Monday, 13 September 2010

with implied correlation

correlation chart

despite the recent commentary on how correlation is, and how this MUST be caused by high frequency trading its quite interesting to look at correlation on a longer term basis. The Raven created a pseudoDow (which is subject to survivor bias, but much quicker to do calculatons on) and calculated a rolling two year "correlation" on the monthly returns. Instead of taking an average of the correlation matrix coefficients he used an approximation from the calculation of the dispersion. The difference is a couple of point of correlation at most, so the general shape of the chart shouldn't be missing too much.

The key takeaway from this is though, that while correlation may be high, its certainley not freakish or out of historical norms, and the panic in the media with respect to HFT overdone and ill informed to say the least.

BskyB and NewsCorp
FT alphaville today highlights the 'competition commission concerns', which unsurprisingly a competitor supports. To take the liberty of summarizing the concerns; Sky + Times + The Sun = unstoppable control of the UK media, however the article says this is because of the ability to cross market titles and spend on marketing, neglecting more crucially the importance of how NewsCorp have really won the content war. The fact that the Times has a paywall when no other main stream newspaper does, or that Sky's pay TV model is dominant is the key issue, not spend on marketing or cross selling. These products are superior. Arguing against the deal because of competition concerns seems weak and definitely not as solid ground as the real reason that shareholders should be voting against the NewsCorp bid for BskyB, VALUATION. Taking 700p for an asset worth at least 1000p on a standalone basis would be absurd.

Wednesday, 8 September 2010

bits and Bob

"The UK Royal Mail's £26bn pension fund made a 29% return on its money last year, helped by a sophisticated derivatives strategy, reducing the company's £10.2bn deficit and potentially helping along its possible privatization"

well it turns out that the "strategy" was buying equity futures, aka taking a leveraged bet on the market, very uhmm sophisticated.

The story that has been hogging the headlines in the UK has been the appointment of Bob Diamond as the new CEO of Barclays. Today Vince Cable (who now apparently prefers to be called Dr. Cable) has been calling for the breaking up of the large 'universal banks'.

This as a measure to reduce risk makes absolutely zero sense. Utility banks will still have to invest their depositors cash, any belief that making loans on commercial property or residential mortgages is not risky really should have been destroyed in the credit crunch. The financial world would merely have more firms with more linkages, and as such there would be no amelioration of counterparty credit risk, nor the removal of the moral hazard of 'too big to fail'. It is the systemic nature of financial intermediation and the lack of penalties on bondholders and creditors of financial institutions that propogate poor investments. There is only one logical solution and that is a pigovian tax on all creditors.

Friday, 3 September 2010

Krugman and the Wolf.

Its interesting to see a high brow rehash of Krugman's appaulingly weak argument in the FT today by Martin Wolf.

Essentially the argument is that because long term bond yields are low, we should not worry about government debt. Economically and logically it makes no sense. A proponent of this view would logically conclude that only now should Greece begin fiscal consolidation, rather than years ago. The whole point that fiscal conservatives are trying to make is that trying to cut a deficit when long term yields have exploded is almost impossible, needless to say, cutting government spending when private firms are finding it difficult to borrow makes even less sense that the gloomy scenario Wolf and Krugman paint.

It is intellectual dishonesty in its most repulsive form, and unsurprisingly partisan support of Balls by Wolf. Even if one were to swallow Krugman's prescription that fiscal responsibility should only be practiced when one is forced to do so by the market, the notion that bond yields are signalling a lack of concern isn't clear cut at all, especially in the UK given the government's commitment to cut the budget deficit over the term of the parliament.

If as the Raven believes, bond markets are signalling a lower growth, lower inflation future, then it makes it even more imperitive that governments show fiscal responsibility as their ability to shrink debts in the future through a growth in their tax base is diminishing.