The Pin That Pricked The Bubble

One need not look hard to find any number of articles talking about how student debt in the U.S. recently reached the $1 trillion threshold.  Regardless of what it means to our nation in general, and more specifically, the individuals who graduate with no salient marketable skills to show for their debt, it has been my opinion for quite sometime that the generally accepted annual 6% inflation modeled into virtually all future cost of higher education projections could not go on forever. As is the case in every corner of the business world I can think of, it takes disruptive innovation to bring about a real paradigm shift. It began a few years back, but it seems that we are finally on the cusp of what I believe will be the disruptive innovation that pricks the high cost of education bubble.

NY Times article: Harvard and M.I.T. Team Up to Offer Free Online Courses

 One could argue that only schools with billion dollar endowments such as Harvard, Stanford, M.I.T. and their peers have the luxury of offering free non-credit courses precisely because they have benefited in the past from the high cost of education, but that misses the point. In a digital world, where it becomes faster and easier to connect to the internet every day, "what you know" will become more important than "who you know" or where you went to school. In the end, results matter. If somebody sitting on a dirt floor in Tanzania can absorb, digest and implement an idea derived from the same course content as somebody sitting in a mahogany-lined classroom in New England, what does it mean for the local economy in Tanzania, and to the bigger picture, the world in general?

College is not for every one; never has been and never will be. I think one of the greatest shams pulled on our nation's youth has been to inculcate them with the belief that if they just go through the motions and do whatever it takes to graduate with a 4 year degree regardless of the discipline, they would be entitled to a life of privilege. Ivy League course content, offered for free, to basically anybody with an internet connection, is the death blow to this notion. In the end, the world will be better for it.

How to Fix Income Equality

Here's a humorous look at one way to do away with income inequality.

$10 mil loans for everybody!

I recall an article in The Economist a few years ago that highlighted a Harvard study about student's attitudes towards wealth. 

The question was this; would you rather: 

a) make $100,000 a year when your friends made $200,000

b) make $50,000 when all your friends made $25,000

Of course this presents a false choice, as the study did not ask if they would be content to make the same amount of money as their friends. Nevertheless, the answer is instructive. By a margin of 4 to 1, the students chose B.

The moral of the story is self-evident as far as I'm concerned..

What Really Happened to the MF Global Money

Re-hypothecation on steroids.

(Business Law Currents) A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.
MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF’s dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients’ funds to finance an enormous $6.2 billion Eurozone repo bet.
If anyone thought that you couldn’t have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else’s cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing.

Read the whole thing.

Imitation is the highest form of flattery

If imitation is the highest form of flattery, then Apple should be thoroughly flattered:

Entire Apple stores being faked in China

China reaches a new milestone in fake goods: entire Apple stores, signs, sales assts and all

BEIJING (AP) -- At first, it looks like a sleek Apple store. Sales assistants in blue T-shirts with the company's logo chat to customers. Signs advertising the iPad 2 hang from the white walls. Outside, the famous logo sits next to the words "Apple Store."
And that's the clue it's fake.
China, long known for producing counterfeit consumer gadgets, software and brand name clothing, has reached a new piracy milestone -- fake Apple stores.

I know China "owns" us; we hear about it everyday. But until I start reading stories about how we're faking successful Chinese branded stores here in the US, I'm not going to worry about it too much.

This is an indication that the Chinese are beginning to have too much money. It is my belief that only people with too much money buy Apple products in the first place.

Value Destruction on Steroids

What would you think if you bought, say a Bugatti Veyron supercar at what you thought was a screaming deal of $250,000. Shortly thereafter, not only did you realize that what you thought was an exotic sports car was actually a Yugo, but that it was going to cost you an additional $850,000 just to get rid of it.

Now we know what it must have felt like to be Bank of America after they bought Countrywide Financial in 2008. But instead of talking about relative pocket change in the hundreds of thousands of dollars, add a couple of orders of magnitude and make the numbers $2.5bil and $8.5bil respectively.

BofA Agrees to $8.5 Billion Settlement, Sees Quarterly Loss

Bank of America (BAC) has confirmed it will pay $8.5B to large investors who lost money on mortgage-backed securities. The settlement is the largest in U.S. banking history and covers securities issued by Countrywide Financial, which BofA bought in 2008 for $2.5B. The bank will also record an additional $5.5B provision in Q2 2011 for representations and warranties exposure. Bank of America now expects to report a Q2 loss of $0.88-$0.93 a share, including a goodwill impairment charge of $2.6B. The investors include Pacific Investment Management, BlackRock (BLK) and the New York Fed. BofA rose 4.4% in premarket trading after news of the deal, with some estimates having put its liability at much higher than $8.5B. The deal could embolden investors to seek similar settlements with other major U.S. banks such as Wells Fargo (WFC) and JPMorgan (JPM). 

 *sigh*...

US Credit Rating Outlook Cut To Negative

Yesterday the big story was that S&P put the US government "on notice" that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. I love the terminology. Anybody that's sat through a mandatory firm-wide harassment seminar will immediately recognize that when you put somebody on notice it means they've officially crossed the line of comfortable civility that should exist between adults in the workplace. The real question here is why it took so long for S&P to recognize the fact the the government crossed the line? I am of two minds on this one. On one hand they're stating the obvious, but better late than never. On the other hand, given their record of complicity and the very prominent role they played in the housing bubble debacle, why should they have any credibility at all? Nevermind that, why are they still in business?

Consuming ourselves

Bill Gross' most recent investment outlook likens our current fiscal path to the mating ritual of mantises. He has this to say:

The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that “old normal” norms have returned. Not likely. There will be pain aplenty and it’s imperative that we recognize now what the ultimate cost of blueberries will mean for American citizens of tomorrow. Four major factors come to mind:

1. American wages will lag behind CPI and commodity price gains.
2. Dollar depreciation will sap the purchasing power of consumers, as well as the global valuation of dollar denominated assets.
3. One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible.
4. Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable: witness Greece, Ireland, or a host of Latin American countries of generations past.

Read the whole thing.

Is $250,000 really rich?

 Who knows where the number came from, but whenever the subject of extending the Bush tax cuts comes up, the line between the haves and the have-nots seems to be $250,000. If you make more than $250,000 you can afford more taxes is what many politicians on the left apparently believe. Fortunately, President Obama caved to GOP pressure and went along with the tax-cut extension by saying something along the lines of, "when you're in hostage negotiations, it's best to not harm the hostage. In this case the hostage was the American people." Silly illustrations aside, I think he did right by extending the tax cuts to all tax-paying citizens. As a recent Economist article pointed out, Federal Government spending is 24% of GDP and tax receipts are 15% of GDP this year. If you raise taxes on  those who make more than $250,000 a year and raise capital gains by 5% to 20%, the extra tax revenue will only cover the deficit for 9 days.When it is put in that perspective, one is left with the feeling that $250,000 is an arbitrary number pulled out of thin air; and those that argue people making more than that are "rich" are promoting class warfare whether they realize it or not.

The following article, "Down and out on $250,000 a year"does an excellent job revealing what a family of four making the magical $250,000 really has left at the end of the year. To control for geographical cost and local tax rate differences, the article models 5 different cities across the nation: Huntington, NY, Plano, TX, Pinecrest, FL, Naperville, IL and Glendale, CA.

The results are shocking, but not surprising.

How to Make the Dollar Sound Again

Here's a must read from James Grant, one of the more intelligent and dead-pan humorous guys on the street in my opinion.

In Gold We Trust

A realistic alternative to QE 2

The results of the most recent and much anticipated Fed meeting are out. The Fed is going to purchase $600bil in bonds through June 2011 to help stimulate the economy by flattening out the middle of the yield curve. The hoped for stimulus resulting from this move will be lower mortgage and interest rates which will theoretically make it easier for small businesses to get loans for expansion and eager home buyers to get a piece of the American Dream. Not sure how that will help stimulate employment though. From my vantage point, it doesn't matter how low mortgage rates go if nobody will refinance or lend to you without a job. And with few exceptions, I'll wager not many small businesses are eager to expand in the current political climate. From a saver's point of view, with money market rates already well below 1%,  it's not like anybody is going to go out and buy a Chevy Volt off their earned interest. It's hard not to conclude that if the Fed continues down this path they are going to lose credibility in the not too distant future; at which point, "...backed by the full faith and credit of The United States of America"--the phrase that underpins our debtor nation--will be worth less than a wooden nickel.

QE 2: not just another giant ocean liner

I remember several years ago, before they decided to dismantle her in Dubai, when the Queen Elizabeth II arrived in San Francisco to much fan fare. People lined the bay all the way from the Golden Gate Bridge to her berth over by Pier 29. I happened to be crossing the Bay Bridge after she had berthed and caught a glimpse of her transom. It was massive. It almost dwarfed the impressive west-looking view of the San Francisco skyline. But that was the old QE 2. The new QE 2, even bigger and more impressive than the last, was christened in Southampton earlier this month. Ironically, this is happening at the same time that the markets are widely speculating that the Fed will announce the details of its own version of QE 2 at the conclusion of their meeting on 3-NOV. 

Top 10 Things I Hate Most About Trading

On a lighter note, but with a heaping teaspoon of truthiness...
Courtesy of The Dopey Cowboy

DARK POOLS are the one thing that keeps me up scratching my head at night. Regulators in all their genius, decided that your every day Joe Schmo investor was being treated unfairly and needed more market transparency.  So what did we do?  We created “dark pools” of super secret hidden liquidity. So much for transparency and disclosure.

VWAPS also helped to destroy the industry.  Market data that started out as a way to analyze daily stock activity has become a way of life.  How pathetic. Being average has now become the bogie.  There went all the creativity and differentiation amongst market makers, sell-side and buy-side traders.  It’s no longer about getting the best price for your customers or not impacting the tape.  It’s about being within a penny or two from the VWAP.

ALGOS- Screw them too. If I had my way, they’d be plucked off everybody’s desk like chickens. Stretch this! We are traders – not monkeys. We are supposed to prove how good we can trade based on information, levels, conviction and “feel”.  It's not trading when you throw your order in some algo and watch the micro-reports come back.

Flash Crash

Last Friday the SEC released the much anticipated report on the "Flash Crash" that occurred 6-MAY-2010 when the Dow sold off 700 points in a matter of minutes then recouped much of the losses almost as quickly to close down 347 for the day. The report found that a single market sell order of 75,000 SPX e-Mini futures contracts with a notional value of $4.1bil caused the sell off. To put that in perspective, 1 e-mini contract is equal to 500 SPY shares. That's the equivalent of sending 37,500,000 SPY to sell at the mkt with absolutely no regard to price. One can't blame the market for treating a mkt order like a mkt order. That's about 1/6th of the avg daily volume for the SPY. Although not officially named in the report, it has been revealed that a trader at the firm Waddell & Reed Financial in Kansas was responsible for the order. That's not exactly "adding alpha" to performance, which is the end goal of every trader.  

How sausage is made

I recently returned from a three day trip to Washington D.C. where I attended the annual Security Traders Assoc. conference and met with a few of our elected officials as a representative from the board of the San Francisco affiliate of the STA. Generally the convention is in a more exotic location, but this year since Wall St. is everybody's favorite punching bag and with so much pending legislation that will fundamentally alter US equity markets, the organizers thought it would be prudent to really focus on the political end of our existence.

Good advice from the grave

Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today's economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues.
—President John F. Kennedy,
Economic Report of the President,
January 1963

The politicians of yore sure were different animals.