or to pick fund managers who pick stocks), other times wisdom lies in indexing, and knowing in advance which times will be which has obvious value.
(Don't actually ditch your index funds, that is a figure of speech. So was "Commit Fraud Now" on Friday, if you're keeping track.)
JPMorgan didn't just hire clients' kids
DealBook reported Friday that U.S. "government authorities are examining JPMorgan's hiring practices throughout Asia, focusing on South Korea, Singapore and India," after first investigating JPMorgan's "Sons and Daughters" program in China. The focus is on whether the bank hired relatives of government officials and other potential clients with "corrupt intent" to win business. Of course, one place where banks hire children of clients and potential clients in an effort to gain contacts and win business is everywhere, so restricting the inquiry to Asia seems a little silly. But I guess it'd be somewhat uncomfortable for the SEC to investigate nepotism in banks' hiring in New York.
The Dutch government would like to
sell some mortgages
Here's a story about how the Dutch government, which acquired a whole bunch of non-agency mortgage bonds when it bailed out ING Group in 2009, is planning to sell all $12 billion of those bonds. It's a nice illustration that in the bond markets supply and demand don't always work in simple ways. After the financial crisis, the non-agency market more or less shut down, with new issues still pretty rare and with lots of existing bonds locked up in bailed-out entities such as ING, or more importantly Fannie Mae and Freddie Mac. But:
Large sales of non-agency mortgage securities have met with mixed consequences. ... Auctions in 2012 of non-agency securities acquired by the U.S. central bank during the rescues of American International Group Inc. and Bear Stearns Cos. proved a catalyst for market demand. The previous year, the Fed's sales as it sought to unwind the portfolios exacerbated a slump in the market as Europe's debt crisis deepened.
Selling massive amounts of a thing: generally bad for the price of that thing. Selling massive amounts of a thing where the market is moribund: possibly even worse? Or possibly a catalyst to revive that market, create liquidity where there was no liquidity before, etc. It must be fun to be a non-agency mortgage bond trader, if that is still a job that exists.
Here's a fun post from Felix Salmon about sovereign credit. He charts one common indicator of sovereign creditworthiness -- CDS spreads -- against one odd indicator of sovereign creditworthiness, basically weeks of cash on hand. The point is that they don't correlate particularly well: The U.S. and U.K., for instance, can borrow easily but would shut down relatively quickly if they couldn't; Argentina, which is not beloved by the debt markets, could run itself for five-plus years without borrowing. Salmon finds these results "startling," though they make more sense if the causality is "creditworthiness leads to low cash reserves" rather than "low cash reserves lead to creditworthiness": If you can borrow at zero-ish real rates whenever you want, I guess you wouldn't be that worried about keeping a lot of cash around. Which is a good metaphor for a lot of financial trouble: The problem is not the risky things; it's that the safe things get levered up until they are, sneakily, even riskier.
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Matthew S Levine at firstname.lastname@example.org