Financial news you should read

Posted on Jan 7, 2009 in Blog, Finance

It’s only Tuesday but there are already a number of good articles that have caught my eye over the weekend and last two days which are noteworthy to read:

From The Wall Street Journal – By the Numbers — How 2008 Shakes Out:

-33.84% The percentage loss in the Dow industrials, worst since 1931, third-worst in history.
-38.49% The percentage loss in the S&P 500, worst since 1937.

-40.54% The percentage loss for the Nasdaq Composite Index, worst in history.
126 The number of up days on the S&P 500 in 2008.
126 The number of down days on the S&P 500 in 2008. (The difference, of course, is that on the down days, the market lost an average of a kajillion points.)
28 The number of Dow industrials components ending lower on the year. The outliers were Wal-Mart Stores and McDonald’s.

15 The number of Standard & Poor’s 500-stock index members that ended the year in positive territory. This is the worst breadth for the S&P going back to 1980; second-worst was 2002, when 131 stocks, or 26% of the issues, rose on the year.
18 The number of daily 5%+ moves on the S&P 500 in 2008.
17 The number of 5%+ moves on the S&P 500 between 1956 and 2007.

280.80 The daily average point range on the Dow Jones Industrial Average.
421.01 The daily average point range on the Dow Jones Industrial Average between Sept. 1 and Dec. 31.
-7.87%. The worst one-day percentage change on the Dow in 2008, which ranks ninth all-time.
-87.14% The performance of General Motors in 2008, making it the worst among Dow components. (There are issues here of survivorship bias – American International Group was removed from the 30-stock average during the year, and that stock lost 97.31% in 2008, making it the worst performer among the members of the S&P 500.)

1.78 The percentage-point decline in the benchmark 10-year Treasury yield, which fell to 2.253% by the end of the year.
6 The number of days in 2008 that rank among the Dow’s top 20 up days and top 20 down days in terms of percentage change. (The leader, with 10 appearances, is 1932.)
-17.7%.The performance of the S&P’s consumer staples sector – the best performer among the S&P’s 10 industry sectors.

24.03% The gain in the Barclays long-term Treasury Index in 2008.
15.66 The difference, in percentage points, between the lowest spread over Treasurys for the Merrill Lynch High Yield Index for the year, and the highest spread over Treasurys. (At its peak, the index was at 20.68 percentage points over comparable Treasurys.)
$61,000 The cost of insuring $10 million in U.S. Treasurys against default for five years. At the beginning of 2008, this cost was $6,000.

 
 

From the New York Times:
The End of the Financial World as We Know It and
How to Repair a Broken Financial World

EXCERPT:

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest…

 
 

From the New York Times: Risk Mismanagement

EXCERPT:

…..Risk managers use VaR to quantify their firm’s risk positions to their board. In the late 1990s, as the use of derivatives was exploding, the Securities and Exchange Commission ruled that firms had to include a quantitative disclosure of market risks in their financial statements for the convenience of investors, and VaR became the main tool for doing so. Around the same time, an important international rule-making body, the Basel Committee on Banking Supervision, went even further to validate VaR by saying that firms and banks could rely on their own internal VaR calculations to set their capital requirements. So long as their VaR was reasonably low, the amount of money they had to set aside to cover risks that might go bad could also be low…….

 
 

From Calculated Risk: Credit Crisis Indicators: Improvement

  • The yield on 3 month treasuries has increased to 0.08%. I suppose this is an improvement (better than zero).

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  • The three month LIBOR has decreased to 1.42%. The three-month LIBOR rate peaked (for this cycle) at 4.81875% on Oct. 10. (improved) Imagine all those adjusted rate mortgage loans tied to treasuries or even the 3 month LIBOR? The rates are looking pretty good!
  • The TED spread is at 1.34, sharply lower. (improved)

    The TED spread was stuck above 2.0 for some time, but has been steadily moving lower over the last few weeks. The peak was 4.63 on Oct 10th. I’d like to see the spread move back down to 1.0 or lower. A normal spread is around 0.5.

  • The A2P2 spread has plunged to 1.92%. This peaked at 5.86 after Thanksgiving. (better).

    This is the spread between high and low quality 30 day nonfinancial commercial paper. Right now quality 30 day nonfinancial paper is yielding close to zero. This may be holiday related, but this is significant decline.

  • The two year swap spread from Bloomberg: 77.75. (Improved). This spread peaked at near 165 in early October, so there has been significant progress, and the swap is finally well below100.

    It appears the Fed is finally getting some rates down … the A2P2 spread decline is worth watching.


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