Financial topics

[aedens]

[quote="bluebird"]Higgie writes "A Treasury Bill only money market fund is safe.
There are a couple things I should mention though. I posted last Fall about a story in Jim Sinclair's blog where he got a call from an elderly lady who thought she had a t-bill only money market fund but really didn't. It turned out the fund had synthetic derivatives of t-bills in it instead of the real thing and she couldn't get her money out. Another thing would be the management fees. If t-bill interest rates go low enough it is possible that the effective rate of the t-bill only money market fund could go negative and I suppose in that case there might be small periodic deductions to cover expenses in the event that expenses exceed the interest paid on the fund."
***********************************************

Vanguard announces changes to money market funds
The following changes will take effect in early August for retirement plan investors:

Vanguard Treasury Money Market Fund will merge into the lower cost Vanguard Admiral™ Treasury Money Market Fund (or another Vanguard money market fund if your plan sponsor chooses).
Vanguard Federal Money Market Fund will be closing to new contributions and exchanges into the fund in your plan. If your plan offers Vanguard Federal Money Market Fund, you may continue to make additional purchases of, or exchanges into the fund, until early August.
If you are investing in either fund, you will receive a letter from Vanguard with more details, including an outline of your options.

Why are these changes being made?
"Taking these preventive measures will protect fund shareholders and help to ensure that the funds' yields remain competitive," said Bill McNabb, Vanguard CEO. "It is possible that yields on government-backed securities and, consequently, Vanguard Admiral Treasury Money Market and Vanguard Federal Money Market Funds will remain quite low for the foreseeable future. Shareholders may wish to consider switching to alternative Vanguard fund options that are consistent with their goals and risk tolerance."

The merger of Vanguard Treasury Money Market Fund, which has an expense ratio of 0.28%, into the Admiral Treasury Money Market Fund, with its lower expense ratio of 0.15%, will reduce expenses for Treasury Fund shareholders while continuing to keep yields at competitive levels. After the merger, Admiral Treasury Money Market Fund is expected to maintain an expense ratio of 0.15%. Additionally, reducing new cash flow into Vanguard Federal Money Market Fund may slow the decline of that fund's yield.

Vanguard's actions come amid continuing strong demand for government-backed securities, which have served as a safe haven during the global financial crisis. This increased demand, coupled with cuts to prevailing interest rates by the Federal Reserve, has driven yields of government-backed securities to record lows, with current 1- and 3-month Treasury bills yielding less than 0.20%. As securities in Vanguard money market funds mature, the reinvestment of assets into new, lower-yielding securities decreases the funds' yields.

Notes
Asset figures as of May 31, 2009, unless otherwise noted.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
Notwithstanding the preceding statements, Vanguard Prime Money Market Fund, Vanguard Variable Insurance Money Market Portfolio, and all of Vanguard's tax-exempt money market funds are participating in the U.S. Treasury's Temporary Guarantee Program for Money Market Funds. The Program generally does not guarantee any new investments in these funds made after September 19, 2008, and is scheduled to expire on September 18, 2009. For more information, please see each fund's most recent prospectus as supplemented on April 8, 2009.

[bluebird]

Thanks aedens - I do recall reading those 2 Vanguard memos on the web and its good for me and others to re-read them. Vanguard says that its Treasury Admiral MMF contains 99.8% short term Treasury Bills which are backed by the full faith of the U.S. government (but the MMF is no longer insured because the T-Bills are already backed by the government).

But the Treasury Bills in the MMF are not purchased in a person's name, directly. How can everyone be certain they will be able to withdraw their portion of a MMF if those Treasury Bills are lumped in with everyone else. There is no title that directly says you own those Treasury Bills other than a quarterly statement. However, I have also purchased Treasury Bills, in my name, via TreasuryDirect.gov, rotating the T-bills in and out of the 'C of I'. Those T-Bills are titled to me, and I own them directly, and I know they will be paid to me (as long as we have a government.)

[Higgenbotham]

Thanks aedens - I do recall reading those 2 Vanguard memos on the web and its good for me and others to re-read them. Vanguard says that its Treasury Admiral MMF contains 99.8% short term Treasury Bills which are backed by the full faith of the U.S. government (but the MMF is no longer insured because the T-Bills are already backed by the government).

From aedens post: "U.S. government backing of Treasury securities applies only to the underlying securities and does not prevent share-price fluctuations."

This is a point I hadn't considered. Apparently, Vanguard thinks it is possible. Technically, t-bills are liquid, but not immediately liquid. The average duration until maturity of the t-bills would average so many days in the money market fund. If a person or fund owns a t-bill, it can be sold in the secondary market and payment received the next day. So let's say there is a huge demand for immediate liquidity. I guess it is possible, technically, that t-bill rates could temporarily spike higher and that the share price of a t-bill only money market fund could drop. If that were to happen, my guess is this should only last a few days. But if things were to get so severe that there is a "run" on treasury only money market funds, the t-bills would have to be sold at a small loss. The fund would probably start selling its lowest duration paper. Let's just say for example that was 11 days until maturity or about 3% of a year and bill rates spiked 5% above what was purchased by the fund. Then the loss would be (0.03) x (0.05) or $1.50 per $1000 face value if I did that right.

During the panic last Fall, t-bill rates went negative. That seems to be the more likely scenario in my view because t-bills are probably liquid enough to satisfy anyone who is getting out of other asset classes and since you can't go from stocks to C of I directly t-bills are likely to be the preferred destination.

[John]

Dear Jack,

At that time, based on long-term trends, I estimated that the CPI
would fall by 30% by 2010.

I would no longer be certain of the 2010 date, but I stick by the 30%
figure, probably by 2012 or so.

A 30% drop in CPI in 3 years! I hadn't really thought about how fast
deflation would occur before. I had assumed deflation in general
things would be slow and gradual and would last for years. A 10%+
drop in a year though has all sorts of interesting (and painful)
social implications.

From 1977 to 1980, the CPI rose 30%. When looked at that way, a 30%
drop doesn't seem so exceptional.

John

[aedens]

I feel a reread on Mr. Dent research is appropiate on GD curves on spending and risk aversion most enumerated on regional inflation issues of logic do play. Another side to give a quick thought is so called zombie money which I rather thought was puzzling by the media. Other than volume and volatility issues they want I am inclined it is a dead bull wish as we have seen foment by technologcal innovation and common sense. I did hear a thought that some stocks are undervalued and I tend to agree in premise, but not reality for intent this year other than America selling the farm as we see. Well, I think Mr. Market will address that so the news was ignored as I tend to do for the last year. As we speak those let go are dying the slow death on the 401k, and they should be already blanket covered by dollar for dollar untaxed on this element to spend each dollar since why should Washington spend penalty they did cause on this last market cycle? Old farmer's say they will drink and talk bull all day long until you give them something to do then they will leave so given there track record why in any spirit of good faith are they entitled other than ordinary income in any time? In this mixed market reality in the West the Consumer will remember this facet why so few caused so much havoc on the back of the common man. I feel the secondary market's will insulate themselves as they must in this unwarranted capital grab we have seen and will not go back. During the trend I was adding 11% per week away and sorry to say now less than half for a indefinite period now to realise another cycle we see coming. Of course Washington is disconnected from the daily other side of mixed market and will press every dialog to how they are the answer. They just plain blew it and the majority of thinking people will cut the rope on them. If I need labor the answer I need to hear is I owe my employer no gratitude but a quantity and quality of work only. This is what I do for my Company and the people I am responsible for I ask no more. At somepoint soon I see a problem where they take more than I have to sustain my family and those In my community who will work with out
a government that is unwanted since oversized and unneeded since they are the disconnect. Revenue drain will persist and look anywhere you will see it. Local food banks are stressed and Food stamps are rising. The people I know are tough midwestern people and will work since food stamps are for women and children in ther eye. Mr. Tip O'Neill and Mr. Monihan had file on there desk that was a coal miners widow with children and hence a chicken in every pot no more no less. Will it turn around? Depends on what you consider important since it is not A. Taxpayer but the few who thought economic gravity is not for them since there better than most others. Those that need I will try to help, but those who expect it have a lesson to learn sooner than they wish to consider. I am entitled to nothing and who is?

Upcoming fun:
2009 comprehensive revision
On July 31, 2009, the Bureau of Economic Analysis (BEA) will release the results of a comprehensive, or benchmark, revision of the national income and product accounts (NIPAs). The comprehensive revision will incorporate the results of the 2002 benchmark input-output (I-O) accounts as well as changes in definitions, classifications, statistical methods, source data, and presentation.

Well, we can check on bread, banana's, beer, bowling balls, baseball bats prices and see how we can match there numbers in the Ivory Tower to purchase power

Recap: http://money.cnn.com/magazines/fortune/ ... /index.htm
If you ran a business how many would you fire on the Hill? Not a fair question is it?

Every serious discussion of the problem of credit expansion must start from the distinction between two classes of credit: commodity credit and circulation credit.
Public opinion is utterly wrong in its appraisal of the phases of the trade cycle. The artificial boom is not prosperity, but the [p. 224] deceptive appearance of good business. Its illusions lead people astray and cause malinvestment and the consumption of unreal apparent gains which amount to virtual consumption of capital. The depression is the necessary process of readjusting the structure of business activities to the real state of the market data, i.e., the supply of capital goods and the valuations of the public. The depression is thus the first step on the return to normal conditions, the beginning of recovery and the foundation of real prosperity based on the solid production of goods and not on the sands of credit expansion.

In discussing the situation as it developed under the expansionist pressure on trade created by years of cheap interest rates policy, one must be fully aware of the fact that the termination of this policy will make visible the havoc it has spread. The incorrigible inflationists will cry out against alleged deflation and will advertise again their patent medicine, inflation, rebaptising it re-deflation. What generates the evils is the expansionist policy. Its termination only makes the evils visible. This termination must at any rate come sooner or later, and the later it comes, the more severe are the damages which the artificial boom has caused. As things are now, after a long period of artificially low interest rates, the question is not how to avoid the hardships of the process of recovery altogether, but how to reduce them to a minimum.
Mises: Paper of the British Experts, April 8, 1943. [p. 227] [p. 228] [p. 229]

As stated in forum hibernating nuetral until the carnage clears: caring for my family and friends and waiting for reason to return to invest then in fungible areas.

http://files.libertyfund.org/files/2038 ... 401_Bk.pdf

Economics is not about goods and services; it is about the actions of living men. Its goal is not to dwell upon imaginary constructions such as equilibrium. These constructions are only tools of reasoning. The sole task of economics is analysis of the actions of men, is the analysis of processes. Mises
Ah the moral compass we use...

[wvbill]

We have been discussing computer trading -- from John Maudin:

"This Is Outrageous

But first, I want to direct the attention of those in the US finance industry to a white paper written by Themis Trading, called "Toxic Equity Trading Order Flow on Wall Street." Basically, they outline why volume and volatility have jumped so much since 2007; and it's not due to the credit crisis. They estimate that 70% of the volume in today's markets is from high-frequency program trading. They outline how large brokers and funds can buy and sell a stock for the same price and still make 0.5 cents. Do that a million times a day and the money adds up. Or maybe do it 8 billion times. It requires powerful computers, complicity of the exchanges (because the exchanges get paid a lot), and highly proximate computer connections. Literally, the need for speed is so important that to play this game you have to have your servers physically at the exchange. Across the river in New Jersey is too slow. Forget Texas or California. This is a game played out in microseconds.

The retail world doesn't get to play. This is a game only for big boys who can afford to pay for the "arms" needed to fight this war. But the rest of us pay for the game, as that half cent is like a tax on transactions, not to mention the increased daily volatility, which skews pricing. Think it doesn't affect you? That "tax" is paid by mutual funds, your pension fund, and every large institution.

Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent. We need rules to level the playing field. Themis suggests one simple one: just make it a rule that all bids have to be good for at least one second. That would cure a lot of problems. One lousy second! In a world of microseconds, that is an eternity.

Goldman Sachs went after an employee who stole some of their latest and greatest software this last week. The US assistant attorney general said in the courtroom that the software had the potential to manipulate the market. Imagine that. I am shocked. There is gambling going on in the back room? Gee, commissioner, I had no idea.

All this "algo" (algorithmic) trading also gives a very false impression of volume. If you are a fund and see 10 million shares a day traded, you might feel comfortable that you could hold one million shares and exit your trade easily. But if 80% of the volume is false "algo" trading, that volume isn't really there. You may have a position that will be a problem if you want to exit, and not know it.

"High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don't even know it." (Themis Trading)

We are literally talking billions of dollars here. The SEC needs to step in and stop this, and soon. This is a lot more important than the salaries of investment professionals, for which the Obama administration today suggested new rules, which would allow the SEC to oversee salaries at member firms. Seriously? They don't have enough to do already?

The link to the white paper is http://www.themistrading.com/article_fi ... -17-08.pdf. Themis Trading is at http://www.themistrading.com/"

Bill

[greghaught]

first off, themis trading is a commission merchant. they make money off of institutional clients who are not sophisticated enough to do their own trading.

Frankly, this is outrageous. The more I read the madder I got. And it is going to get worse as computers get faster and software more intelligent. We need rules to level the playing field.

this is just an example of the automation/computer aversion syndrome. "pretty soon those goddam computers will be running everything." the Amish still use buggies. they'd like to level the playiing field, too.

Goldman Sachs went after an employee who stole some of their latest and greatest software this last week. The US assistant attorney general said in the courtroom that the software had the potential to manipulate the market.

GS couldn't have come with a better ad campaign than the one that was served up to them on a platter by the internet rumor mill. now, they are now the company that is believed to manipulate markets. their competitors fear them and their customers love them. they'll be playing the DOJ like a violin and getting as much mileage out of this joke as they can.

"High-frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don't even know it." (Themis Trading)

to quote alan abelson "Sometimes the best business plan for a dying business [e.g. Themis Trading] is interment". it's axiomatic that all market techniques have a shelf life. Themis Trading's client execution strategies are now defunct. that's why they're "outraged". that's why they think that there are mysterious and sinister forces at work. welcome to the world of markets.

however, the same axiom holds for the machines. a profitable trading strategy has a shelflife that is inversely proportional to 1) the number of people who know about it and/or 2) the scale on which it is traded. 2 elementary examples are trend following and convertible arbitrage which nowadays are only consistently profitable for authors, and seminars. the machines render themselves ineffective even as they change.

[John]

I just want to point out that Themis Trading is the firm of Joe
Saluzzi, whom I quoted in my article two weeks ago:

** The influence of computerized trading programs
** http://www.generationaldynamics.com/cgi ... 02#e090702

Last week there was an excellent article on FT Alphaville on high
frequency trading (HFT).

** The Cold War in high frequency trading
** http://ftalphaville.ft.com/blog/2009/07 ... y-trading/

This article is generally negative about the current extent of HFT,
but it also contains links to about a dozen articles on HFT and on a
related subject, dark pools. I downloaded and saved all of them, and
I put them all on a page of my web site:

** HFT - Articles on High Frequency Trading and Dark Pools
** http://www.generationaldynamics.com/cgi ... 010.wk.hft

> this is just an example of the automation/computer aversion
> syndrome.

I really don't believe that this is a Luddite-type argument. What's
appalling is the extent to which program trading has taken over the
market, to the extent that almost nothing else matters.

It's like structured finance and credit derivatives, which are based
on computer models. There's nothing wrong with CDOs and CDSs and
other credit derivatives per se, but when the market is buried
in over $1 quadrillion of them, then there's a big problem.

There's nothing wrong with program trading either. But when the
market is being predominantly driven by program trading, which is
apparently the case, then there's a big problem.

Program trading is just one more bubble that keeps growing until it
explodes. Just like the real estate bubble and the credit bubble had
to end, the "program trading bubble" also has to end.

As I pointed out in my article on computerized trading programs,
there's a simple mathematical reality: When stock prices are going
up, the "bubble algorithm" calls for buying and selling small
positions, so the bubble grows slowly; when stock markets start
falling, the algorithm calls for selling everything as quickly as
possible. In other words, we have a panic that takes place in
milliseconds, rather than hours or even minutes.

Sincerely,

John

[greghaught]

I really don't believe that this is a Luddite-type argument. What's
appalling is the extent to which program trading has taken over the
market, to the extent that almost nothing else matters.

john, i've been wrong before. but there's one thing that i know for sure, beyond any doubt. in the market, losers always have an excuse and a scapegoat and want change. the real winners just continue on about the business of continually adapting and winning.

what Mr. Saluzzi wants is just a another form of market manipulation for his benefit. that's fine with me. i dont care. for me, manipulated markets trade just as profitably as the unmanipulated.

[Higgenbotham]

I really don't believe that this is a Luddite-type argument. What's
appalling is the extent to which program trading has taken over the
market, to the extent that almost nothing else matters.

It's like structured finance and credit derivatives, which are based
on computer models. There's nothing wrong with CDOs and CDSs and
other credit derivatives per se, but when the market is buried
in over $1 quadrillion of them, then there's a big problem.

There's nothing wrong with program trading either. But when the
market is being predominantly driven by program trading, which is
apparently the case, then there's a big problem.

Program trading is just one more bubble that keeps growing until it
explodes. Just like the real estate bubble and the credit bubble had
to end, the "program trading bubble" also has to end.

As I pointed out in my article on computerized trading programs,
there's a simple mathematical reality: When stock prices are going
up, the "bubble algorithm" calls for buying and selling small
positions, so the bubble grows slowly; when stock markets start
falling, the algorithm calls for selling everything as quickly as
possible. In other words, we have a panic that takes place in
milliseconds, rather than hours or even minutes.

Sincerely,

John

This is a great description of the problem. It's a systemic problem that has been created due to an unstable financial system. It arises whenever there is "risk free" profit to be made. As more players enter the particular "risk free" speculation, the profit spreads on the transactions narrow and more capital must be deployed to maintain the profits. This capital should be deployed elsewhere in productive capacity but "speculation" has become more attractive (better return on investment). The growth of speculative activities takes capital out of the real economy, making the real economy weaker and inherently less attractive to invest in. Problem is, once that happens, "risk free" is no longer "risk free" and the latest bubble implodes. It's a vicious downhill spiral. That's one reason why I think there is nothing that precludes another stock market crash. As a society, we still don't get it. In the big big picture, nothing at all has been learned in the past 2 years.