John At The Center

At a time like this, I reissue my call to sell stocks and buy corporate bonds, even junk bonds. When the advantage of corporate bond yields are so large over the earnings yields of common stocks, there is no contest. When the yield advantage is more than 4%, bonds win. It is more like 6% now, so enjoy the relatively stable returns from corporate bonds.

via The Aleph Blog » Blog Archive » Sell Stocks, Buy Corporate Bonds (II).

Given the choice, what would you rather be: a freshly-minted MBA with thousand of possible career paths ahead of you, or an MBA of vintage 2004 who got snapped up by a subprime mortgage origination desk and who now has an all-but-unemployable skillset?

via Whither This Year’s MBAs? – Finance Blog – Felix Salmon – Market Movers – Portfolio.com.

“Eddie doesn’t know what to do. He’s not a merchant. He hasn’t been a retailer. As a result, he tries a bunch of different ideas because he himself doesn’t have a vision,” says a former high-level Sears Holdings executive. “In the absence of a vision, what comes out are multiple ideas being tested. On the one hand, that’s better than nothing. But there comes a time when the time to test runs out, and you have to lock and load with what’s the best answer for the company.”

via Kmart Sears Merger – National Business News – Print – Portfolio.com.

The largest 15 global banks are expected to further shrink their balance sheet by about $2 trillion in 2009 and longer-term return on equity will remain subdued for the next two years, Reuters said, citing a joint report from Morgan Stanley and Oliver Wyman.

The balance sheet shrinkage will continue to have a huge impact on liquidity and provision of capital, hence it is critical confidence is restored soon, in particular to help real money investors buy credit assets, the analysts from both the firms wrote in a note to clients.

via Banks May Shrink Balance Sheets By $2 Trillion More – DealBook Blog – NYTimes.com.

Many politicians and pundits blame fair-value accounting rules, also often called mark-to-market rules, for worsening the current crisis. Attaching distressed market values rather than a higher historical cost or long-term recovery value to financial assets, they say, has caused financial institutions’ capital cushions, as reported to investors, to collapse, unnecessarily overstating the risk of insolvency.

But if a financial firm holds securities specifically for sale or in a liquid trading book, and finances itself partly or mainly with short-term borrowing, what do investors need to know? Pretty obviously, roughly what the securities would fetch if sold. Supporters of a fairly strict mark-to-market approach say its critics are blaming the messenger for problems of financial firms’ own making.

Now FASB appears to be caving under political pressure, at least to a point.

via Suspending Mark-to-Market: Bad Policy, Bad Time – DealBook Blog – NYTimes.com.

By letting banks use internal models instead of market prices and allowing them to take into account the cash flow of securities, FASB’s change could boost bank industry earnings by 20 percent, Willens said. Companies weighed down by mortgage- backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.

via Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes – Bloomberg.com.

FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent.

The changes proposed

via Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes – Bloomberg.com.

You simply cannot make this stuff up.

The Pension Benefit Guaranty Board, which backstops defined benefit plans (yes, Virginia, they still exist) faced a rather sizable gap between its expected returns on its $64 billion in holdings and its expected liabilities

via naked capitalism: Black Hole Alert: The Last Sucker into the Stock Market Was the Pension Guaranty Corporation.

A second concern I have with the new Fed balance sheet is that it has seriously compromised the independence of the central bank. To my knowledge, every hyperinflation in history has had two key ingredients: (1) budget deficits that could not be resolved politically, and (2) a central bank that assumed the obligations that the fiscal authority could not.

via Marginal Revolution: Managing the Fed’s new balance sheet.

Applying Bayesian techniques, the professors found that reversion to the mean isn’t powerful enough to overcome the growing uncertainty caused by other factors as the holding period grows. Specifically, they estimated that the volatility of stock market returns at the 30-year horizon is nearly one and a half times the volatility at the one-year horizon.

But Professor Pastor says that these methods are better suited than the standard techniques for quantifying the uncertainty faced by real-world investors. Even if Bayesian approaches have yet to become mainstream in financial research, he adds, they have become much more widely used in recent years.

via Strategies – Now the Long Run Looks Riskier, Too, for Investors – NYTimes.com.