I get to close out 2008 on hospital room duty with my son. He's doing well - had his breathing tube out yesterday, is eating regular food, and slowly recuperating. He should be moved out of the ICU tomorrow and into a regular room. With some luck, he might be home by Monday the 5th.
The Unknown Wife and Daughter are going to a neighbor's house for a little New Year's cheer (the non-alcoholic kind, since Unknown Wife is expecting), and then home by about 10.
Here's hoping 2009 finds you healthy, prosperous, and happy.
Paddy Hirsch Explains Quantitative Easing
Yet another excellent whiteboard talk by Paddy Hirsch, senior editor at Marketplace. In this one, he explains "Quantitative Easing"
Quantitative easing from Marketplace on Vimeo.
Quantitative easing from Marketplace on Vimeo.
How Do You Use Credit Default Swaps (CDS) To Create "Synthetic Debt"?
There's been a lot of talk in recent months about "synthetic debt". I just read a pretty good explanation of synthetics in Felix Salmon's column, so I thought I'd give a brief summary of what it is, how it's used, and why.
First off, let's start with Credit Default Swaps (CDS). A CDS has a lot of similarities to an insurance policy on a bond (it's different in that the holder of the CDS needn't own the underlying bond or even suffer a loss if the bond goes into default).
The buyer (holder) of a CDS will make yearly payments (called the "premium"), which is stated in terms of basis points (a basis point is 1/100 of one percent of the notional amount of the underlying bond). The holder of the CDS gets paid if the bond underlying the CDS goes into default or if other stated events occur (like bankruptcy or a restructuring).
So, how do you use a CDS to create a synthetic bond? here's the example from Salmon's column:
Let's assume that IBM 5-year bonds were yielding 150 basis points over treasuries. In addition, Let' s assume an individual (or portfolio manager) wanted to get exposure to these bonds, but didn't think it was a feasible to buy the bonds in the open market (either there weren't any available, or the market was so thin that he's have to pay too high a bid-ask spread). Here's how he could use CDS to accomplish the same thing:
So why go through all this trouble? One reason might be that there's not enough liquidity in the market for the preferred security (and you'd get beaten up on the bid-ask spread). Another is that there might not be any bonds available in the maturity you want. The CDS market, on the other hand, is very flexible and extremely liquid.
One thing that's interesting about CDS is that (as I mentioned above), you don't have to hold the underlying asset to either buy or write a CDS. As a result, the notional value of CDS written on a particular security can be multiple times the actual amount of the security available.
I know of at least one hedge fund group that bought CDS as a way of betting against housing-sector stocks (particularly home builders). From what i know, they made a ton of money. But CDS can also be used to hedge default risk on securities you already hold in a portfolio.
To read Salmon's column, click here, and to read more about CDS, click here.
First off, let's start with Credit Default Swaps (CDS). A CDS has a lot of similarities to an insurance policy on a bond (it's different in that the holder of the CDS needn't own the underlying bond or even suffer a loss if the bond goes into default).
The buyer (holder) of a CDS will make yearly payments (called the "premium"), which is stated in terms of basis points (a basis point is 1/100 of one percent of the notional amount of the underlying bond). The holder of the CDS gets paid if the bond underlying the CDS goes into default or if other stated events occur (like bankruptcy or a restructuring).
So, how do you use a CDS to create a synthetic bond? here's the example from Salmon's column:
Let's assume that IBM 5-year bonds were yielding 150 basis points over treasuries. In addition, Let' s assume an individual (or portfolio manager) wanted to get exposure to these bonds, but didn't think it was a feasible to buy the bonds in the open market (either there weren't any available, or the market was so thin that he's have to pay too high a bid-ask spread). Here's how he could use CDS to accomplish the same thing:
- First, buy $100,000 of 5-year treasuries and hold them as collateral
- Next, write a 5-year, $100,000 CDS contract
- he's receive the interest on the treasuries, and would get a 150 basis point annual premium on the CDS
So why go through all this trouble? One reason might be that there's not enough liquidity in the market for the preferred security (and you'd get beaten up on the bid-ask spread). Another is that there might not be any bonds available in the maturity you want. The CDS market, on the other hand, is very flexible and extremely liquid.
One thing that's interesting about CDS is that (as I mentioned above), you don't have to hold the underlying asset to either buy or write a CDS. As a result, the notional value of CDS written on a particular security can be multiple times the actual amount of the security available.
I know of at least one hedge fund group that bought CDS as a way of betting against housing-sector stocks (particularly home builders). From what i know, they made a ton of money. But CDS can also be used to hedge default risk on securities you already hold in a portfolio.
To read Salmon's column, click here, and to read more about CDS, click here.
Bad News
We just got som bad news regarding the Unknown Son. As many of my regular readers already know, he's gone through a lot - he's a two-times cancer survivor.
In 2002 he was diagnosed with Neuroblastoma, a particularly nasty and resistant childhood cancer. After a great deal of chemotherapy, surgery, radiation, more chemotherapy, and experimental treatments (including an autologous (i.e. "self") stem-cell transplant, he went into remission in 2005.
In January of 2008, he was diagnosed with a Wilms' tumor (a kidney tumor), which resulted in the removal of his right kidney and, after more chemo, he was given another clean bill of health this summer.
Now it looks like he has another tumor - in the lower part of his right lung. We just found out about it two days ago as a result of routing follow-up scans. He's scheduled for more surgery this coming Monday (the 29th). He'll get the tumor removed, which will give us the best information as to what exactly it is. He'll probably have about a week-long hospital stay, and we'll then know if this is a recurrence of the Wilms, tumor or something else (it could be a recurrence of his neuroblastoma, but that's unlikely because there was no indication on his latest MIBG scan a couple of weeks back).
So, please keep us in your prayers.
If you're one of my "non-blogosphere" friends (or a regular reader who knows me by my real name) and you want to keep up with what's going on, we maintain a website that we use to keep family and friends abreast of the little guy's treatment. Drop me an email and I'll send it to you in case you want the url.
In 2002 he was diagnosed with Neuroblastoma, a particularly nasty and resistant childhood cancer. After a great deal of chemotherapy, surgery, radiation, more chemotherapy, and experimental treatments (including an autologous (i.e. "self") stem-cell transplant, he went into remission in 2005.
In January of 2008, he was diagnosed with a Wilms' tumor (a kidney tumor), which resulted in the removal of his right kidney and, after more chemo, he was given another clean bill of health this summer.
Now it looks like he has another tumor - in the lower part of his right lung. We just found out about it two days ago as a result of routing follow-up scans. He's scheduled for more surgery this coming Monday (the 29th). He'll get the tumor removed, which will give us the best information as to what exactly it is. He'll probably have about a week-long hospital stay, and we'll then know if this is a recurrence of the Wilms, tumor or something else (it could be a recurrence of his neuroblastoma, but that's unlikely because there was no indication on his latest MIBG scan a couple of weeks back).
So, please keep us in your prayers.
If you're one of my "non-blogosphere" friends (or a regular reader who knows me by my real name) and you want to keep up with what's going on, we maintain a website that we use to keep family and friends abreast of the little guy's treatment. Drop me an email and I'll send it to you in case you want the url.
Window Dressing and Other Mutual Fund Games
What do the following terms have in common?
- Window Dressing
- Painting The Tape/Banging The Close
- Comparison Shopping
- Window dressing happens when the portfolio manager sells off securities just before the end of the reporting period so that they don't show up in the annual (or quarterly) listing o the portfolio's securities.
- Painting the Tape (also called Banging the Close) occurs when a portfolio manager holding a security buys a few additional shares right at the close of business at an inflated price. For example, if he held shares in XYZ Corp on the last day of the reporting period (and it's selling at, say $50), he might put in small orders at a higher price to inflate the the closing price (which is what's reported). Do this for a couple dozen stocks in the portfolio, and the reported performance goes up. Of course, it goes back down the next day, but it looks good on the annual report.
- Comparison Shopping could also be called "benchmark shopping". This refers to the idea that if a fund manager can't beat his benchmark, he just switches to a new benchmark that he can beat.
President Bush and The Military
I try to keep politics mostly out of Financial Rounds because it generally gets people far too worked up. Likewise, I try not to post too much about President Bush. But this piece in the Washington Post caught my eye.
Regardless what else you think about President Bush, he clearly appreciates and honors the role the military plays and the sacrifices those soldiers have made for their country.
For much of the past seven years, President Bush and Vice Prresident Dick Cheney have waged a clandestine operation inside the For much of the past seven years, President Bush and Vice President Dick Cheney White House. It has involved thousands of military personnel, private presidential letters and meetings that were kept off their public calendars or sometimes left the news media in the dark.Read the whole thing here.Their mission: to comfort the families of soldiers who died fighting in Afghanistan and Iraq since the Sept. 11 terrorist attacks and to lift the spirits of those wounded in the service of their country.
Regardless what else you think about President Bush, he clearly appreciates and honors the role the military plays and the sacrifices those soldiers have made for their country.
Awesome Explanation of the Economic Crisis
I didn't realize this, but every year Harvard's Kennedy School invites new members of congress for a three-day "briefing" by Harvard profs on various topics. This year, Jeff Frankel came up with a graphic explanation of the current economic crisis. Here it is:
Now that's what I call an information-rich slide.
Now that's what I call an information-rich slide.
Subscribe to:
Posts (Atom)