The Big Picture

Asset Encumbrance, Financial Reform and the Demand for Collateral Assets
Liberals Skewer Obama Administration
10 Tuesday PM Reads
How Investors Spread Their Housing Bets
Home Prices See Strong Gains in Q1 2013
10 Tuesday AM Reads
Proposal for New Hedge Fund Fee Structure: 1% + 33% of Alpha
Monday Morning Melt Up (Tuesday edition!)
Nikola Tesla Pitching Silicon Valley VCs

Asset Encumbrance, Financial Reform and the Demand for Collateral Assets

Posted: 29 May 2013 02:00 AM PDT

Source: Bank of International Settlements

Posted: 28 May 2013 10:30 PM PDT

Liberals are starting to wake up to the fact that the Obama administration is betraying the principals of justice and economic fairness.

Here's the front page of the Huffington Post tonight (each phrase at the website is linked to a separate article exposing Holder's corruption and incompetence):

Jon Stewart lambasted the Obama administration for failing to walk its talk … and having awful priorities:

And Bill Clinton's Secretary of Labor – Robert Reich – writes:

According to the New York Times, a bill that's already moved through the House Financial Services Committee, allowing more of the very kind of derivatives trading (bets on bets) that got the Street into trouble, was drafted by Citigroup – whose recommended language was copied nearly word for word in 70 lines of the 85-line bill.

Where were House Democrats? Right behind it. Rep. Sean Patrick Maloney, Democrat of New York, a major recipient of the Street's political largesse, co-sponsored it. Most of the Democrats on the Committee, also receiving generous donations from the big banks, voted for it. Rep. Jim Himes, another proponent of the bill and a former banker at Goldman Sachs, now leads the Democrat's fund-raising effort in the House.

***

It's not entirely coincidental that the Obama Administration never put tough conditions on banks receiving bailout money, never prosecuted a single top Wall Street executive for the excesses that led to the near meltdown, and still refuses to support a tiny tax on financial transactions that would bring in tens of billions of dollars as well as discourage program trading.

Democrats can't be trusted to control Wall Street. If there were ever an issue ripe for a third party, the Street would be it.

10 Tuesday PM Reads

Posted: 28 May 2013 02:30 PM PDT

My afternoon train reading:

• Record Cash Sent to Balanced Funds (Bloomberg)
• Flippers Ride Housing Wave–Again (Developments)
• Dear Dumb VC (What I Learned Building) see also To disrupt an industry, it's best to know it well (pandodaily)
• 5 deadly sins on Wall Street (MarketWatch)
• Too-Big-to-Fail Myths, Goldman Sachs Edition (The Ticker)
• Fewer Americans Identify as Economic Conservatives in 2013 (Gallup)
• United States lags Europe on paid vacation time (Washington Post)
• Today’s WTF Tech headline: Apple and Samsung pay the same global tax rate (Venture Beat)
• How Beetle Overcame Nazi Past to Become Americans' Car (Echoes)
• Advice on Life and Creative Integrity from Calvin and Hobbes Creator Bill Watterson (Brain Pickings)

What are you reading?

Consumer Confidence Makes New Bull Market High

Source: Bespoke

How Investors Spread Their Housing Bets

Posted: 28 May 2013 11:30 AM PDT

Click to enlarge

Source: WSJ

Home Prices See Strong Gains in Q1 2013

Posted: 28 May 2013 09:00 AM PDT

Click to enlarge

S&P/Case-Shiller1 Home Price Indices (data through March 2013) shows:

• All three composites posted double-digit annual increases.
• The 10-City and 20-City Composites increased by 10.3% and 10.9% in the year to March with the national composite rising by 10.2% in the last four quarters.
• All 20 cities posted positive year-over-year growth.
• In the first quarter of 2013, the national composite rose by 1.2%. On a monthly basis, the 10- and 20-City
Composites both posted increases of 1.4%.
• Charlotte, Los Angeles, Portland, Seattle and Tampa were the five MSAs to record their largest month-over-month gains in over seven years.

More charts below

~~~

Source:
Dave Guarino and David Blitzer
www.spindices.com
S&P Dow Jones Indices, May 28, 2013

10 Tuesday AM Reads

Posted: 28 May 2013 07:00 AM PDT

My Tuesday morning reads:

• So, About That Selling-in-May Thing… (Moneybeat)
• Inflation, deflation and QE (Coppola Comment)
• Financial innovation for once works for the investor (Abnormal Returns)
• Gold Bets Cut to Five-Year Low as Prices Whipsawed (Bloomberg)
• The investment committee doctor (Research Puzzle)
• Ten Brands That Will Disappear in 2014 (24/7 Wall St)
• Globalisation isn’t just about profits. It’s about taxes too (theguardian)
• What is your oldest, most outdated device? (Yahoo) see also The Weird Stuff Warehouse is where old tech goes to retire (arstechnica)
• How To Set Goals Without Screwing It Up, Part 1 (IttyBiz)
• Ricky Gervais’s GQ Interview (GQ)

What are you reading?

QE & Bond Yields, Japanese Edition

Source: Dr. Ed’s Blog

Proposal for New Hedge Fund Fee Structure: 1% + 33% of Alpha

Posted: 28 May 2013 04:15 AM PDT

One of my pet peeves is the way that insiders — whether corporate CEOs, hedge fund managers, or elected politicos — capture compensation (or credit) for normal cyclical gains they had little or nothing to do with.

This is the approach favored by the Crony Capitalists — those people pretending to be free market participants, and who merely pretend to be creating value. They are taking credit for structural successes that would have occurred with or without them. What they are actually doing is capturing value, not creating it — and then transferring it from its true owners (shareholders/investors) to themselves.

This is wrong; it is legalized theft.

If you want to see a good example of how CEOs transfer shareholder wealth to themselves, a good place to start is Roger Lowenstein’s 2004 book, Origins of the Crash: The Great Bubble and Its Undoing. The section on CEO compensation is astounding; these guys were essentially getting wildly overcompensated for being CEOs during a bull market. The prime example was the CEO of Heinz, who gave himself (with the tacit approval of his Board of ~~Crony~~ Directors) a $90 million bonus. And this was back in the early 1990s, when $90 million was real money.

Here is an idea for you corporate governance types: How about a compensation scheme based on genuine Alpha generation?

For corporate executives, this means their bonuses are based on something more than mere stock price irrespective of what the market and their sector is doing; I would suggest a combination of revenue gains (total sales) + total dollar profit growth (not a mere slashing of costs) + outperformance of stock relative to both the broad benchmark (S&P500/400/600 as appropriate) PLUS out-performance relative to their own sector.

In other words, stop paying excess bonuses for having the good fortune to be CEO during a bull market.

Which brings us to hedge funds. As we discussed over the weekend (A hedge fund for you and me? The best move is to take a pass), we discussed how much of the investing profits were captured by fund managers for themselves. It is a similar situation in that they are taking performance pay for Beta, not Alpha.

A better fee structure? Replace 2% + 20% current structure with a 1% + 33% of Alpha.

How would that work? Well, the 2% fee gets cut in half, for the simple reason that 2% fee on million dollars plus is excessive. But the real change is when it comes to the performance fee/bonus. That 20% of gains as of late has not been performance, its been only Beta. If their benchmark is up 20% and the manager is up 15%, there is precisely zero Alpha generated. So why should the manager get a bonus or a performance fee? They under-performed.

Instead, I propose a 33% of Alpha as a performance fee. The manager gets a bonus performance fee ONLY IF THEY CREATE EXCESS ALPHA OVER BETA — only on the percentage of gains over the benchmark.

Lets use a simple example: Two hedge fund managers run funds. Assume the market (their benchmark is the S&P500) is up 10%. Manager 1 (Fund ABC) is up 20%, while manager 2 (Fund XYZ) is up 10%. We will use a million dollar fund as a nice round number.

Fund ABC: FUND +20%, SPX +10%

Fund ABC sees the manager handily out performing the market. The fee comparisons are below.

Example 1:

2 & 20: $20,000 + $40,000
(Twenty thousand dollars is the two percent management fee; forty thousand is twenty percent of the two hundred thousand dollar gain. Half of which is Beta, half of which is truly Alpha.

1 & 33: $10,000 + $33,000
(ten thousand dollars is the one percent management fee; thirty-three thousand is thirty percent of the one hundred thousand dollar Alpha gain.

In our example of the out-performing manager, 2&20 generates a 6% fee versus 4.3% fee for the 1&33 structure.

Example 2:
Fund XYZ: FUND +10%, SPX +20%

Fund XYZ sees the manager under perform the market. The fee comparison is:

2 & 20: $20,000 + $20,000
(Twenty thousand dollars is the two percent management fee; twenty thousand dollars is twenty percent of the hundred thousand dollar gain.

1 & 33: $10,000 + $0
(ten thousand dollars is the one percent management fee; zero dollars is thirty three percent of the gain above the markets.

In our example of the under-performing manager, 2&20 generates a 4% fee versus 1% fee for the 1&33 structure.

In both examples, managers are being wildly overpaid for Beta; in the other, they are receiving a bonus based in part on Alpha generation. Hence, their compensation is more aligned with the client’s.

Note that fund manager of ABC makes less under 1 +33 when they generate Alpha — $43k versus $60k. But look at the enormous savings that come from an underperforming manager: Instead of making $60k for partial Beta generation, he makes $10k — a quarter of the fee generation for partial Beta.

I don’t expect fund managers will rush out to embrace this model — unless the institutional players, trustees, and endowments demand it.

Monday Morning Melt Up (Tuesday edition!)

Posted: 28 May 2013 03:00 AM PDT

Green on the screen as global markets recover and then some from last week’s Japanese mini-crash. 3 day weekend in US and UK show serious upward bias. Yen is weakening, dollar strengthening. Asian markets bouncing after a 5 day losing streak.

~~~

Yes, today is Tuesday. The people responsible for calling today Monday have been sacked . . .

Nikola Tesla Pitching Silicon Valley VCs

Posted: 28 May 2013 02:00 AM PDT

Here is what would have happened if Nikola Tesla had to pitch some Silicon Valley venture capitalists to get started:

hat tip boingboing