Archive for the ‘Investment’ category

Risk and Return – A Balancing Act

April 5, 2013

From Max Rudolph

There are similarities between value investing and enterprise risk management (ERM) methods. For some, especially portfolio managers, this may be obvious. These investors come to the table with experience using risk as a constraint while trying to optimize returns. Years of experience have taught this group that risk balances return, and that return balances risk. Value is added by creating favorable imbalances. The investor with high returns and average risk has succeeded, as has the investor reporting average returns and low risk.
Many concepts are shared between ERM and value investing. When defining risk, which is generally unique to the individual, an analyst considers uncertainty, downside risk, and optimization. Value investors look at concepts like conservative assumptions, margin of safety, and asset allocation. These concepts are comparable, and this paper uses the International Actuarial Association’s Note on enterprise risk management (ERM) for capital and solvency purposes in the insurance industry to take the reader through general ERM topics. This is followed by a comparable value investing discussion and a comparison of the two practice areas.

In some firms, a risk manager is placed in a position with little authority, limiting the benefits of ERM. A process driven ERM function can identify risks and risk owners, create a common language, and send useful reports to the Board. A stronger risk officer adds value by using transparency to understand risk interactions, scanning for emerging risks and generally keeping a focus on how an entity’s risk profile is evolving.

Continued in Value Investing and Enterprise Risk Management: Two Sides of the Same Coin

Very High cost for Asset Allocation Advice

May 10, 2012

Most investors in hedge funds must be looking at them totally marginally.  Certainly that is the way that hedge fund managers would suggest.

What that means is the ther investor should not look at the details of what the hedge fund is doing, it should only look at the returns.  Those returns should be looked upon as a unit.

Certainly that is the only way to think of it that matches up with the compensation for hedge fund managers.  They get paid their 2 and 20 based solely upon their performance.

But think for a moment about how an investor probably looks at the rest of their portfolio.  They look at the portfolio as a whole, across all asset classes.  The investor will often make their first investment decision regarding their asset allocation.

While hedge fund managers have argued for treating their funds as one or even several asset classes, they are almost always made up of investments, long and short, in other asset classes.  So if you are an investor who already has positions in many asset classes, the hedge fund is merely a series of moves to modify the investors asset mix.

So for example, if the hedge fund is a simple leveraged stock fund, the hedge fund manager is lowering the investor’s bond holdings and increasing the stock holdings.

So if an investor with a 70% 30% Stock bond mix changes their portfolio to 65%, 25%, 10% giving 10% to a hedge fund manager who varies runs a leveraged stock fund that varies from all cash to 4/3 leveraged position in stocks, then they have totally turned their asset mix over to the hedge fund manager.

When the hedge fund is fully levered in stocks then their portfolio is 65% long Stocks, 25% long bonds, plus 40% long stocks and 30% short bonds.  Their net position is 105% stocks with  5% short bonds.  But that is not quite right.  If you only get 80% of your performance, your position is 97% stocks and 1% bonds.  That is right, it is less than 100%.  Only it is really worse than that.  That is the allocation when performance is good.  When the stock market goes really poorly, you get the performance of the 105%/(5%) fund. 

Other funds go long and short large and small stocks.  The same sort of simple arithmetic applies there. 

It is really hard to imagine that anyone who thinks that there is any merit whatsoever to asset allocation would participate in this game.  Because they will no longer have any say in their asset allocation.  What you have done is to switch to being a market timer.  In the levered stock example, you now have a portfolio that is 65% long stocks and 35% market timing.  

So in most cases, what is really happening is that by investing in a hedge fund, the investor is largely abandoning most basic investment principles and shifting a major part of their portfolio asset allocation to a market timer. 

At a very large fee.

Prop Trading – Do Not Try This at Home

July 19, 2011

The GAO last week released a report on Proprietary Trading of banks. The headlines feature a conclusion from the report that the six largest US banks did not make any money our of Prop Trading over the 4.5 years of the study period.

The analysis looks pretty straightforward.  But it is difficult to see if the conclusions are quite so obvious.

First and most important for a risk manager to notice is that this is a post facto analysis of a risky decision.  Risk Managers should all know that such analysis is really tricky.  Results should be compared to expectations.  And expectations need to be robust enough to allow proper post facto analysis.  That means that expectations need to be of a probability distribution of possible results from the decision.

Most investments had performance that was vaguely similar to the pattern shown above during that time.  Is the conclusion really anything more than a 20-20 hindsight that they should have stayed in cash?  That is true everytime that there is a downturn.   Above is a graph of a steady long position in the S&P.

On the other hand, traders in such situations seem to generally get paid a significant portion of the upside and share in very little, if any of the downside.  In this case, the downside cancelled out all of the upside.  The good years had gains of over $15.6 B.  If the traders were getting the usual hedge fund 20% of the gains, then they were paid 3.9 B for their good work.  In the bad years, banks lost $15.8 B.  That means that the gains before bonus were $3.7B.  Incentives were over 100% of profits.

The one other question is why investors need banks aas intermediaries to do prop trading?  Why can’t investors do their own prop trading?  Why can’t investors go directly to the hedge funds or mutual funds or private equity funds?

Ultimately, the report says that prop trading was not really significant to bank earnings and not a real diversifier of bank volatility.  So in the end, is there any reason for banks to be doing prop trading?

It seems that the banks are reaching that conclusion and exiting the activity.

Another Fine Mess

May 9, 2010

High speed trading ran amok on Thursday, May 6.  It sounds like exactly the same thing that lead to the 1987 market crash.  There never was an explanation in 1987 and there most likely will not be one now.

Why not?  Because it is not in the interest of the people who are in a position to know the answer to tell anyone.

Look, the news says that this high speed trading is 75% of the volume of trading on the exchanges. That means that it is probably close to 75% of the exchanges revenue.

Most likely, the answer is that this sort of crash has always been possible at any time of any day with computers sending in orders by the thousands per minute. The people who programmed the computers just do not have enough imagination to anticipate the possibility that no one would want to take the other side of their trade.

Of course this is much less likely if someone actually looked at what was going on, but that would eliminate 90% of that volume.  Back before we handed all of the work to computers, the floor brokers who were the market makers would take care of these situations.

The exchange, that is benefiting from all of this volume, should perhaps be responsible to take some responsibility to maintain an orderly market.  Or else someone else should.  The problem is that there needs to be someone with deep pockets and the ability to discern the difference between a temporary lack of buyers or sellers and a real market route.

Oh, that was the definition of the old market makers – perhaps we eliminated that job too soon.  But people resented paying anything to those folks during the vast majority of the time when their services were not needed.

The problem most likely is that there is not a solution that will maintain the revenue to the exchanges.   Because if you brought back the market makers and then they got paid enough to make the very high risk that they were taking worth their while, that would cut into the margins of both the exchanges and the high speed traders.

Just one more practice that is beneficial to the financial sector but destructive to the economy.  After the 1929 crash, many regular people stayed out of the markets for almost 50 years.  It seems that every year, we are learning one more way that the deck is stacked against the common man.

In poker, when you sit down at the table, it is said that you should look around and determine who is the chump at the table.  If you cannot tell, then you are the chump.

As we learn about more and more of these practices that are employed in the financial markets to extract extra returns for someone, it seems more and more likely that those of us who are not involved in those activities are the chumps.

Are We “Due” for an Interest Rate Risk Episode?

November 11, 2009

In the last ten years, we have had major problems from Credit, Natural Catastrophes and Equities all at least twice.  Looking around at the risk exposures of insurers, it seems that we are due for a fall on Interest Rate Risk.

And things are very well positioned to make that a big time problem.  Interest rates have been generally very low for much of the past decade (in fact, most observers think that low interest rates have caused many of the other problems – perhaps not the nat cats).  This has challenged the minimum guaranteed rates of many insurance contracts.

Interest rate risk management has focused primarily around lobbying regulators to allow lower minimum guarantees.  Active ALM is practiced by many insurers, but by no means all.

Rates cannot get much lower.  The full impact of the historically low current risk free rates (are we still really using that term – can anyone really say that anything is risk free any longer?) has been shielded form some insurers by the historically high credit spreads.  As the economy recovers and credit spreads contract, the rates could go slightly lower for corporate credit.

But keeping rates from exploding as the economy comes back to health will be very difficult.  The sky high unemployment makes it difficult to predict that the monetary authorities will act to avoid overheating and the sharp rise of interest rates.

Calibration of ALM systems will be challenged if there is an interest rate spike.  Many Economic Capital models are calibrated to show a 2% rise in interest rates as a 1/200 event.  It seems highly likely that rates could rise 2% or 3% or 4% or more.  How well prepared will those firms be who have been doing diciplined ALM with a model that tops out at a 2% rise?  Or will the ALM actuaries be the next ones talking of a 25 standard deviation event?

Is there any way that we can justify calling the next interest rate spike a Black Swan?

Toward a New Theory of the Cost of Equity Capital

October 18, 2009

From David Merkel, Aleph Blog

I have never liked using MPT [Modern Portfolio Theory] for calculating the cost of equity capital for two reasons:

  • Beta is not a stable parameter; also, it does not measure risk well.
  • Company-specific risk is significant, and varies a great deal.  The effects on a company with a large amount of debt financing is significant.

What did they do in the old days?  They added a few percent on to where the company’s long debt traded, less for financially stable companies, more for those that took significant risks.  If less scientific, it was probably more accurate than MPT.  Science is often ill-applied to what may be an art.  Neoclassical economics is a beautiful shining edifice of mathematical complexity and practical uselessness.

I’ve also never been a fan of the Modigliani-Miller irrelevance theorems.  They are true in fair weather, but not in foul weather.  The costs of getting in financial stress are high, much less when a firm is teetering on the edge of insolvency.  The cost of financing assets goes up dramatically when a company needs financing in bad times.

But the fair weather use of the M-M theorems is still useful, in my opinion.  The cost of the combination of debt, equity and other instruments used to finance depends on the assets involved, and not the composition of the financing.  If one finances with equity only, the equityholders will demand less of a return, because the stock is less risky.  If there is a significant, but not prohibitively large slug of debt, the equity will be more risky, and will sell at a higher prospective return, or, a lower P/E or P/Free Cash Flow.

Securitization is another example of this.  I will use a securitization of commercial mortgages [CMBS], to serve as my example here.  There are often tranches rated AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, and junk-rated tranches, before ending with the residual tranche, which has the equity interest.

That is what the equity interest is – the party that gets the leftovers after all of the more senior capital interests get paid.  In many securitizations, that equity tranche is small, because the underlying assets are high quality.  The smaller the equity tranche, the greater percentage reward for success, and the greater possibility of a total wipeout if things go wrong.  That is the same calculus that lies behind highly levered corporations, and private equity.

All of this follows the contingent claims model that Merton posited regarding how debt should be priced, since the equityholders have the put option of giving the debtholders the firm if things go bad, but the equityholders have all of the upside if things go well.

So, using the M-M model, Merton’s model, and securitization, which are really all the same model, I can potentially develop estimates for where equities and debts should trade.  But for average investors, what does that mean?  How does that instruct us in how to value stock and bonds of the same company against each other?

There is a hierarchy of yields across the instruments that finance a corporation.  The driving rule should be that riskier instruments deserve higher yields.  Senior bonds trade with low yields, junior bonds at higher yields, and preferred stock at higher yields yet.  As for common stocks, they should trade at an earnings or FCF yield greater than that of the highest after-tax yield on debts and other instruments.

Thus, and application of contingent claims theory to the firm, much as Merton did it, should serve as a replacement for MPT in order to estimate the cost of capital for a firm, and for the equity itself.  Now, there are quantitative debt raters like Egan-Jones and the quantitative side of Moody’s – the part that bought KMV).  If they are not doing this already, this is another use for the model, to be able to consult with corporations over the cost of capital for a firm, and for the equity itself.  This can replace the use of beta in calculations of the cost of equity, and lead to a more sane measure of the weighted average cost of capital.

Values could then be used by private equity for a more accurate measurement of the cost of capital, and estimates of where a portfolio company could do and IPO.  The answer varies with the assets financed, and the degree of leverage already employed.  Beyond that, CFOs could use the data to see whether Wall Street was giving them fair financing options, and take advantage of finance when it is favorable.

Risks, Not Risk

October 9, 2009

From David Merkel in Aleph Blog

There is no generic risk.  There are many risks.  Are you getting fair compensation for the risks that you are taking?  If not, invest in other risks, or if there are few risks worth taking, invest in cash, TIPS, or foreign fixed income.

To this end, it is better to think in terms of risk factors rather than some generic formulation of risk.  Ask yourself, am I getting paid to bear this risk?  Look to the risks that offer the best compensation, and avoid those that offer little or negative compensation.

Modern Portfolio Theory has done everyone a gross disservice.  It is not as if we can predict the future, but the use of historical values for average returns, standard deviations, and correlations lead us astray.  These figures are not stable in the intermediate term.  The past is not prologue, and unlike what Sallie Krawcheck said in Barron’s, asset allocation is not a free lunch.  With so many people following strategic asset allocation, assets have separated into two groups, safe and risky.

Any risk reward strategy that is developed by looking backward at historical performance will no longer work well when everyone knows and uses it.  See the Law of Risk and Light Riskviews

Black Swan Free World (3)

September 29, 2009

On April 7 2009, the Financial Times published an article written by Nassim Taleb called Ten Principles for a Black Swan Free World. Let’s look at them one at a time…

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

Since I cannot claim to have completely clean hands, I will simply point to the writings of Hyman Minsky.  His Financial Instability Hypothesis describes how a financial system goes to the extremes of leverage that creates a crash like what we just experienced.  He wrote this in the 1980′s and early 1990′s and then did not feel that there was much chance of the extreme part of that cycle happening any time soon.  He thought that the Fed had enough of a handle on the financial system to keep things from getting to a blow up state.

However, he did mention that with the advent of sources of debt and leverage and money outside of the traditional financial system, that if those elements grew enough then they could be the source of a severe problem.

How prescient.

In addition to reading what Minsky wrote, we should also be studying the thinking of those who totally avoided the sub prime securities that caused so much problems for so many very large financial institutions or who were in but got out in time to avoid fatal damages.

Those are often the people with the common sense that we should be using as the basis for the way forward.

Risk management programs need to have a deliberate risk learning function, where insights are developed from the firm’s losses and near misses as well as from others losses and near misses.

In this crisis, we should all seek to learn from those who were not enticed into the web of false knowledge about the riskiness of the sub prime securities.   One of the most interesting that I hear at the time when the markets were seizing up was that those who had escaped were too unsophisticated to have gotten into that market.

I spoke to one of those severely unsophisticated people on the buy side and he said that he never did spend too much time looking into the CDOs.  He said that he knew what the spreads were on straight mortgage backed securities.  And he had some idea of how many additional people were getting a slice in the creation of the CDOs.  And then he knew that the CDOs were promising higher yields for the same credit rating as the straight mortgage backed securities.   At that point, he was sure that something did not add up and he moved on to look at other things where the numbers did add up.  I guess he was just too unsophisticated to understand the stochastic calculus needed to explain how 2-1-1-1 = 3.

We need to learn that kind of unsophistication.

Black Swan Free World (10)

Black Swan Free World (9)

Black Swan Free World (8)

Black Swan Free World (7)

Black Swan Free World (6)

Black Swan Free World (5)

Black Swan Free World (4)

Black Swan Free World (3)

Black Swan Free World (2)

Black Swan Free World (1)

Custard Cream Risk – Compared to What???

September 26, 2009

It was recently revealed that the custard Cream is the most dangerous biscuit.

custard-cream-192b_684194e

But his illustrates the issue with stand alone risk analysis.  Compared to what?  Last spring, there was quite a bit of concern raised when it was reported that 18 people had died from Swine Flu.  That sounds VERY BAD.  But Compared to What?  Later stories revealed that seasonal flu is on the average responsible for 30,000 deaths in the US.  That breaks down to an average of 82 per day annually, or more during the flu season if you reflect the fact that there is little flu in the summer months.  No one was ever willing to say whether the 18 deaths were in addition to the 82 expected or if they were just a part of that total.

The chart below suggests that Swine flu is significantly less deadly than the seasonal flu.  However, what it fails to reveal is that Swine Flu is highly transmissable because there is very little immunity in the population.  So even with a very low fatality rate per infection, with a very high infection rate, expectations now are for more than twice as many deaths from the Swine Flu than from the seasonal flu.

disease_fatalities_550

For many years, being aware of the issue I tried to make a comparison whenever I presented a risk assessment.  Most commonly, I used a comparison to the risk in a common stock portfolio.  Was the risk I was assessing more or less risky than the stocks.  I would compare both the average return, the standard deviation of returns as well as the tail risk.  If appropriate, I would make that comparison for one year as well as for many years.

But I now realize that was not the best choice.  Experience in the past year reveals that many people did not really have a good idea of how risky the stock market is.  Many risk models would have pegged the 2008 37% drop in the S&P as a 1/250 year event or worse, even though there have now been similar levels of loss three times in the last 105 years on a calendar year basis and more if you look within calendar years.

spx-1825-2008-return

The chart above was made before the end of the year.  By the end of the year, 2008 fell back into the 30% to 40% return column.  But if your hypothesis had been that a loss that large was a 1/200 event, the likelihood of one occurrence in a 105 year period is only about 31%.  Much more likely to see none (60%).  Two occurrences only about 8% of the time.  Three or more, only about 1% of the time.  So it seems that a 1/200 return period hypothesis has about a 99% likelihood of being incorrect.  If you assume a return period of 1/50 years, that would make the three observations a 75th percentile event.

So that is a fundamental issue in communicating risk.  Is there really some risk that we really know – so that we can use it as a standard of comparison?

The article on Custard Creams was brought to my attention by Johann Meeke.  He says that he will continue to live dangerously with his biscuits.

Lessons from a Bull Market that Never Happened

September 22, 2009

This is the 10 year anniversary of the publication of the book Dow 36000. Right now, the Dow is actually below the level of the Dow of 10 years ago.

Bret Arends writes about the lessons that two market crashes might have brought to investors in the Wall Street Journal.

Here are some thoughts on his seven lessons from the point of view of a risk manager, rather than an investor.

1.  Don’t forget dividends

Dividends are the hard cash part of stock returns.  As a risk managers, we need to keep in mind the difference between the real hard cash elements of the risks that we evaluate as opposed to the models and market values.

2.  Watch Out for Inflation

Inflation creates two major concerns for a risk manager.  The first is of course the concern of whether you have taken rising costs into account properly in the evaluation of multi period risks.  The second goes the other direction.  Because of inflation, the over conservative risk manager is a danger to his organization because she might just keep the business from growing enough to keep up with inflation.  A constant cycle of cost cutting to keep costs in line is not a viable long term strategy for a company.

3.  Don’t Overestimate Long Term Stock Returns.

The risk manager needs to keep reminding management of things like this.  Once someone pointed out that long term stock market average returns, even if you got them right, were misleading anyway because some part of that long run average was built up in a period when PE grew to historical highs.  So te starting point matters.  The same logic will apply to other financial series.  The starting point matters.

4.  Volatility Matters

You have to live through the short term to get to the long term.  The fact that your firm can afford the volatility does not mean that the board will keep the same management through what seems to them to be excessive volatility.  It is only the regulators who are focused on ruin only.  Watch your volatility.  Have conversations with your board about volatility.  Understand their volatility tolerance, both on a relative and on an absolute basis.

5.  Price Matters.

Risk managers need to focus both on controlling losses and on optimizing returns on risk.  So the prices of your risks does matter.  Some would argue that you only need to get a better return for risk that the market you are in (i.e. that risk reward is purely relative to the market), but just like volatility, the risk manager needs to understand the degree to which her board cares about absolute return and how much they care about relative return.

6.  Don’t Hurry.

Even more than investing, risk management needs careful thought.  That is why risk management is so very unlikely in a bank trading area where there is tremendous pressure to keep up with the frenetic pace of the trading desks.  If you are a risk manager in any other situation, you need to learn to insist on being given enough time to get your analysis correct.  If you are that risk manager on the trading desk, that is when you must have that authority to unwind things that turn out, when you take the time, after the fact, to be much worse than advertized by the trader.

7.  Don’t Forget Your Lifeboats.

The first thing that a risk manager needs to know is the exact situations where his firm will need a life boat.  Then he has to make sure that there are enough lifeboats and finally she must carefully watch for distant signs that the storm that will swamp the ship is on the horizon.  A firm that wants to survive for the long term will give its risk manager some leeway for false alarms, so that they are sure to be ready for the real thing.

Black Swan Free World (1)

September 20, 2009

On April 7 2009, the Financial Times published an article written by Nasim Taleb called Ten Principles for a Black Swan Free World. Let’s look at them one at a time…

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

It does seem safer to that fragile things break when they are small.  Unfortunately, what seems to have happened was that big things were permitted to become fragile.  So large things need to be encouraged to avoid becoming fragile.  It is hard to imagine why such encouragement might be needed.  For something to be large, it is usually very valuable. (Unless it is a US auto manufacturer)  And most sane people work very hard to protect their valuable possessions.  And most of the people who are engaged to run large firms are sane people who would be expected to avoid fragility as well.

So one explanation that fits the facts is that almost everyone did not know that the large firms were fragile.

Which leads to the third sentence.  The easy conclusion is that the risks of the big banks were hidden.  Some they hid themselves – such as all of the off balance sheet risks.  Other risks was hidden even from them.

And fortune favors those with hidden risks because they will hold capital based upon the visible risks and report profits from the actual risks.

So how do we solve the riddle? How do we make sure that large organizations do not become fragile?

The only sensible answer seems to be that there needs to be better risk assessment, probably independent reliable risk assessment.

And because of the extreme complexity of the larger firms, the resources applied to this independent assessment need to be quite substantial.

Time will be required for a thorough risk assessment.  It is unlikely that a good job could be done in time for a financial statement, unless the independent assessors are working inside the institutions with full knowledge of positions at all times.

The second sentence suggests that the risk assessments should have a negative size bias- the larger the firm the more risk would be assumed.  There seems to be some talk in that direction from the regulators.  But the thing that will put that to an abrupt end will be if one or more of the countries with major international banks fails to adopt the same sort of anti-size bias, tilting competition in the favor of their banks.

What can a risk manager take from this?  For assessing investment risk, it may make sense for risk models to take a sector, rather than an index or ratings approach to looking at investment risk.  The financial sector tends to lead the real economy in timing and severity of downturns.  More robust modeling may reveal better strategies for investing that reflect the real risks in financial firms.

And finally, the risk manager should really question whether it ever makes sense to invest in financials unless their risk disclosures become much, much better.  There was really no hint to investors that the large banks had built up so much risk.  Why, from a risk management point of view, does it make any sense to make an investment that you cannot find out the nature or extent of the underlying risks or any usable information about when that risk materially changes.

Black Swan Free World (10)

Black Swan Free World (9)

Black Swan Free World (8)

Black Swan Free World (7)

Black Swan Free World (6)

Black Swan Free World (5)

Black Swan Free World (4)

Black Swan Free World (3)

Black Swan Free World (2)

Animal Spirits Eating Green Shoots

September 4, 2009

Guest Post from David Merkel

http://alephblog.com/2009/09/01/animal-spririts-eating-green-shoots/

I have never liked Keynes concept of “animal spirits.” (I reread that piece, and though it is long, I think it is worth another read.  I try not to say that about my own stuff too often.)  Businessmen are generally rational, and take opportunities when they see them.  As for those that invest in the stock market, perhaps the opposite is true — panicking near bottoms, and buying near tops.

Most businessmen are risk-averse.  They do what they can to avoid insolvency.  But debt capital is cheap during the boom phase of an economic cycle, and businessmen load up on it then.  During the bear phase of the cycle, overly indebted businessmen pull in their horns and try to survive.  At bottoms, deals are too attractive for businessmen with spare cash to ignore — businessmen are rational, and seek deals that offer profitability with reasonable probability.

Unlike this article, I’m not convinced that the news does that much to affect behavior.  Movements in asset values are self-reinforcing not because of crowd opinion, but because of the accumulation and decumulation of debt and other financial claims.  As businessmen get closer to insolvency, they trim activity.  As their financial constraints get looser, they are willing to consider more investments with free cash.

As for the current situation, I am less confident of the “green shoots.”  Yes, inventory decumulation has slowed down.  So has the increase in unemployment, maybe.  Yes, financing rates have fallen.  We still face a situation where China is force feeding loans for non-economic reasons into its economy, and where the financial sector of the US is still weak due to commercial real estate loans, bank loans to corporations, and weak financial entities propped up by the US government.  Even residential real estate is not done, because of the number of properties that are inverted, and the increase in unemployment, which I think is likely to get worse.

Applications: I think it is more likely than not that there will be another crisis with the banks, and another round of monetary rescue from the government.  I also think that many speculative names like AIG have overshot, and the advantage now rests with the shorts for a little while.  Real money selling is overcoming day traders.

Be cautious in this environment.  After I put out my nine-year equity management track record, the next project is to dig deeper in the risks in my own portfolio, and make some changes.

Disclosure

This post is produced by David Merkel CFA, a registered representative of Finacorp Securities as an outside business activity. As such, Finacorp Securities does not review or approve materials presented herein. By viewing or participating in discussion on this blog, you understand that the opinions expressed within do not reflect the opinions or recommendations of Finacorp Securities, but are the opinions of the author and individual participants. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security or other instrument. Before investing, consider your investment objectives, risks, charges and expenses. Any purchase or sale activity in any securities instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Finacorp Securities is a member FINRA and SIPC.


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