Quants Quench

A very instructive and entertaining paper by Amir E. Khandani and Andrew W. Lo:
What Happened To The Quants
In August 2007?

The pointer has been from The Trading Digest.

Bill Miller Video

Bill Miller interview

BT&T Timelife

On 2007-12-27 came this announcement from BT&T Timelife AG:

Successful CHF 30 million class action suit against Lernout & Hauspie / KPMG
BT&T TIMELIFE AG is receiving an amount of about CHF 30 million from a successful class action suit against the Belgian software company Lernout & Hauspie, which filed for bankruptcy in 2001 due to accounting fraud, as well as against their auditing firm KPMG.
The Net Asset Value of BT&T TIMELIFE AG will be adjusted as of December 28, 2007 – proportional to the value increase through the financial returns from the class action suit – by CHF 1.53 per share from CHF 1.43 per share to newly CHF 2.96 per share.

On 2007-12-28 there was an insider transaction purchase of 182'480 securities amounting to CHF 179'378.00 (CHF 0.98 / security).

The share price later on closed at CHF 1.50 for a nice 53 % intraday profit. For the whole day the stock increased a whopping 89 %. Thought the whole market capitalization is still less than CHF 21 million.

Nestle Insider Transaction

Wow, good timing, Mr. Brabeck-Letmathe?!

According to the SWX Swiss Exchange:

Issuer	Nestlé AG
Transaction date	12.12.2007 by an executive member of the board of directors / member of senior management
Type of transaction	Sale of 20'000 securities amounting to CHF 11'000'000.00 (CHF 550.00 / security)
Type of security	Equity securities
ISIN	cf. remarks on the product
Remarks on the product	Exercise de Management Stock Options

Or are there any other executive members of the board of directors?

The all time high of Nestle was CHF 550.50 at 2007-11-15 and this sale was less than 1 permille below it. Anyway, today's price is still only -4.82 % below that sale price.

Jon Tait

An inspiring interview at StockTickr from 2006-10-18:
Interview with Jon Tait, the Fickle Trader

Oil Reserves

Who has the oil?

Greatest Oil Reserves by Country, 2006

Trading Psychology

Brett Steenbarger: Two Kinds of Traders

Now here's the interesting part: The first group of traders almost universally asks me to help them tame their emotions. They have problems with impulsive trading, failing to honor risk limits, failing to take valid signals due to anxiety, etc. The second group of traders, having researched successful strategies, almost universally asks me to help them take maximum advantage of their edge. They want help taking *more* risk and trading larger positions.

The trading psychology literature focuses strongly on the first group of traders, because much of the universe of retail traders falls into this category. At many investment banks and hedge funds, however, visual trading is practically non-existent. If you don't have a model with a demonstrable edge, you don't trade. Such traders tend to have solid analytical strengths, but are not necessarily risk-takers.

Riding Bubbles?

Here is a paper by Eric Kole, Nadja Guenster, and Ben Jacobsen: Riding Bubles

Here is a summary/comment about the paper: Bubbles: Ride, Watch or Play the Pop?

Cataclysmic Countrywide

Here is a background article by Art Detman for the FTSE Global Markets Magazin about Countrywide Financial.

Buffett too Old?

Gannon to Barron’s: Berkshire Fairly Valued…As a Buffettless Empire!

However, the age angle is overdone in most media reports. People look at Buffett (like Bill O’Reilly recently did) and say “this guy’s old; he’s going to be dead soon”.

There are a few problems with this logic when applied to Buffett’s future services to Berkshire. One, CEOs don’t usually die in office. Even great CEOs retire long before they reach 77 – and 86 is never even contemplated.

Buffett will work for as long as he’s able. Taking Barron’s actuarial life expectancy of nine years, it’s obvious that Buffett is still expected to last longer at Berkshire than the average public company CEO appointed today. CEOs don’t make it much more than five years on average; so, Buffett’s expected future service time is actually above-average not below average.

Investment Banks Carnage

Investment or other big bank current share price drawdowns (drawdown = percentage below all time high), as of 2007-12-14:

US       |  ATH Date|   ATH| Price|Down %
Morgan S.|2000-09-11|109.37| 50.30|-54.01
Citigroup|2000-08-28| 58.88| 30.70|-47.86
Bear St. |2007-01-12|171.51| 95.29|-44.44
Merrill  |2007-01-24| 97.53| 56.84|-41.72
JP Morgan|2000-03-23| 65.67| 45.20|-31.17
Lehman B.|2007-02-02| 85.80| 62.24|-27.46
BoA      |2006-11-16| 54.90| 42.16|-23.21
Goldman  |2007-10-31|247.92|210.67|-15.03

Europe
Fortis   |2007-04-10| 35.35| 18.47|-47.75
RBS      |2007-03-06|  7.19|  4.39|-38.94
Soc. Gen.|2007-05-04|158.42|100.67|-36.45
Barclays |2007-02-23|  7.90|  5.32|-32.66
ING      |2001-07-02| 39.95| 27.06|-32.27
UBS      |2007-06-01| 80.00| 55.25|-30.94
CS       |2007-04-30| 95.45| 69.95|-26.72
Unicredit|2007-04-26|  7.68|  5.72|-25.52
Deutsche |2007-05-11|117.96| 89.15|-24.42
HSBC     |2001-01-25| 10.84|  8.39|-22.60
BNP Par. |2007-05-23| 94.25| 74.64|-20.81
Santander|2007-10-31| 15.00| 14.69| -2.07

Domestic
N. Rock  |2007-02-09| 12.51|  0.92|-92.65
Countryw.|2007-02-02| 45.03|  9.80|-78.24
IKB      |2006-04-21| 33.13|  7.96|-75.97

Joe Cool

Dr. Joseph Ackerman (source DPA/Manager Magazin)

Anchoring

A good post on anchoring...

Stock Market Psychology Blog: Behavioral finance and beyond - For Smooth Sailing, Winch up Your Financial Anchors

Andrew Hurst

Andrew Hurst of Reuters on Banks in general, European and Swiss Banks in particular...

"andrew hurst" - Google News

Buffett Owned UBS

Correction. Buffett said USB (U.S. Bancorp). So no news here...
---

We've owned UBS. Some of them are black boxes. Some of them are too hard to figure. If they have enormous positions in mortgage-backed, or CDOs, or even in some forms of derivatives, they may be fine but I can't know that. I like 'em fairly simple and somebody's characterized what's going on now as a flight to simplicity. And there's a good reason for that. You should only buy what you understand. And I can only understand simple things, so, ergo, I look at simple businesses.

Warren Buffett's Complete CNBC Interview: Video and Transcript (2 of 2)

UBS Stops Proprietary Trading

UBS, which is hiking its Tier 1 capital to 12 percent in a 19.4 billion Swiss frmanc injection has ordered a halt to proprietary trading -- which involves investment banks committing their own money to investments and trading positions.

Source Reuters: UBS Investment Bank Faces Challenge to Recover

Option Selling

The Art of Option Selling
by Barclay T. Leib

UBS Losses

UBS strengthens capital base and adjusts valuations
Sounds really great for investors:).

Hear Ospel ("we took 10 billion of risk out of the balance") and Zuberbühler ("there have been no death casualties") at this DRS interview.

SEC EDGAR Forms

Here is the official description of all SEC EDGAR form types.

Here is the link to search the EDGAR database.

An overview of the different kind of information provided at the EDGAR database is given at this guide.

Trading Books

From StockTickr.com:
What Books Do Successful Traders Recommend?
July 9th, 2007

The 13 Basis Point Portfolio

The 13 Basis Point Portfolio
by Matthew Hougan

Private Banking Study 2007

The International Private Banking Study 2007
by Prof. Dr. Teodoro D. Cocca and Prof. Dr. Hans Geiger

Ackermann in Zurich 2

A report by Sven Egenter from Reuters:
Deutsche Bank CEO says credit crisis not over yet

British Sub Prime Humor

The Long Johns - The Last Laugh - George Parr - Subprime


Pointer from Michael Covel.

Paul Tudor Jones

Paul Tudor Jones II interview by
Joel Ramin
January 13, 2000

I applied to Harvard Business School, got accepted and was about to go. I literally was packed up to go and then I thought, 'this is crazy', because for what I'm doing here, they're not going to teach me anything. This skill set is not something that they teach in business school. So I didn't go, I stayed, but I was really bored because there wasn't the personal interaction that was something that I craved and having colleagues and being in a clean atmosphere and that was when I started my fund. All through growing up I've been involved in team sports and fraternities and in school I was involved in a whole variety of activities all of which were team oriented and when I was on my own I was printing money every month, but I wasn't getting the psychic satisfaction from it
...
Q: Are you more naturally bearish or bullish?

Paul Tudor Jones: Bearish, I think. I would have difficulty asking anyone to pay 10 or 20 times earnings for my earnings capability for the rest of my life. I would think you're crazy to do that even though it might be a great deal, so the concept of paying one-hundred-and-something times earnings for any company for me is just anathema. Having said that, at the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PE's? If it's going up you're supposed to be long it. But there's no question that it's just easier for me to leverage with some degree of conviction the short side of some markets.
...
Q: Let's play a word association game. I'll say a word and you say whatever comes to mind.

Q: Technical analysis

Paul Tudor Jones: Made well over half the money that I've made in my lifetime.

Q: Fundamental Analysis

Paul Tudor Jones: Made the rest.

Q: Are you better at one or the other?

Paul Tudor Jones: Probably technical analysis.

Q: Market efficiency

Paul Tudor Jones: No such thing.

Q: Long Term Capital Management

Paul Tudor Jones: Icarus.

Q: Black Monday

Paul Tudor Jones: It was like watching a natural disaster from the sidelines. I was intimately involved in that day, but the macro implications of what was happening overwhelmed any personal considerations that I had.

Q: Warren Buffet

Paul Tudor Jones: His aversion to paying taxes made him a great investor.

A good summary of hiw rules can be found at Wikipedia.

Jim Simons

Bloomberg: Simons at Renaissance Cracks Code, Doubling Assets (Update1)

``There are just a few individuals who have truly changed how we view the markets,'' says Theodore Aronson, principal of Aronson + Johnson + Ortiz LP, a quantitative money management firm in Philadelphia with $29.3 billion in assets. ``John Maynard Keynes is one of the few. Warren Buffett is one of the few. So is Jim Simons.''
...
With his myriad positions in different markets, Simons likens his approach to the extensive farming he once practiced in Colorado, using center pivot irrigation to grow wheat on thousands of acres.

``Every little stalk of wheat was not doing so great, but most of them were, so you're working on statistics,'' Simons says.

By contrast, he says, the traditional focused investing practiced by Warren Buffett is akin to intensive farming, in which each individual plant really counts. ``It's two completely different ends of the spectrum,'' Simons says.
...
Scientific exploration underpins all of Simons's work. ``What motivates me?'' he says. ``I'm ambitious and I like to do things well. I love to create something that really works. We have lots and lots and lots of strategies, and each new one gives me a lot of pleasure, to see something new that works.''
...
Former employees say observers may gain as much insight into Renaissance's performance by scrutinizing a more obvious factor: Simons has succeeded in building a pretty good business model. First, it's a firm run by and for scientists.

``I've always said Renaissance's secret is that it didn't hire MBAs,'' says Berlekamp, who blames the herdlike mentality among business school graduates for poor investor returns.

Programming and modeling are treated as the heart of the firm's advantage -- not an expense. ``If you needed a lot of computer power, the decision was based on whether you needed it, not the budget,'' says Peter Weinberger, former chief technology officer at Renaissance and now a software engineer at Google Inc.

Decisions are made quickly and feedback is constant. ``One of the things about Renaissance is that there's a feeling of urgency,'' says Frey, who left to teach applied mathematics and statistics at Stony Brook in 2004.

``We always believed that there was a wolf at the door, that somebody would get there before we did.''

Joe Ackermann in Zurich

If you are located in Zurich, you might take notice of this event:

Die Bedeutung von Schwellenländern in der globalen Strategie der Deutschen Bank
2007-12-05, 18:15
Karl Schmid-Strasse 4, 8006 Zürich; KO2, Raum: F 180

Buffett and Freddie Mac

The Washington Post: Buffett Testifies That He Saw Early Signs of Freddie Mac's Woes

It would be an interesting (but maybe time consuming:) exercise to go back and read the old annual reports and see if you also detect something fishy.

Buffett said he was troubled in part by a Freddie Mac investment that had nothing to do with its business.

"I follow the old dictum: There's never just one cockroach in the kitchen," Buffett said.
...
Buffett said he bought stock in Freddie Mac in the 1980s because "it looked ridiculously cheap." He said his company became one of Freddie Mac's largest shareholders before it began liquidating its stake in the late 1990s at an eventual profit of about $2.75 billion.

Buffett said he met with Brendsel and former Freddie Mac president David W. Glenn five or six times over the years at Brendsel's request, initially at a summer house Buffett had in Laguna Beach, Calif. Brendsel requested and followed some of his recommendations on whom Freddie Mac should appoint to its board, Buffett said.

Buffet said he became troubled when Freddie Mac made an investment unrelated to its mission. He wasn't clear on the specifics but said he "didn't think that made any sense at all" and "was concerned about what they might be doing . . . that I didn't know about."
...
Buffett said he reviewed Freddie Mac's annual reports every year he held stock in the company.
...
Buffett said he thought he expressed his concern to Brendsel in several conversations but added that he didn't keep notes or a diary and couldn't recall details.
...
Asked by the judge, William B. Moran, whether he felt his concerns were vindicated, Buffett said, "I think they were fully vindicated."

Research in India

The trend to outsourcing is not just in IT:

Bloomberg: JPMorgan, Deutsche Bank Keep Mum on Indian Intellectual Capital

UBS in Trouble

UBS seems to be in trouble, according a Citigroup analyst:
Citi do a Whitney on UBS - “A major reversal of fortune”

While UBS have the second highest ABS CDO exposure, they have taken one of the lowest writedowns.

Clearly, UBS are not marking their assets at current market prices, and are still heavily relying on marked to model prices. Consider also the fact that many of the CDOs UBS arranged and sponsored have been some of the worst hit - like the appropriately named Vertical Capital, a CDO whose AAA debt was slashed 14 notches to junk in one fell swoop.
...

The third scenario is a worst-case scenario. Under this scenario (50% writedowns on HG ABS CDOs and 100% on mezz ABS CDOs), UBS would end up with a substantial SFr22bn writedown. The group’s Tier 1 ratio would drop to 5.8% (Basel II). Even after cutting the dividend and accounting for a lower group Tier 1 ratio of 9% (Basel II), a capital shortfall of SFr 8.5bn would remain, raising the prospects of a large capital increase/rights issue.

After all, Citi should know, they just got an expensive equity infusion themselves.

Taking the Other Side

... of the zero sum game, see this article at Financial Times:
1000% hedge fund wins subprime bet

The decision to use derivatives to short, or bet against, low-quality US home loans taken by a select group of hedge funds last year appears to have become the most profitable single trade of all time, making well over $20bn in total so far this year. John Paulson’s New York-based Paulson & Co, the biggest of the group with $28bn under management, is said by investors to have made $12bn profit from the trade already.
...
“Our entire banking system is a complete disaster,” he wrote. “In my opinion, nearly every major bank would be insolvent if they marked their assets to market.” He also said he would be putting some of his own profits into gold and other precious metals.

David Einhorn's Remarks

Heilbrunn Center for Graham & Dodd Investing
17th Annual Graham & Dodd Breakfast
David Einhorn’s Prepared Remarks
October 19, 2007

Very good long article about the whole sub prime, credit, structured products, rating agencies, banking crisis.

The crisis came because there have been a lot of bad practices and a lot of bad ideas. Securitization is a mediocre idea. Re-securitization of already securitized assets into a CDO is a bad idea. Re-securitization of CDOs into CDO-squared is a really bad idea. So is funding a pool of long-term illiquid assets with very short-term funding in the so called asset backed commercial paper market. And as I will get to in a moment, it is a horrendous idea to delegate most of the responsibility for assessing credit risk to a group of credit rating agencies paid for by the issuers rather than the buyers of bonds.
...
Last Saturday’s Wall Street Journal reported that the big fear that the US Treasury Department is working to avoid is, “the danger that dozens of huge bank-affiliated funds will be forced to unload billions of dollars in mortgage-backed securities and other assets, driving down their prices in a fire sale. That could force big write-offs by banks, brokerages and hedge funds that own similar investments and would have to mark them down to the new, lower market prices.” So the fear is that the new prices are actually disclosed. This is the “don’t ask-don’t tell” method of security valuation.

In my view, the credit issues aren’t just about subprime. Subprime is what the media says. Subprime is what parts of our financial establishment say. Subprime is about them — those people and the people who made foolish loans to them. The word “Subprime” is pejorative. Subprime is not about us, for we are not subprime. How convenient to be able to pass the blame.

There has been much talk from politicians and pundits about predatory lending –that is making loans at high rates to people who couldn’t reasonably be expected to pay them back. They are right, that is a bad practice, but that is not what’s shaking the markets. At issue today is that lenders of all sorts have lent too much money and did not demand enough interest to compensate them for the risks they took. There has been a colossal undercharging for credit across the board.
...
The latest hedge fund getting bad press is Ellington management, a large participant in the mortgage business. A couple of weeks ago, it suspended redemptions from its funds because it could not determine the value of its assets. Apparently they own what I’d call 20/90 bonds. 20-bid and 90-offered. While Ellington made negative headlines for doing the right thing, acknowledging it is unfair to let people in or out in such circumstance, does anyone believe that the large mortgage players like Bear Stearns and Lehman Brothers don’t also have large portfolios of 20/90 bonds? When they reported their quarterly results, investors marveled at their risk controls. However, Lehman moved about $9 billion of mortgage securities into a special classification called Level 3 under FASB 157, which gives them more valuation discretion. Both Lehman and Bear claimed their Level 3 portfolios actually had gains in the quarter, so it looks like they put the 20/90 bonds closer to 90 or perhaps even 95. This appears to be a classic example of a hedge fund being vilified for doing the right thing, while others are cheered for doing the opposite.
...
In early September, a senior Moody’s executive confirmed this suspicion at a small private dinner sponsored by one of the brokerage firms. He said, “Moody’s would never lower the credit ratings of a financial guarantor, because that would put the guarantors out of business.”

It is plain that the States and Cities and Towns in this country are triple A credits without triple A ratings and the financial guarantee companies have triple A ratings without being triple A credits.

UBS Insider Transactions

Have a look at this insider transactions list at the SWX Swiss Stock Exchange.

At the moment (2007-11-22) there is also a lot of selling of Lindt going on, a single but bigger sale of Roche, Swatch is on the buy list, and also someone is heavily investing into Straumann.

Issuer	UBS AG
Transaction date	20.11.2007 by a non-executive member of the board of directors
Type of transaction	Purchase of 20'000 securities amounting to CHF 980'000.00 (CHF 49.00 / security)
Type of security	Equity securities
ISIN	CH0024899483

Issuer	UBS AG
Transaction date	19.11.2007 by a non-executive member of the board of directors
Type of transaction	Purchase of 1 securities amounting to CHF 262'500.00 (CHF 262500.00 / security)
Type of security	Equity securities
ISIN	CH0024899483
Further transaction details	Ein externes VR Mitglied hat die Wahl getroffen, als Bestandteil seiner Vergütung zusätzlich zu den fest zugeteilten Aktien den Betrag von CHF 262'500.-- in UBS Aktien zu beziehen. Die entsprechenden Aktien werden nach Festsetzung des Preises Ende Februar 2008 zugeteilt.
Issuer UBS AG Transaction date 05.11.2007 by a non-executive member of the board of directors Type of transaction Purchase of 20'000 securities amounting to CHF 1'100'000.00 (CHF 55.00 / security) Type of security Equity securities ISIN CH0024899483 Issuer UBS AG Transaction date 02.11.2007 by a non-executive member of the board of directors Type of transaction Sale of 90 securities amounting to CHF 39'753.80 (CHF 441.71 / security) Type of security Put option ISIN CH0024899483 Further transaction details Strike price CHF 54,75

Bid & Ask

How the price is set at the dating market, by Zubin Jelveh:

Odd Numbers

GuruFocus

www.gurufocus.com

GuruFocus tracks the Stock Picks and Portfolio Holdings of Warren Buffett, George Soros and other guru investors like Ruane Cunniff, Mohnish Pabrai, Tweedy Browne, Mark Hillman.

Some background story from the BusinessWeek:
Where Buffett Wannabes Trade Tips

The Complete TurtleTrader

The book is in the mail already, so I am not gonna read this article. Nevertheless author Michel Covel wrote a three page summation at the Daily Trader (free login required) about the story of his latest book:
Secrets Of The ‘Turtles’

Here is
The Complete TurtleTrader at Amazon.

Other worthwhile books related to either trend trading or 'the turtles' (or Richard Dennis) are
Trend Following, also by Michael Covel, and
Way of the Turtle by Curtis Faith.

It you like one of those books, you might bookmark Michael Covel's blog as well.

Update: I couldn't stop me from reading the article. Here is a quote I like:

“If it’s raining, all that means to me is I need an umbrella,” he once joked. “You don’t get any profit from fundamental analysis. You get profit from buying and selling. Why bother with appearances when you can go right to the reality of price?” The money, for Dennis, was simply a means of keeping score. “Trading is a little bit like hitting a ball,” he would say. “If you’re thinking what your batting average should be, you’re not concentrating on the right thing when you hit the ball. Dollars are the batting average of the trader.”

Bill Miller 3Q Letter

Bill Miller is a famous value investor, who has beaten the S&P 500 index for 15 consecutive years from 1991 through 2005.

Here is his latest commentary at Legg Mason:
3Q letter to shareholders

The difference between what is unfolding now and the Crash of '87, or the problems with Long-Term Capital Management in 1998, is that they were confined to Wall Street, whereas this issue extends to Main Street and to the value of the biggest asset of most consumers, their house.
...
One of the enduring features of the findings in behavioral psychology as it applies to finance, a subject I have discussed many times over the years, is the almost complete inability of those who are aware of them to actually apply them. You can attend Richard Zeckhauser’s seminars at Harvard, read lots of articles and case studies, be reminded of how recency bias, or anchoring, or the representative fallacy, or myopic loss aversion impair clear thinking and skew decision making, and still fall prey to them and others of their ilk the moment you are confronted with real world situations.

The recent precipitous decline in financial stocks, especially those related to housing, which sent Countrywide Financial (CFC) to $12 last week, and led to 20 to 30% drops in financial guarantors in a day or so—after they had already dropped between 25 and 50% this year—is a case in point. After falling 20% in a only a few days on no news, and this after being down 50% for the year, CFC rallied over 30% in one day once they reported their results and indicated they would be profitable for the 4th quarter and expect to earn a reasonable return on equity of 10-15% for all of 2008. The price action on both sides was driven by emotion – first fear, then relief – and was hardly the result of a careful analysis of Countrywide’s long term business value. That, by the way, we think is in the $40’s compared to its current price of about $14-15.

No More Credit Suisse Writedowns!?

Credit Suisse claims they won't have any more writedowns ahead of them:

From Dow Jones (2007-11-14): Credit Suisse's Calello: Our Markdowns Are Accurate

Let's see if the market believes that.

Unlike UBS and DB they did not "disclose" their exposure. Well, they say now, they are short on CDOs.

Prosper

The Internet makes new inroads, this time into the credit business. Have a lookk at prosper.com. I think it is incredible.

Here you see how loans have recently performed.

Here is a Deutsche Bank Research paper on Web 2.0, which has a section about prosper.com and similar sites at page 8.: Be a driver, not a passenger - Implications of Web 2.0 for financial institutions

Such person-to-person (P2P) lending aims to save costs by cutting out the middleman – i.e. the retail banks (see chart 7).4 Examples include Zopa in the UK, Prosper in the US, Boober in the Netherlands and most recently, Smava in Germany. Another outlet, Kiva, specialises on loans to entrepreneurs in developing countries.
...
Regulatory hurdles are steep but not insurmountable. Lenders are typically not allowed to lend commercially (otherwise they need a credit licence) and loans and/or investments are mostly limited to values between EUR 10,000 and EUR 35,000.5 In Germany, P2P loans are technically granted by a traditional bank which then passes these loans to the investors. As a consequence, transaction costs are higher and Smava only handles bigger allocations starting at EUR 500 (Prosper USD 50).

Lenders bear credit risk

To diversify, most loans are granted on a “one to many basis” – i.e. allocations are being spread across many loans so that the individual exposure to each loan is small. However, all models differ in detail. Zopa does not showcase individual borrowers, whereas most others let borrowers explain who they are and why they need the money. Prosper determines interest rates with an auction mechanism, others have fixed rates. Loans are typically unsecured and repayment is not guaranteed but German Smava offers a rudimentary insurance based on the default rates of a group of borrowers rather than any individual debtor. Borrowers at Prosper can improve their standing by joining (and being accepted by) a reputable group of borrowers, e.g. a group of MBA alumni. The group’s reputation depends on punctual payments being made by all members and hence there is peer pressure to conduct oneself reputably. Shame on those who do not pay on time! Kiva has a strong charity component while others are commercial.

Lenders ignore high-risk borrowers

For P2P borrowers it is easy to judge whether they are agreeing a good deal (compare the best rate offered by a bank with that of the P2P platform). For P2P lenders it is difficult because they bear the default risk and few of them are experts in risk management. Hence, the key challenge to further growth is to find more people willing to lend. Prosper, the Californian outlet which went online February 2006, has brokered loans worth around USD 70 m so far but had unfunded loan requests of more than USD 460 m. Loan requests from low-risk borrowers have the highest probability of being funded (around 45%) whereas high-risk borrowers are being ignored (less than 5% of loan bids are funded) (see chart 8).
...
Evidence from Prosper illustrates the difference peer-review and peer-pressure can make: default rates are typically much lower if borrowers have joined (and were accepted by) a group of borrowers – this holds in particular for high-risk and non-rated borrowers.6

Many lenders are not primarily attracted by higher interest rates but rather by the community aspect: potential borrowers explain who they are and why they need the money and lenders can actually decide which loan requests to fund and which not. A compelling story or stirring plea can make a difference. Online P2P lending also has a strong non-establishment twist (“no banks, better deals”) and many users prefer doing business with other people rather than with an impersonal bank.

Mimicking Buffett's Picks

Below is a link to a paper by Gerald S. Martin and John Puthenpurackal about mimicking Berkshire Hathaway's stock picks (and exits), whenever they become publicly known.

BTW, the decisions could have been made by either Warren Buffett, Charles Munger, or Lou Simpson.

Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway

Actually they seem to show that this would result in an out performance of over 14 % of the S&P.

Buffett's Statement on Taxes

Buffett prepared an eloquent statement about taxes for a hearing in Washington DC.

From CNBC: VIDEO AND TRANSCRIPT: Warren Buffett's Statement to Congress on Estate Taxes

Berkshire Hathaway's Portfolio

Yesterday came out SEC form 13F-HR of Warren Buffett's Berkshire Hathaway, which lists all its public company stock holdings at the end of the third quarter 2007.

The total was USD 65.8 billion. In comparison, Berkshire Hathaway has today a market capitalisation of around USD 213 billion.

Have a look at the list (13F-HR form) for yourself.

Woman Quants

Woman in the quants field by Leah McGrath Goodmann: Women in Trading 2007 : Women on the Edge

You need an account first, but it is a longer article, has some names and gives an idea what is going on in the world of developing trading algorithms.

“Of the 7,000 quants we have in our global database, only about 3 percent are women,” says Dominic Connor, director of Paul & Dominic Quantitative Recruitment in London.

The STOCK BLOCK

Renamed the Clemens Investment Blog to The STOCK BLOCK. Please note also the URL change to http://stockblock.info/.

Gannon On Investing

Another blog for the watchlist: Gannon On Investing

The Big Picture

Have a look at this blog The Big Picture. On occasion, the comments might be interesting as well.

E*Trade Volatility

E*Trade bounced back +41%.

Bloomberg: E*Trade Bankruptcy Is `Highly Unlikely,' BMO Says (Update4)

Van K. Tharp

Van K. Tharp is a psychologist specialized in coaching traders.

A very good book is:
Trade Your Way to Financial Freedom

From No Requirements to Be Happy: Part II:

A critical difference between good traders and the average trader is that good traders thrive on simplicity and not knowing. They come from being and simply go with the flow of the markets. If the markets tell them it's time to go up, then they buy. They might be wrong 60% of the time, but that is part of the game. They'll get out when the markets are no longer going up. They do this by simply observing what is happening, and are much more joyful because they are going with the flow. They allow themselves to let their profits run, because it's okay to be in the market when it is going up. They also allow themselves to get out, because it's okay to get out when the markets start to do something else.

What I've just described is pure trading. Its essence is simple. It doesn't require a lot of time. Instead, it gives you lots of time to play. It also involves seeing all possibilities and being in the flow of what is happening right now. You cannot do this if you are preoccupied with being right, doing hard work, or having money or profits. You can only do this when your mind is pure and you can be at one with what is going on around you.

E*Trade -58 %

Another one bytes the dust... today 2007-11-12 E*Trade is down 58 % after announcing writedowns on asset backed securities. They have an investmen of around USD 3 billion in ABS. You wonder what an online broker has on its balance sheet.

Update on Bloomberg: E*Trade Shares Fall; Analyst Says Bankruptcy Possible (Update4)

Here is the wording from E*Trade itself.

Banking Blood Bath

Very interesting albeit scary article about what is on the balance sheets of the big investment banks.

Nouriel Roubini's Blog: The bloodbath in credit and financial markets will continue and sharply worsen (2007-11-05)

It also points to this FT article (from 2007-11-04) predicting more write downs at Merrill Lynch, Citigroup, and UBS: What’s the subprime damage to banks?

The first article also looks into how many structured product assets are valued on an internal model valuation method, also named 'Level 3' (level 1 means you just take market prices, level 2 means you base your valuation on other prices of similar asset classes - level 3 basically means you make up your own prices).

Look at the info Citigroup just filed with the SEC today: they have $135 BILLION in LEVEL 3 ASSETS.

I have a neat idea.

Why don't we take every single major financial institution out there and then divide their total Level 3 assets by their equity capital base and make comparisons?

This will give us a better idea as to which of them may really remain solvent at the end of the day. Shall we?

Let's have a look at Citigroup. Their equity base is $128 billion. Therefore, their Level 3 assets to equity ratio: 105%

How about Goldman Sachs? Level 3 assets are $72 billion, equity base is $39 billion. Their Level 3 assets to equity ratio is 185%.

Morgan Stanley: $88 billion in Level 3, equity base is $35 billion. Ratio: 251% (WOW!)


Bear Stearns: $20 billion in Level 3, equity base is $13 billion. Ratio: 154%

Lehman Brothers: $35 billion in Level 3, $22 billion in equity. Ratio: 159%

Merrill Lynch: $16 billion in Level 3, $42 billion in equity. Ratio: 38%

Here is the Level 3 assets to equity ratio summary:

Citigroup 105%

Goldman Sachs 185%

Morgan Stanley 251%

Bear Stearns 154%

Lehman Brothers 159%

Merrill Lynch 38%

This becomes very interesting now, doesn't it?

Looks to me like Goldman Sachs and Morgan Stanley are by far in the WORST situation among the investment banks.

And yet the media is focusing all of their attention on Merrill Lynch---which actually has by far THE LEAST EXPOSURE of all of them.

BTW, UBS reported in third quarter 2007 CHF 23.4 billion in 'level 3' assets. This in addition to another CHF 21.6 billion in MBS and CDO assets. UBS has equity (without Goodwill) of CHF 33 billion.

IFRS

Here is an online version of IFRS as far as it has been adopted by the EU.

The individual standards are ordered historically by their adoption, so you might have to scroll down a bit...


Amazon (Germany) has a book version with both English and German text next to each other.


In case you wonder what IFRS is, here is the Wikipedia article.

Victor Niederhoffer

Blowing Up by Malcom Gladwell.

The Blow-Up Artist by John Cassidy.

Buffett Interview

Charlie Rose - Warren Buffett

From 2007-05-7, watch it while they still haven't pulled it.

The IKB Desaster

Background article by The Economist: Sold down the river Rhine

As an excercise here are some excerpts from the IKB 2006/7 annual report (when everything looked shiny and sunny).

Page 42 f.:

The capital released through our securisation activities over recent years has been used to expand our national and international lending business. Additionally, the capital has also been used to invest in international loan portfolios. Two thirds of our investments are focused on US investment-grade portfolios (including, for example, credit card claims, mortgage loan claims and corporate loans), with the remaining third being invested in similarly structured European portfolios.

However, we also utilise our wealth of expertise in this area to advise external companies - against a fee - on their own investments in international loan portfolios. This applies in particular to the Rhineland Funding Capital Corporation in the US. Based on our advise, this company is investing in portfolios comparable to those in which IKB is itself investing. In this way we ensure that the same quality standards that apply to the bank are also applied to third parties.

Page 50:

A gratifying increase in net commission income was also recorded, up by 19.2% to EUR 108 million. Half of this income resulted from structuring fees and commission earned in the Corporate Clients, Real Estate Clients and Structured Finance segments, with the other half being contributed by the Securitisation segment from advisory fees relating to the Rhineland Funding conduit.

Page 53:

As in previous years, the main focus of our activities were the placement of credit risks and investments in international loan portfolios. Overall, credit risks in the amount of EUR 4.7 billion were placed during the reporting period. Our investment in international loan portfolios totalled EUR 1.2 billion (EUR 2.1 billion), resulting in a slight increase in the portfolio to EUR 7.0 billion (EUR 6.8 billion).

The Rhineland Funding Capital Corporation, a conduit for which we have assumed an advisory function, increased its investment portfolio to EUR 12.7 billion (EUR 9.7 billion).

Page 77:

We expect an investment volume of EUR 20 billion (currently EUR 12.7 billion) for tge Rhineland Funding conduit, and a volume of EUR 10 billion for Rhinebridge.

In short, this means that the IKB Group will continue to grow over the coming years.

Page 182 f.:

Other commitments include credit commitments totalling EUR 11.9 billion (prio year: EUR 11.2 billion) in favor of special purpose companies, which can only be utilised by these companies in case of a short-term liquidity squeeze.

The figures presented reflect the amounts which would have to be paid out in case the customer fully draws on the relevant credit facility. The largest portion of these obligations by far will probably expire without ever being utilised. The figures are not representative for the actual future credit exposure or for liquidity requirements resulting from these obligations.

Now compare this to the EUR 32 billion which Deutsche Bank has invested in similar conduits, which is roughly the size of its equity. In comparison IKB had equity of EUR 1.4 billion at 2007-03-31.


The Rhine (right side) where it meets the Mosel river (left) by Koblenz at the so called Deutsche Eck.

Deutsche Bank And The Sub-Prime Crisis

Here are the slides of the presentation Joseph Ackermann gave on 2007-09-04 regarding Deutsche Bank's exposure to the Sub-Prime crisis in order to calm down the market.

It is in German.

STOCKscreener. i n f o

STOCKscreener.  i  n  f  o   is a new web site which provides a quick and easy way to search for interesting stocks to invest in and to access further information on the web about these financial instruments and their underlying companies.

At the moment you can see which stock moved the most, upwards or downwards, yesterday or for whatever timeframe you are interested in.

The stock performance list can be restricted to individual currencies or exchanges.

Hope it will be useful to somebody.

Marty Whitman

Interesting book by Martin J. Whitman and Martin Shubik: The Aggressive Conservative Investor


You can get a taste of Whitman's writings from his
shareholder letters.

See Marty Whitman talking about his investment philosophy.

ETF Providers

Europe's Top ETF Providers

Manager	AUM (Bia $)	Change p.a. %	Market share %	Change p.a. %
Lyxor Asset Management	22.31	73.7	24.9	1.5
Barclays Global Investors	21.97	76.2	24.5	1.5
IndEXchange AG	21.26	70.9	23.9	1.1
AXA/BNP	5.57	128.1	6.2	1.8
Credit Suisse Asset Management	4.67	36.4	5.2	-1.0
Credit Agricole Asset Management	3.33	30.1	3.7	-0.9
State Street Global Investors	2.49	60.7	2.8	0.0
XACT Fonder	2.48	33.6	2.8	-0.6
UBS Global Asset Management	1.65	24.1	1.8	-0.6
DVG-Deutsche Vermögensbildung GmbH	1.07	-54.4	1.2	-3.1

Source: Schweizer Bank magazine, June 2007

Buffett's Income

From: Times Online

Mr Buffett said that he was taxed at 17.7 per cent on the $46 million he made last year, without trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 30 per cent.

This is interesting, as his salary as CEO of Berkshire used to be no more than $ 100'000 (might be doubled by now) and his billions worth of Berkshire stock yield zero dividend income.

Best Prices for Books in CH

http://www.billigbuch.ch/

The so called "Preisbindung" for books has been dropped in Switzerland (or so I heard). billigbuch.ch lets your compare book prices across all Swiss online sites.

You might still go and compare with amazon.de too, thought.

Indices Performances

Below is a selection of world indices and their performances for the last few years. Performance for 2007 (not annualized) is for the closing price as of 2007-04-03/4 (depending on the timezone).

No		Index	Ccy		2007	2006	2005	2004	2003
1.		BOVESPA	BRL	%	4.08	32.93	27.71	17.81	97.33
2.		SMI	CHF	%	3.05	15.85	33.21	3.74	18.51
3.		SPI	CHF	%	4.60	20.67	35.61	6.89	22.06
4.		Shanghai Composit	CNY	%	23.03	130.43	-8.33	-15.40	10.27
5.		Shenzhen Composit	CNY	%	57.04	97.53	-11.74	-16.59	-2.60
6.		DAX	EUR	%	6.80	21.98	27.07	7.34	37.08
7.		DJ EURO STOXX 50	EUR	%	3.07	15.12	21.28	6.90	15.68
8.		FTSE 100	GBP	%	2.34	10.71	16.71	7.54	13.62
9.		Hang Seng	HKD	%	1.23	34.20	4.54	13.15	34.92
10.		Mumbai Sensex	INR	%	-7.25	46.70	42.33	13.08	72.89
11.		Nikkei 225	JPY	%	1.85	6.92	40.24	7.61	24.45
12.		KOSPI 100 Index	KRW	%	3.56	4.52	52.51	9.25	31.57
13.		Bangkok SE Set Ind	THB	%	2.02	-4.75	6.83	-13.48	116.60
14.		DJ Industr Average	USD	%	0.38	16.29	-0.61	3.15	25.32
15.		EM	USD	%	2.68	29.18	30.31	22.45	51.59
16.		NASDAQ Comb Comp	USD	%	1.45	9.52	1.37	8.59	50.01
17.		S&P 500	USD	%	1.37	13.62	3.00	8.99	26.38
18.		The World Index	USD	%	3.29	17.95	7.56	12.84	30.81

A table with the absolute index numbers is located here.

Security Analysis

Security Analysis is a famous book by Benjamin Graham first published in 1934. Benjamin Graham is the so called father of "Value Investment" and teacher and mentor of Warren Buffett.

Another book by Graham, The Intelligent Investor, is even more famous. According to Kilpatrick in "Of Permanent Value":

Buffett has said, "I read the first edition of this book early in 1950, when I was nineteen. I thought then that it was by far the best book about investing ever written. I still think it is.

Graham's Intelligent Investor is a popular version of Security Analysis, the classic study written by Graham and Columbia Professor David L. Dodd.

Nevertheless, it has been said, Buffett has red Security Analysis (and especially the 2nd edition from 1940) many times over.

I have heard him say, that he has read it from cover to cover more than a dozen times. He has read the other editions as well.

Security Analysis: The Classic 1940 Edition


The book plays also a major role (next to the bone scanner) in the movie The Pursuit of Happyness.











However, according to Wikipedia:

The film prominently showed the 5th edition of Security Analysis — black jacket, white, gold, red fonts — as the one that Dean Witter Reynolds required 60 unpaid interns to study for six months. The intern portion of the story is circa 1981; the 5th edition of Security Analysis was published in 1988; ergo, the film production prop department used the wrong edition.

The Pursuit Of Happyness


Oh yeah, and just for the record, the movie IS cheesy:)


Here is the real Chris Gardner (not so cheesy):
Chris Gardner - Excerpt from "The Pursuit of Happyness"

The Pursuit of Happyness Part 1

The Pursuit of Happyness Part 2