The fun of covered bets

It is the period in which quarterly results of all kind are published. We have seen everything from enormous losses to amazing profits. In this moment of wealth redistribution I am having a strange feeling about too large profits. Why are people investing that much these days, why keep trading volumes going up every day if there is so much confusion in the market? Partly responsible is financial media who is not trying to make investors be more cautious. But by reading how Morgan Stanley made its profits I understood that they are risking a lot with the money the manage, so if it goes, either well or bad, it goes big time. However, this is not exactly what newspapers are writing about...

Reuters for example writes, as many newspapers, about the bank's involvement in risky trading operations, but does not bother to explain what pushes Morgan Stanley to do so. Instead a large part of the article is focusing on comparison with its 'chief rival' Goldman Sachs. The way this article is putting the news makes it look like these two investment banks are racing for the largest bonus pools and value-at-risk ratios (which for both are really high at 95%). This article gives the reader a lot of information, interviews with analysts and even the CFO, tons of certainly accurate numbers and also a good picture where and how Morgan Stanley positioned itself in the market and among its rivals. But it does not give the background I am looking for.

So I continued reading in on Bloomberg. They are obviously starting off with some numbers and ratios that support the title saying that the bank is beating the estimates. Typically for Bloomberg also surveys made among analysts about the estimates are included. This kind of information based on quantitative research is something that in my opinion looks really good in a financial article, especially nowadays. However, after interviews with the CEO, the CFO, analysts, portfolio managers and the comparison with major rivals Goldman Sachs and JP Morgan Chase as well as paragraphs about book value and fixed income, there was no more space for interesting background. My curiosity to find an answer about the WHY? of all this led me to....

....the Wall Street Journal. This article is much more focused on Morgan Stanley itself and gives a detailed overview of the development of the bank's shares trading at the New York stock exchange. It also includes comparison with the results form previous quarters this year which provide the reader with a good understanding of what happened. However, not with a why!! After useless reading through more articles in The Financial Times, The New York Times, BBC and the Guardian I decided to think about it and find an answer myself:

In the race for the highest profits and ROIs banks are looking for the riskiest trades they can get out there and do not really worry about a thing. Probably this is because in the back of there heads they know that if anything goes wrong, the FED will back all their losses and give their trading desks some more billions until they are healthy again. Isn't it beautiful to be too big to fail?

Sources:
http://www.reuters.com/article/BROKER/idUSN2143290720091021?sp=true
http://bloomberg.com/apps/news?pid=20601087&sid=adpXZLj_1P.U
http://online.wsj.com/article/SB125612022489198637.html#articleTabs%3Darticle

Highest EURO / $ ratio since 2008

Today the dollar fell through $ 1.50 against the euro for the first time in 14 months. Since over the last few years this round number has developed to a sort of benchmark, today’s relationship between these currencies was a big event in financial media and formed dramatic headlines in many newspapers. After rather neutral reports on third quarter results from last week, almost all newspapers are now using a language full of temper and aggression again.

Among several articles I read about this topic, by far the best one was in the Economist. A clear title followed by a short overview about what happened during the last year and statements about current situation a’ la ‘not necessarily a cause for concern’ show the reader immediately that this article is more about information and objectivity than about drama and exaggerations. The Economist defines the steadily decreasing dollar over the last year as a consequence of risk aversion which is not accompanied by a sharp rise in bond yields since the FED has been buying a lot of the year’s debt issuance. And in the outlook at the end of the reader can find more interesting information: ‘A country heavily in debt to foreigners (..) is creating vast amounts of additional currency. Yet it is allowed to get away with very low interest rates. Eventually such an arrangement must surely break down.’ In my opinion an excellent article and more like a report, the only thing missing are interviews.

As already expected after reading the title, the article in the Wall Street Journal is trying to attract readers by dramatising the given facts. Formulations like ‘impact on nascent recovery’and ‘markets have largely ignored the rhetoric’ are not what I am looking for in a newspaper. From my point of view this in language that can be used in blogs or commercials but is certainly not adequate in a source of information. However, the dollar’s influence on stock prices as well as the interrelation between British pound, euro and dollar is well explained. There can be found interviews with different people ranging from analysts to CEOs.

Definitely the most exaggerated article was in today’s Financial Times. When writing about the current exchange rates they say that it would hit ‘the recovery in the euro zone at its most fragile juncture’ and that ‘the pain (!) will get stronger’. They even talk about a ‘disaster in European industry’ and an increasing unease among politicians. The article does give the least information and is the most dramatic one too read. A little bit of panic is certainly the natural reaction for many readers.

….which is something I do not really understand. Actually this was predictable after the Fed lowered interest rates to practically nothing and threw loads and loads of cash into the economy. The reason is because these actions expand the credit market but at the same time it causes adverse effects to the dollar. A basic knowledge of economics is enough to understand that it is not possible to have a credit expansion and a strong dollar. You can either get one or the other. The main reason for this year’s weak dollar is that people began pulling their assets from the US when markets started going crazy. These days it would be better for the average reader to look at a standard ECO 101 book instead of newspapers.

Sources:

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14686307

http://online.wsj.com/article/SB10001424052748704597704574486631968841004.html#articleTabs_comments%26articleTabs%3Darticle
http://www.ft.com/cms/s/0/c5d3d652-be49-11de-9195-00144feab49a.html
http://www.japanfocus.org/data/US_Dollar.jpg

The one billion dollar surprise

Everything just seemed so nice during recent weeks: after a beautiful trend of rehiring people in large companies and banks, the stock market was constantly increasing and precious metal prices skyrocketed. Now however, the third quarter results of several financial institutions where published. On top of the list is the Bank of America with the tremendous loss of 1 billion dollars. Share prices dropped by 4.25% in the first 10 minutes after the announcement - just as if nobody could have predicted it. Well, how could you have when looking at the headlines during the last weeks? Selling immediately was today's reaction of numerous, unprofessional investors. They were waiting for yet another boost of profits while sitting on a big pile of shares but instead experienced a bad surprise.

To blame is in part financial media that spread the believe that everything was going well and a kind of 'the-earlier-you-buy-the-more-you-take-home'-philosophy. So people were buying, possibly before the results got published, especially after the announcement of an over 3 billion dollar profit made by Goldman Sachs two days ago. However investment banks are not the same as commercial banks. Some people understood how financial markets work and knew that in this financial and economic environment no commercial bank could have possibly made a profit. They thus wisely sold yesterday already. The days or week before the announcement of Bank of America's results a lot of trading was going on, and a lot of controversies about what will happen. This can been seen when looking at the stock charts in the Morning star: an almost unchanged share price but much larger trading volumes compared to other days.

Now several different articles from newspapers like the Wall Street Journal, Reuters and the Financial Times can all be put in the same box. What I believe to be important when analysing this week's financial media is to note that they all give the same numbers, facts, statements by Bank of America's CEO - Kenneth Lewis - and don't use any particularly subjective or critical language. There is nothing that really differentiates these rather neutral and objective articles. The one published by Reuters however was a little more detailed then the others, included 'credit worries' subheading with a forecast and is thus considered to be the most useful for an interested reader.

As predicted already in my last week's analysis, people have to be informed well in order to be calm and thus able to make reasonable decisions. In calm times investors tend to do the same things and thus stabilize the market. The speculation in different directions combined with the large trading volumes during the last days as well as the degree of difference among financial news ranging from billions of profit to billions of loss are very likely to generate volatility. In this period of uncertainty in the market with nobody (!), not even the big players, being really sure about anything, it is better for investors to be cautious. Newspapers should have this kind of readers' reaction as a goal in order to avoid further disasters. It is now important to tell people that there might be more losses for banks to come: commercial real estate going down and thus affecting the banks' assets, cash withdrawals from its accounts that have been made for future loan losses tied to credit cards and nobody caring about the bank's reserves instead etc; these are all facts forming the perfect storm to hit banks hard. They should also not forget to mention record deficits of companies and businesses, record borrowing and the plunging dollar. These are only suggestions that are based on my personal opinion and that I am hoping to see in financial media. But for now: the recession remains over.

Sources:
http://quote.morningstar.com/Stock/s.aspx?t=BAC
http://online.wsj.com/article/SB125568868735889619.html?mod=article-outset-box#articleTabs%3Darticle
http://www.reuters.com/article/newsOne/idUSTRE59F1TJ20091016?pageNumber=1&virtualBrandChannel=11618
http://www.ft.com/cms/s/0/263220e0-ba43-11de-9dd7-00144feab49a.html

Gold price records vs. weak dollar - what is the real news?

Dear Reader, please try to think about the impact the currently weak US dollar can have on the country's imports and thus on its trade balance. It is already horrendous and shows a constantly increasing US national debt of almost 12.000 bn US dollars. Instead of showing in an open and honest way what is going on in the market, the newspapers keep on cheering: cheering over better-than-expected corporate earnings due to layoffs; Cheering housing and car sales due to more government debt etc. This causes the vast majority of bad news to actually look like good ones, because the bad part is made unimportant and put in the background if mentioned at all. But how can a weak currency be transformed into a good headline? Just start with the consequence of beautifully rising gold prices and the readers are happy! Let's look at some examples taken from different newspapers:

On Friday CNBC published a price forecast by JP Morgan for gold and said that 'new record highs for gold (...) were likely in 2010'. This article defines gold as the 'overwhelming beneficiary of investment allocations to commodities all year'. The bank already describes the next year as a year of consolidation in the base of metals, stating only in the second last paragraph that investors may be paying too high prices for gold as an inflation hedge. This immediately tells the attentive reader, who knows that in times of uncertainty in the market gold is a secure investment, that there is, as he expected, not everything going well, but without specifying where the exact problem is. This newspaper obviously decided to focus on the good part of the whole story.

The Economist uses a slightly different approach to present the news. It, typical for this magazine, starts off with a short headline that should attract the reader's attention since it contains strong words and does not immediatly make clear what the news is about. This article explains, why factors other than the weak dollar were not the reason for the current boost of the gold prices. According to the Economist, it has been seen already that risk-averse investors tend to buy gold when the dollar falls. At the end of the article there is even a forecast to be found, saying that prices are likely to increase further. However, also this article begins with the fascination of gold from an investors' point of view followed by detailed information about the new record prices. This article gives the best overview combined with background information and I would thus recommend this article to other interested readers.

Even though the article analyzed in the Financial Times refers to different sources including brokerage MF Global and large metal producers, it is still focusing too much on the actual record price of gold, generated profitability and successes acchieved at the London Metal Exchange. This waive of great numbers, statistics and forecasts does not allow a detailed insight in the less brilliant consequences for the world's trade and economy. It is the only article that talkes about the copper, platinum, silver etc. market. With comments like 'unexpected profits' and a paragraph about the fact that materials priced in the US currency are cheap for countries holding alternative currencies, this article sounds quite pushy to me; it almost seems that the FT would get commission for new investors introduced to the commodity market, which from my point of view does not look very adequate.

When trying to not only read through random articles, but thinking about their content and way of putting information, it became apparent to me, that financial media is trying to calm everybody who has a direct or even inderect interest in finance. In good times everything has to be made worse, sometimes even by exagerating, in order to become a great headline. Now, in times of financial crisis (yes, it is not over yet), good news is what people are interested in. For the sake of clarity, I am not saying that attempts to calm down the whole situation are a bad idea, but it depends on how it is done; a good headline will only be good until the bad parts attached to it become obvious to everybody. Then, as soon as there are too many contradictions and different opinions about a topic, disturbance and incertitude are created which lead to wrong behaviour, misinterpretation and bad investments. For this reason I believe that the process of tranquilizing is only sustainable if objectiveness, honesty and straightforwardness are offered in financial media. In the end it is the readers' responsibility to judge the news, decide what to believe in and make decisions as a consequence. But bear in mind: all that glitters is not gold!

Sources:

http://www.usdebtclock.org/

http://www.cnbc.com/id/33239364

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14587601

http://www.ft.com/cms/s/0/88d2fe0e-b3f9-11de-98ec-00144feab49a.html

The IMF about World Economy

It seems to be a trend to make readers of financial newspapers believe that the deepest recession since the second world war, the current economic crisis, is over and markets are upwards-sloping. Optimistic titles can be found everywhere in the media and the word 'economy' is mostly accompanied by positive adjectives like 'strong', 'expanding' or 'recovering'. The newspaper articles in the Financial Times, Reuters and on BBC News are just some examples. Unfortunately the good news are rather limited and can be expressed in a few words in the first paragraphs, just like I expected.

The FT, after saying in the title that the world economy is recovering, states that the forecasts for 2009 and 2010 of world economic output have been revised higher. Then though, it refers to the IMF's World Economic Outlook and the challenges that are to be resolved: the weaknesses in the global banking system and the 'persistent unwillingness of countries with large trade surpluses to boost domestic demand'. Recovery is expected to be weak by historical standards and the IMF is no more optimistic about the medium-term outlook since global trade imbalances will be created. Furthermore the unemployment forecasts keep rising across developed economies. Towards the end of the article Axel Weber, the Bundesbank president, says that recommendations for Germany to 'reduce its surplus have no place on international discussions' and is thus confirming the unlikely realisation of a best case scenario.

Reuters is the most optimistic article of these examples and describes the 'stronger global economic rebound next year' with some positive, easy-and-quickly-to-read bullet points just under the title, followed by strong phrases from IMF's chief economist like 'recovery has started' and 'financial markets is healing'. This tranquilises the reader before reaching the paragraph that introduces the little problem of 'rebalancing the global growth' on which the 'strength of the world economy' depends. For this more domestic consumption in export driven counties like China and less spending in heavily importing countries like the United States would be needed. This obviously very difficult project is mentioned only briefly at the end of the article.

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Also BBC News is proudly telling the reader that the IMF forecasts the economy to be expanding and says that financial conditions have improved significantly already. It is the only article that published the words of somebody else than the IMF itself: the head of the ECB, Jean-Claude Trichet, talks about recovery strategies and stimulus packages. Furthermore it is also the only newspaper that dedicated half of the article to various recovery risks, talking about government intervention and the fact that banks are being forced to hold more cash in reserve.

After more than one year of continuing disasters, everybody with a direct or even indirect interest in finance is now looking out for positive things and big, optimistic headlines that give some kind of foothold in this chaotic environment. And this is exactly what several newspapers want to offer the reader. They do it by making a big thing out of a rather small but positive fact and put the bad bits in the very end, where the reader is probably not even concentrating anymore or not even reading anymore at all. In general I do not really trust any kind of forecasts, especially nowadays. I am being objective when saying that incomes keep decreasing, unemployment is going up and foreclosures and bankruptcies are soaring. And yet every foreign and domestic forecast is predicting better times. The disconnect is obvious. People need good jobs, higher income, real prospects. Instead they are fed one ludicrous forecast after another. Lost your job? Don't worry....eat this yummy forecast!!!!!

sources:

http://www.ft.com/cms/s/0/ceeff158-ade6-11de-87e7-00144feabdc0.html
http://www.reuters.com/article/europeanCurrencyNews/idUSSGN00219520091001
http://news.bbc.co.uk/1/hi/business/8284217.stm

Introduction

Dear Reader,

Fall 2009. More than a year has gone by since the start of the largest crisis in economic history and we are still witnessing a period of unseen financial turbulence. When trying to stay up to date the reader can easily access a jungle of financial news with numerous dates, numbers, statements and forecasts that are published every day. The information in the different sources is similar, no matter from where it is taken, but the "packaging" of these news changes vastly. This is influencing the reader's opinion and his way of thinking and arguing about the current situation in the market. Why are there to be found different ways of putting the same news? How is the population being affected and manipulated? Who wants to be targeted with theses different methods?

On this blog some examples of information taken from different financial sources will be commented and the growing importance of financial media and communications in today's situation of insecurity and doubt will be discussed.

Enjoy!