Ex-ecutive pay

Ben Walsh
Apr 17, 2014 21:43 UTC

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In January, fifteen months after he joined Yahoo, chief operating officer Henrique de Castro was firedSEC filings show that the company paid him $58 million to walk out the door, or around $130,000 per day of service, weekends included.

In a move unlikely to mollify critics, Yahoo’s filing showed that had the company’s stock not risen since de Castro joined the company, he would have exited with a mere $17 million. Bloomberg Businessweek’s Joshua Brustein says that de Castro “got fired at the perfect time”. The company’s shares rose more than two and a half times while he was there. All of that rise is attributable to the rise in the value of Yahoo’s stake in Alibaba.

Golden parachutes offend even Vladimir Putin’s corporate governance sensibilities. The good news is that, despite de Castro’s payout and former Time Warner Cable CEO Robert Marcus’ $80 million parachute, severance packages are on the decline, at least by one measure. Fortune’s Claire Zillman reports that a Thomson Reuters Journal of Compensation and Benefits study found that from 2007 to 2011, the number of randomly selected S&P 500 companies that paid three times salary in severance dropped from 58% to 38%. The number of companies paying two times salary as severance rose from 9% to 20% over the same time period.

The Washington Post’s Jena McGregor reports that: “the professional services firm Alvarez & Marsal found that among the largest 200 US public companies, the value of golden parachute benefits have remained basically flat, going from $30.2 million in 2011 to $29.9 million in 2013.”

Summarizing a study he co-authored, Harvard Law’s Lucian Bebchuk writes that companies where executives had severance packages were more likely to receive acquisitions offers and be acquired. Matt Levine breaks out the data: golden parachutes “increase a company’s 1-year chance of being acquired from ~4% to ~5.3%… increase shareholders’ expected gains from being acquired… They do not, however, increase shareholders’ expected wealth generally. Parachute-having stocks underperform non-parachute stocks by ~4.35% a year”.

Looking at the same study, James Kwak thinks there’s some adverse selection at work:

Companies are more likely to grant golden parachutes to their CEOs if they have: (a) CEOs who care more about maximizing their personal wealth than about their companies; (b) boards who are more concerned about doing favors for the CEO than about doing what’s right for the company; or (c) both. Those are not the kinds of companies you want to be investing in.

– Ben Walsh

On to today’s links:

“The evidence shows that prosperity and gender equality go together” - Chris Dillow

Before he sends it to the government, Steve Cohen can not-insider-trade with his $1.2 billion settlement - DealBook

How Americans die - Matthew Klein
Goldman’s shrinking FICC - Ben Walsh

The re-segregation of American schools - Nikole Hannah-Jones

Never interact with a brand on the internet - NYT

Empiricism is not politically neutral - Jonathan Chait

Crisis Retro
The government’s P&L on the Fannie/Freddie bailout is somewhere between –$19 billion and +$181 billion - Wonkblog

“VC for the people” is an argument for universal basic income - Steve Waldman

A $225,000 salary for Paul Krugman is more than fair - Reihan Salam

Niche Markets
The resurgent market for skywriting, thanks to Instagram - The Atlantic

Please Update Your Records
25- to 44-year-olds show remarkable judgement, don’t want to live in the suburbs - NYT

The world’s dumbest idea: Taxing solar energy - John Aziz

Chart of the day: Goldman’s shrinking FICC

Ben Walsh
Apr 17, 2014 16:00 UTC

Goldman Sachs released its first-quarter earnings this morning. Reuters’ Lauren LaCapra reports that profit was down 11% compared to last year and revenue from fixed income, currency, and commodities (FICC) was down 11% compared to last year. LaCapra writes that “since 2009 – when markets flourished briefly in the aftermath of the financial crisis,” Goldman’s FICC business has been declining steadily as a portion of its overall revenue.

Quartz’s Mark DeCambre charts the post-crisis decline in FICC’s contribution to Goldman’s overall revenue. In the first quarter of 2014, FICC accounted for $2.85 billion, or 30%, of Goldman’s $9.33 billion in total revenue.


Addressing FICC’s performance on this morning’s earnings call, CFO Harvey Schwartz said, “we don’t look at it on a quarter by quarter basis. We look at it on a multi-quarter basis.” Different businesses within the unit will be up some quarters and others will be down, so, Schwartz said, “if you are going to be in these businesses, you really need diversification.”

Diversification may be helping to smooth out volatility in Goldman’s FICC revenue, but it’s smoothing out a decline. On the multi-quarter time-frame Schwartz referenced, FICC revenue seems to be idling at around 25-30% of total revenues.

MORNING BID – Google, IBM cloud market rebound

Apr 17, 2014 13:21 UTC

The markets have remained interesting this week as earnings season has ramped up, but the most interesting index remains the Nasdaq Composite.

The Nazz continues its upward swing following Tuesday’s volatile, deep plunge; it has now gained more than three percent in the brief period between the lows it hit Tuesday and the Wednesday close. That’s a pretty short period of time to see such a dramatic move in the index but doesn’t necessarily point to better tidings ahead. Bespoke Investment Group pointed out that when swings like this are usually seen – there have been 18 such occurrences since 2000 – it doesn’t bode well for the tech-heavy index.

On average, the decline following all of these types of days like Tuesday – where the market opens at least 0.1 percent higher, drops as much as 1.5 percent and then finishes in positive territory – is 2.84 percent in the week that followed. That’s not encouraging, but that’s kind of the way things go when the market sees bouts of volatility like this.

Notably, most of these volatile sessions are clustered around bad market environments – it happened several times in 2000 and 2001 before abating, only to return in 2008; so rough markets are generally when this kind of thing occurs. What’s undetermined now is how well the markets overall will do in a rebound attempt and whether it’s a Sisyphean pursuit at a time when many stocks are doomed for more pain.

Goldman Sachs doesn’t entirely think so, believing some stocks have plenty of room for upside after the momentum-driven selloff took down a lot of stocks heavily. They finger Illumina, Biogen, TD Ameritrade – as among those that could see relief rallies due to the kitchen-sink approach to investing that has driven stocks up, then down, all at once of late.

That may not translate to the entire market, though. Google and IBM results were lousy, with the kind of problems that bode ill for the rest of the market and not just to company-specific issues. Google saw a steep fall in mobile ad rates, while IBM blamed weak hardware sales for its lowest quarterly revenue in five years, as Reuters’ Alexei Oreskovic and Noel Randewich wrote recently.

An 11-percent drop in emerging markets including China, Brazil, Russia and India was partially to blame and that’s worrisome for tech names dependent on enterprise-spending, such as Oracle, Cisco, EMC and Hewlett-Packard. Looking further, these reports, should they continue to disappoint, will take the market’s renewed fervor and bury it. Robert Sluymer of RBC Capital Markets believes that the current technicals suggest nothing more than a ‘technical’ rebound that fizzles within a few days time.

And Scott Fullman, senior managing director and chief strategist at Increasing Alpha, who studies options activity, notes that with options expiration coming today that there are currently about the same percentage of calls and puts that look set to expire worthless – about 28,400 calls and 28,200 puts that have no bid are expiring. That means people are still collecting premiums, Fullman said, a sign they’re not really to stop trading them even this late in the one month cycle that marks expiration; they’re worried about volatility and using this to make a bit of money and also remain prepared against sudden market moves.

It speaks to wariness of more declines, and more earnings like Google and IBM will surely bring them.

The housing density is too damn low

Apr 16, 2014 21:11 UTC

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Your rent really is too damn high.

Kim-Mai Cutler has a long, detailed explainer on San Francisco’s real estate crisis inTechCrunch. To begin with, she says, there’s just not enough supply: “San Francisco has a roughly 35% homeownership rate. Then 172,000 units of the city’s 376,940 housing units are under rent control”, a number equal to a remarkable 75% of the city’s rental units. That doesn’t leave much for the rental market. As a result, any rents which can rise, will rise. (Marc Andreessen notes that tech has been driving up prices in the area for at least 30 years, and population boom cycles have been part of the city’s history since the Gold Rush.)

Tech companies keep creating jobs in San Francisco and Silicon Valley without building more housing to accommodate the extra workers. As computer programmers flood in to the existing housing stock, the working class is pushed out completely. A big part of this problem, says Ryan Avent, is San Francisco’s restrictive zoning requirements. The city’s longtime residents are very good at keeping new construction out of their backyard. “However altruistic they perceive their mission to be, the result is similar to what you’d get if fat cat industrialists lobbied the government to drive their competition out of business”, he writes.

While the tech industry (and San Francisco’s zoning laws) exacerbate the situation in California, it’s really part of a greater trend in urban housing affordability. Urban populations around the country, Cutler points out, have been rising since the 80’s. A report from the real estate website Zillow found that “nationally, renters are spending more of their income on rent than they have at any point in the past 30 years”, especially in urban centers. In quite a few cities, the average person has shot past the generally accepted 30% of income on rent guideline, and is now paying nearly 40% of what they make on housing.

Sheila Dewan at the NYT thinks that, even with new construction, things are unlikely to get better for the middle class. The rental market has bifurcated into affordable and luxury markets:

As long as there are plenty of upper-income renters looking for apartments, there is little incentive to build anything other than expensive units. As a result, there are in effect two separate rental markets that are so far apart in price that they have little impact on each other.

Matt Yglesias (who wrote the book on high rents) finds this argument lacking. “When you increase the number of units — even if the new units are very expensive — you’re making some kind of progress”, he says. Instead, the simple problem is construction of new units since the mid-aughts real estate boom hasn’t kept pace with population growth.

Bill McBride has the numbers. He finds that there should be an increase in multi-family (apartment) building completions in 2014, but the number is still below the number of buildings completed every year in the decade before the crisis. – Shane Ferro 

On to today’s links:

Primary Sources
Janet Yellen’s speech: there’s more slack in the labor market than the unemployment rate suggests - the Fed
Paul Krugman’s CUNY offer letter - Gawker

The US tax code fails the childless poor - The New Republic
A billion people could be pushed below the poverty line because of slowing global growth - FT

New Normal
Loads of student debt plus stagnant wages is a pretty good way to stall household formation - The New Republic

The remarkable productivity stagnation of the US construction sector - Cardiff Garcia

The dark side of UK wage growth: mass employment might be here to stay - Chris Dillow

Cutting unemployment benefits doesn’t help the people find jobs - Ben Casselman

Headline of the Day
“Goldman Sachs CEO Retains Sense of Childlike Wonder” - Jessica Pressler

Wonderful Screeds
“‘Whatever happened to good?’ asks the white man with graying hair, dad khakis and an alarmingly large face” - Matt Buchanan

Health Care
Health care providers are kind of considering a little bit of price transparency - Wonkblog

Just an FYI
Google reads all of your email - Ars Technica

Billionaire Whimsy
Mike Bloomberg: “I have earned my place in heaven. It’s not even close” - NYT

Coke is pushing the bad idea of stock-option pay to the extreme - Edward Hadas

Many happy returns

Ben Walsh
Apr 15, 2014 22:04 UTC

Happy tax day! Or, selfishly at least, it should be, given how little Americans pay in taxes.

Wonkblog’s Christopher Ingram looks at the rate people actually pay after credits and deductions. Even taking into account 2013’s tax hikes, effective US rates are near historical lows for pretty much everyone. The one slight exception is the top 1%. Their effective rate has returned to the mid-1990’s and early-1980’s level of about 35%, but is still below historic levels.

US taxes are also low relative to other developed countries. Matt Yglesias points out that the US has the third-lowest tax burden of OECD countries, measured by tax as a percent of GDP. Corporations, being people too, aren’t left out. In fact, they have things even better: an effective 2010 tax rate of 12.6%, Andrew Sorkin writes, thanks to myriad loopholes. Many pay no taxes at all.

Low taxes aren’t without their downsides. US taxes are, you are no doubt aware, annoyingly complicated, and they’re kept that way by the multi-million dollar lobbying efforts of a company that makes billions from your confusion. The IRS, Ezra Klein explains, already knows enough about you to do your taxes for you. But lobbying works,especially for businesses, so your taxes remain far more arduous than necessary. – Ben Walsh

On to today’s links:

Long Reads
San Francisco’s housing crisis, explained - Techcrunch

“When I am watching a movie I often think ‘why isn’t the Coase theorem holding here?’” - Tyler Cowen
A great discussion of Capital in the 21st Century with Piketty, Bob Solow, Betsey Stevenson, and more - EPI
Martin Wolf on Piketty: He doesn’t explain why inequality matters - FT
HFT and the social value of price discovery - Joe Stiglitz

“Flash Boys is the story of small furry creatures. Some of them are Canadian; one is vegetarian” - Moe Tkacik

EU Mess
Britain hits six straight months of disinflation - the Guardian

A tick-tock of Facebook’s acquisition of Oculus - Fortune
Google buys drone company to bring internet/surveillance to the world - Guardian

For people spurred by emotion, demonstrating that a charity is effective leads to fewer donations - SSRN

UK hedge fund manager pays $72,000 fine for 5-year train fare arbitrage - CNBC

Classic Bess
This Cinco de Mayo, Take A Bath With Warren Buffett - Dealbreaker

The great retirement shift

Apr 14, 2014 22:00 UTC

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Last year, Lydia DePillis gathered a group of charts from the Economic Policy Instituteon the rise of the 401(k) and the fall of the pension. In 1980, 38% of workers had pension plans. In 2008, just 20% did. Retirement saving is now predominantly individual, and reflects wider inequality trends. Since 1990, the retirement savings of the top-fifth income earners have increased more than 3.5 times, “while they’ve declined or risen only slightly for most everyone else”, DePillis wrote.

If you can’t rely on a pension, and have to take matters into your own hands, then you have to pay a lot of attention to fees. Matthew O’Brien shows how a 1.25% difference in fees between an actively managed fund and an index fund can make a six-figure difference in retirement funds.

Ron Lieber has an excellent overview of services for people who can’t necessarily afford a financial advisor. The idea is that if enough companies try to disrupt the market by setting fees below 0.5% of assets, the price for financial advice may come down across the board. Already Vanguard is disrupting itself: it’s replacing one product, with fees of 0.7%, with a replacement which charges just 0.3%.

Not everybody takes advice from the New York Times, however, and the Center for American Progress recommends that retirement plan fees should be transparent, to the point of creating a labeling system like the FDA does for food.

None of this will solve all the problems with individual retirement saving. There’s a whole host of behaviors that mean investors invariably see well below market returns. More profoundly still, as Steve Rattner says, young people, as a generation, simply aren’t saving enough on their own. The country as a whole needs to deal with the problem, he says, through “a radical restructuring of our retirement plans, including mandated savings”. He proposes something like Australia’s mandated savings program that automatically diverts 9% of workers’ pay to the country’s superannuation fund.

In a lengthy thought experiment on the pros and cons of forced savings, Megan McArdleconcludes that while there are really good arguments about forced savings on both sides, there is a larger problem: as people spend more time in school and live longer after the retirement age, it may simply not be possible to save enough during a person’s expected working years. — Shane Ferro and Ben Walsh

On to today’s links:

“High poverty rates for children in single mother families is a policy choice” - Matt Bruenig
The housing bust killed consumer spending - Atif Mian and Amir Sufi

“Eat when the food is passed”: why startups are taking millions they don’t need -DealBook

Small Victories
Citi earnings get better because fewer bad things happen - Reuters
Citi finds another, much smaller bit of fraud in its Mexican subsidiary - FT

Good Luck With That
Yahoo, with “zero cachet and no discernible way forward”, wants to make great TV -David Carr

Headline of the Day
Stock-Market Jitters Put Investors at Ease - Josh Brown

If politics makes us stupid, “then what’s the point of Vox?” - Will Wilkinson

HFT: a symbol that America is investing in the wrong infrastructure - Paul Krugman

Legal Arcana
The First Amendment lets companies keep quiet about blood diamonds - Matt Levine

Explanatory journalism

Ben Walsh
Apr 11, 2014 21:45 UTC

Something troubling is happening in the stock market. Not only are markets are down – the Nasdaq and the S&P 500 are down 3.1% and 2.6%, respectively, this week – but no one has come up with a convenient, compelling (and misleading) reason why. Never mind, says Matthew Klein, that US stocks are up 30% since the start of 2013. We need to know why they are down this week, as Barry Ritholz writes, because we crave meaning in a random world.

Perhaps it’s all tech stocks’ fault. They have, FT Alphaville’s Dan McCrum drolly commented, “become a little bit more modestly priced”. The Nasdaq is down 7% in the last month. Over the past two and a half months, Twitter, Facebook, Amazon, and Netflix are down 31%, 7%, 21%, and 16%, respectively.

Maybe biotech stocks are the culprit. They are down 4.5% in the last week, and 16.8% in the last month. But even analysts, people paid to draw conclusions from just about anything, aren’t sure: “Biotech Stocks’ Rout Perplexes Analysts”, the WSJ said on Thursday. The article explains the problem: biotech specialists, who know a lot about specific companies, are bullish, while generalist investors, who think 36 times earnings is worrying, are bearish. But just a day earlier, on Wednesday, tech shares were ‘leading’ stocks higher, as “biotech stocks attracted buyers in search of bargains”.

Maybe, says the WSJ’s Paul Vigna, stocks are falling because they are becoming less correlated with one another. Maybe it’s earnings season: JP Morgan disappointed people. Or maybe there’s an “air pocket” in the market, which is technical-analyst speak for an ‘area on a chart beneath a line that goes up’.

There’s always the taper to blame. But Joe Weisenthal points out that stocks are up 3% since the Fed began its reduction in asset purchases. “This time,” Weisenthal says, “it just seems to be: stocks are falling”. Or as Eddy Elfeinbein said, “Stocks Are Down on Fears of Lower Share Prices”. – Ben Walsh

On to today’s links:

Christina Romer: Financial crises may not necessarily lead to economic disaster - Bonnie Kavoussi

Emerging Markets
Central banker fights are the best fights - CNBC

85% of Washington nonprofits are run by men (who also get paid more than female directors) - National Journal

Long Reads
The seedy side of college sports: free TVs and $200 weekly payments - SB Nation

Bill Gross isn’t afraid to call out Mohamed El-Erian as long as Mohamed El-Erian can’t respond - Jenn Ablan
And because no one writes headlines like Bess Levin: “Bill Gross Doesn’t Understand Why El-Erian Won’t Just Be A Man, Defend Himself, And Violate His NDA” - Dealbreaker

JP Morgan
Eventually everything – even JP Morgan’s earnings – will disappoint you - Reuters

Only idiots fear hyperinflation (and therefore many people do) - Martin Wolf
Tom Friedman doesn’t understand hockey, geopolitics - Deadspin

Mas Kapital
New capital requirements are “pretty good, but also disappointing given what is needed” - Mike Konczal

Niche Markets
Castrated male chickens are becoming obsolete - Modern Farmer

OMB director Sylvia Mathews Burwell is Obama’s pick to lead Health and Human Services - WaPo

“Most stuff worth writing has been written already. Just link to it” - Chris Dillow

Sell the commodities business and run it too: Blythe Masters’ failed JP Morgan exit plan - Bloomberg


Apr 11, 2014 12:51 UTC

The question of whether the market is going into a longer, broader correction is one with a lot of wrinkles.

Whether these high-flying stocks are going to come back is the easier question to answer. Why? Because unlike stocks where most of the embedded value is in existing earnings and existing growth – things a person can cling to, like the utilities or telecom – these stocks ride based on their expected growth for years down the line.

And when the unknown is combined with optimism you get price-to-sales ratios of something like 20. So when they cheapen – that is, sell off – those price-to-sales ratios (just another way of valuing a company) they drop to 15 times sales, which when compared with the S&P 500 is still ridiculous (the whole index tends to run around the 1.7 area of late). Which tells you of course that valuation was never the name of this game to begin with.

So with the valuation not there, and investors no longer getting the gratification from seeing stocks rise as soon as they buy them, there’s a couple strikes against them. A third one is supply. Motivated sellers, knowing they bought the stock at higher prices, are therefore champing at the bit to get out of positions if the market surges to a level they’re satisfied is enough to either lock in profits (if they’ve been in a while), get out at even (if they bought recently) or get out with losses because they know they’re screwed. Because, make no mistake about it, people who bought these high-flyers this year are underwater, sometimes seriously so, and unless sentiment does a complete about-face, these “investments” suddenly don’t look like so much fun to own. Broken momentum stocks are an ugly thing – just ask those who rode shares of Crocs into oblivion.

How are we so sure of this? Using volume-weighted-average price data (and a big tip to Mike O’Rourke of JonesTrading for cluing us in on this). Using Datastream, we found that some of your momentum favorites have been on average purchased at much, much higher prices this year than they stand now.
A group of 24 big-gaining names with most of their value wrapped in future expectations, as identified by Credit Suisse, have disappointed those who jumped in this year hoping for lots of gains.

We won’t go through all 24 here, but here are five favorites, listing the VWAP, or average price investors have paid this year, along with Thursday’s closing price, and the difference between the two:

  • 3D Systems $71.90 $48.78 -32.2%
  • Twitter $56.81 $41.34 -27.2%
  • SolarCity $71.17 $55.13 -22.5%
  • Workday $94.28 $75.62 -19.7%
  • Netflix $385.91 $334.73 -13.2%

Not much to like there at all. On average, investors in Twitter in 2014 are down 27 percent from where they bought the stock, and it’s not even as if a 27 percent gain will get them to break-even - at $41.34, that stock now needs to rise by 37 percent to get back to this break-even VWAP level.
That’s a tall order, especially when sentiment is moving against the shares and hedge funds are correcting themselves from being more overweight in momentum than they were any of the other style factors that strategists measure (which include things like beta, volatility, earnings yield, dividend yield, and a few other metrics).

If there was one area that wasn’t constrained by the hedge fund managers, it was momentum – thanks to a rosy 2013 that many figured would just roll on in 2014. It’s been anything but that. Now, some strategists are warning that earnings are the next point of measurement and sure, that’s true – but that’s more for companies within a small range of where most think they’re valued. These stocks are different – the forecasts for growth over coming years vary wildly, because with names like this, things are just inexact (and even more so with biotechnology names, which are frequently all-or-nothing stocks).

Momentum works two ways – and now it’s working in the wrong direction for the bulls.

Gross behavior

Apr 10, 2014 21:21 UTC

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Sheelah Kolhatkar has a long profile of Pimco’s Bill Gross, in which Gross makes an attempt to rationalize his somewhat erratic behavior over the last few months. (The front cover of the magazine uses the headline, “Am I really such a jerk?”) Gross’s strange behavior has been chronicled since Pimco CEO and co-chief investment officer Mohamed El-Erian, the heir to Gross’s throne at the company, announced he was resigning from his post back in January.

Then, in February, a devastating article in the WSJ painted Gross as a terrifying and brutal manager who referred to himself as Secretariat. Not long after the WSJ article came out, Gross told Reuters’ Jenn Ablan, “I’m so sick of Mohamed trying to undermine me”. He also “indicated he had been monitoring El-Erian’s phone calls”. Last week, Gross devoted much of his Investment Outlook letter to remembering his dead cat, Bob.

The “Bond King” has been faltering of late. Gross’s Total Return Fund, which fell 1.9%last year – its first down year since 1999 – trailed 95% of its peers and saw $3.1 billionof outflows in March. Which makes 11 straight months of outflows. In total, investors have pulled $52.1 billion from the fund since May. In recent months, Mercer, ING, and Columbia Management have all terminated relationships with Pimco.

Behavior that is tolerated as eccentric when returns are good quickly becomes unacceptable when performance is poor. The problem, write Mark DeCambre and Matt Phillips, isn’t Gross’s behavior, but his returns: if they improve “any questions about Gross’ personality quirks will almost certainly disappear”.

Felix says that Pimco’s clients are overwhelmingly conservative fixed-income investors. While they like outperformance, “they’re not shooting for the stars, and they hate taking unnecessary risks. Like, for instance, the risk that they’ve placed their billions in the hands of a cantankerous old man who always thinks that he’s right and that everybody else is wrong”.

If assets do continue to leave Pimco, it would be great if the exodus continued on its current measured pace. In a recent speech, the Bank of England’s Andy Haldaneworried about the effect on the markets if investors all decided that they wanted to pull out their money at the same time. One problem, he said, is that investors are “becoming more fickle and run-prone”.

Shops like Pimco are what regulators like Haldane call “NBNI G-SIFIs”: non-bank, non-insurer globally systemically important financial institutions. And they’re operating, he says, in “a world of less liquid assets and runnier liabilities”. – Shane Ferro

On to today’s links:

The SEC colluded with banks over CDO prosecutions - American Lawyer
“We can assume that the same nod-and-a-wink deal was struck with all the other one-and-only-one CDO bank prosecutions” - Felix

The Fed
The paradox of transparency in monetary policy - Piera

The history of global wealth - Vox

“Heartbleed is as bad as it is possible for a security flaw to be” - Rusty Foster

Thinking about Rawls in a Pickettian world - Chris Bertram
Paul Krugman’s excellent review of Picketty - New York Review of Books

Headline of the Day
“Live blog: Jeffrey Gundlach speaks about the market at yacht club” - Marketwatch

Tax Arcana
Nobody can use this tax loophole anymore. It’s too popular - WSJ

Paul Ryan’s budgets cuts, and his problem with nominal dollars - Robert Greenstein

Your Daily Outrage
Exorbitant fees cost low-income Americans up to a quarter of their tax refunds - NYT

Profiles in Capital
New rules only succeed in shifting, not reducing, junior bankers’ hours - DealBook

MORNING BID – Dot Matrix

Apr 10, 2014 12:52 UTC

The Federal Reserve did it again, giving back to the markets at a time when it wasn’t expected, and showing once again that the early months of a new Fed chair’s tenure are fraught ones, in terms of interpreting monetary policy.

Janet Yellen probably didn’t mean to suggest rate hikes could come as soon as six months after the bond-buying program ends for good. And the release of the Fed minutes also demonstrated that the Fed – even in discussing projections – worried about how it would all look, specifically the “dot matrix” that showed several Fed members saw higher rates before long, and really, that it was all just kind of overstated. (Yellen even said this at her press conference – that the dots did not mean what you thought they meant).

Either way, that’s wreaked some havoc on expectations for policy, with the market shifting back towards thinking this is all going to come down a bit later than expected. This comes just after the most recent Reuters primary dealers’ poll that suggested major strategists were finally getting comfortable with the idea of possible rate hikes in the first half of 2015 rather than later – there were 8 who saw that happening out of 18, compared with just 4 in the previous poll. CME Fedwatch data shows now the chances of a rate increase before July at 42 percent, down from 52 percent on Tuesday.

“The latest round of minutes highlighted a Fed that in the interest of being ever-more transparent really continues to muddy the waters even more,” wrote Tom Porcelli, fixed income strategist at RBC. But honestly? Early in a Fed chair’s run, that’s just not unusual, and difficult for the market to take after spending several years getting used to someone’s tendencies.

So that happened. Really, on some level we’re still talking about developments scheduled to take place more than a year from now, and markets can only discount so much.
Either way, it helped unwind some of the selling that the market had seen in the short end of the curve, steepening the curve once again and reducing some concern about the front end and the effects of the higher short-term rates and the flattening of the yield curve. It also sparked some life in the biotech and other momentum names as well, though for how long is another question.

Markets will keep an eye on the 30-year bond sale later today, the last of three auctions in the quarterly refunding. Lately, Treasury auctions have been a complete wild card, with bidding by direct bidders – those who aren’t going through the 22 primary dealers in Treasury securities who directly deal with the Treasury and New York Federal Reserve – all over the map.
Direct bidding was high in some recent auctions, especially in the three-year auction on Tuesday, and then fell off again on Wednesday. Coupled with the recent spike in bank buys of five- and seven-year paper, there are a lot of questions around the dynamics in the Treasury market right now.

We’ll be looking at this phenomena later in the day and the market gets the third of its three auctions this week, the 30-year bond sale that shapes up to be relatively attractive given the release of Fed minutes that showed the Fed’s whole deal about being more aggressive in rate cuts? Never mind all that stuff or what not, we’re going at the same pace that we’d been going.
Concern over what was to happen with the Fed minutes (just one hour after the auction) may have kept buyers cooling their heels with the 10-year note sale on Wednesday. Still, much remains unclear about activity in the Treasury market where long-dated yields remain at relatively attractive levels and the short end saw yields drop to their lowest in weeks as prices rallied after the Fed minutes.

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