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Finance is a tool for greasing the wheels of an economy, and when it
serves its proper role, finance can be a very good thing. But it can
(and should) never be the economy itself; it is fundamentally
derivative on the labor of real people doing real work. By extension,
an economy that gives pride of place to what should be a tertiary
concern is an economy that is winding down and running out of ideas.
Just as the ascendancy of the lawyers is the death knell of an industry
(cf. the dying spams of the major record labels and the RIAA), so the
dominance of financial services signals an economy that has become
tired and spent.

The Black-Scholes PDE is a “Wick rotated” Schrodinger
equation for a charged particle in an electromagnetic field, where the
risk-free rate plays the role of a gauge connection.

What’s more –

The gauge connection for the Black-Scholes PDE is given by

PDE results in

PDE is a “Wick rotated” Schrodinger
equation for a charged particle in an electromagnetic field, where the
risk-free rate plays the role of a gauge connection.

What’s more –

The gauge connection for the Black-Scholes PDE is given by

. Inserting the corresponding gauge factor

into the Black-Scholes PDE results in

, which is simply the heat equation from physics!

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Accounting ingenuity speech by David Einhorn

Multiple Alpha Sources and Risk Management by Edward Qian at PanAgora

Via BankersBall :

Now take a Bad Boy, put him in a Brioni suit and you have Mr. Junk Bond.

Dating Mr. Junk Bond (JB) is akin to the non-investment bond grading system. Initially, Mr. Junk Bond is a Ba/BB. JB is charming, unpredictable, decisive and intense. His offer of a high interest rate despite the speculative aspects is irresistible. JB’s late hours in finance indicate hard work and intelligence. You reconcile JB’s bad boy behavior with the nascence of the relationship.

JB quickly plummets to Caa/CCC rating when you can’t remember when your last real date was and he only calls you “babe”. You begin to wonder if JB remembers your name. Then again, you realize, he has to know your name – it’s in your email address.

Nonetheless, the D rating of payment default is looming. JB only seems to have time for you after 10 pm (aka the booty text).

Booty texts may take the form “U awake?” or “U out 2nite?” and often make you wonder whether JB sent the text message to more than one girl. Was it some kind of mass mailed booty text? Perhaps even booty text spam?

As investors, you are cognizant of why you shouldn’t play with junk bonds, but resisting the temptation is difficult. Sometimes you have to dive in and make a really bad investment to learn. Unfortunately, you may have to keep adding more than one JB to your portfolio repeatedly before you learn the lesson of JB’s danger and allure.

Via Dealbreaker

The High Yield Debt (“Junk Bond”): The untamed and often uncontrollable vixen, commonly referred to as the mistress. She’s not looking for any long term investment, but she could offer a mind-blowing weekend in Maui, as long as she doesn’t pick up the tab. There is no middle ground with these types—they enjoy either the high flying adventure or nothing at all; they come with a price. If their partner slips up in any way or ceases to perform, she will immediately default, leaving a trail of broken hearts in her often destructive path. The Junk Bond is perfect for the young and the immature—those who have not experienced the ups and downs of the dating world and simply want to reap the benefits of lust and adventure. They won’t stick around to raise your children, but they will give you a great escape from them.

The Investment Grade Security: The 1950’s housewife. She’s quiet, calm, sweet, and patient; she’ll never get too riled up and will stick with you even in the worst of times. Considered by many to be the ideal wife and future mother of one’s children. Perfect for the well seasoned and experienced individual—one who has seen the highs and lows of the dating scene and is ready to settle down into a stable, committed relationship. They’ll never make you rich, but will also never let you down.

The Bridge Loan: Perfect for the recovering heart-broken man. She is generally kind and gentle, often not requiring much from her partner, but generally giving exactly what is needed—a short term tryst that will leave her partner confident and more experienced upon her leave. She rarely leaves a trail of broken hearts in her wake because she always has the grace to end the relationship amicably. In fact, many men call upon the bridge loan several times in their lives for quick fixes to broken hearts. She, being the selfless type, is always willing to accommodate.


The Asset Based Revolver (“ABR”): The ABR is the trickiest of all the breeds of women—often the most superficial, but generally the most desirable by those with great ambition. She can help her partner reap great benefits, but can take them away just as quickly. She is a social climber, socialista, and often the life of the party—constantly armed with Christian Louboutins stilettos, Balenciaga handbags, and a perfectly sculpted slender body accented with wildly untamed hair. She will make an initial investment in various types of men, but will only stay with those who continually build upon their fortunes. Any faltering in realized ambition will cause her to immediately walk away, taking with her not only her partner’s pride, but often a significant portion of his assets—not to mention his social circle. She carries great penalties, but for the ambitious, she will give continually greater rewards proportionate to her partner’s increased net worth. Great marriage material for the superficial and ambitious men of the world, but be warned: If she files for divorce, the consequences will be catastrophic.


The Convertible Bond: Often the most complex and difficult to value of the group, but just as often the most desired. Generally referred to as proverbial “hooker with a heart of gold.” Upon first glance, she is often seen as being merely rentable material—a short term fling that rarely sticks around for the duration. But, hidden within the lust-inducing exterior, is a hidden gem of warmth with the heart of a housewife and a fealty that will tame even the most promiscuous of men. She is perfect for the post-player type; she will lure her partner in with her sexual prowess but because of her loyalty and kindness, will often be invited by her partner to share in his future growth.


The Subordinated Debt: Generally the second, third, fourth, etc. wife. She’s often a short term fix to a misguided life, frequently brought about by some midlife crisis filled with dreams of reinvention. Arriving in the picture only after her partner has already made his considerable wealth, she rarely reaps the financial benefits of the first wife, to whom her partner owed the most, and to whom her partner always gave, and will continue to give, the most. The subordinated debt will generally have to sign a bullet-proof prenuptial agreement that will reap her modest, but never outsized returns upon the almost guaranteed divorce. She’s perfect for the self-made man who needs the affection of a beautiful (and often younger) woman and the appearance of stability with a marriage. The subordinated debt is always hoping that upon her partner’s death, she will be favored in the will, but she is always disappointed when the children from the first marriage get the lion’s share of the wealth.


The LEAP Option: The consummate “friend with benefits.” Perfect for a good heart to heart, but also equally great for a weekend rendezvous or a late night hook-up. Her partner has borne his soul to her and she has borne hers to him, but they’ve always gone their separate ways to explore other relationships. She, however, is always in the back of her partner’s mind as a potential life-long mate. And if her partner determines she is “in the money,” he will forsake all others just for her. Because there is already intimacy between them (and often years of affection) the love blossoms immediately between the LEAP and her partner. The relationship often begins with the partner making a grand romantic gesture of his undying love filled with a blabbering speech about how he has been a fool for not realizing it before—a sentiment which is often reciprocated freely by the LEAP. For this reason, the engagement period for the LEAP is generally short and the relationship tends to weather the tests of time. Perfect for the commitment phobic types who can never quite let their guards down, but who also have a secret and deep sense of romance.


The Collateralized Debt Obligation: Upon first glance she’s the debutant donned in pearls. The perfect specimen of woman, whose high cheekbones and slender waist immediately bring to mind images of summering the Hamptons, sailing on the Cape, and professionally photographed images of a family-to-be (golden retriever included) lounging aside the dock, shoeless and dressed in seersucker. A perfect marriage candidate for any man desirous of merging his life with that of a well-bred woman whose pedigree includes a generous trust fund compounded by generations of wealth. But behind the ribbons and pearls, she is a soul-sucking black widow—the most frightening of all the types. She grew up on the wrong side of the tracks (probably in a trailer park) listening to “Fancy” while dreaming of seducing heads of states and CEOs. Though she hasn’t a penny to her name, she is able to lure the most talented of men with her well trained charm that effortlessly conceals her subprime roots. All should be wary of this type, though most will never know they have encountered a CDO until their bank accounts are empty, their house is in her name, and she is speeding off in the benz with the tennis pro.

$145 for oil in December 2016, as the futures market is prices, does
not mean that the price of crude oil will be $145 in Dec ‘16.

Currently,
oil is at $131.25 for delivery in the month of July. If I contract to
buy oil from a supplier, in the year 2016, I effectively have paying a
higher price than today for “storage” costs. The price structure where
nearby prices are cheaper than deferred prices is what we call
contango. This is normal and not indicitive of a bubble. It means
supplies are adequate.

When that price structure changes,
whereas nearby prices are more expensive than deferred prices
(backwardation), that is a bullish market. Effectively, the market
punishes those who sit on supplies. It brings available supply to the
market by making it a losing proposition to store supplies.

Looking
at the current price structure, the market is backwardated from ‘08 to
‘12 and then in contango. The market is very concerned over available
supplies in the market for now, largely due to increased demand and
stable production. There certainly is more oil in the world to be
tapped, but it will take time to bring it to the market.

As for
US prices, we are perhaps the only country in the world with known
existing supplies that the government forbids oil companies to explore.
Our own government forbids exploration and drilling on the outer shelfs
over the Pacific and the Eastern gulf of Mexico where large quanties of
oil and natural gas exist. Oil companies are also barred from exploring
oil shale in Colorado, Whyoming, South Dakota, and North Dakota.

This country has a 250 year supply of coal, but we hamstring the new construction of even clean coal power plants.

We have the energy reserves but the US government needs to get out of the way.

Supply in the US might be near average levels, but oil is a global
commodity. A supply disruption in Nigeria impacts global prices. A
refinery outage in France cause prices to go up in the US because it
reduces the availability to import refined products (which is a
bottleneck in the US). By the way, oil traders don’t care about Kenya,
its Nigeria or other oil producing countries in Africa. That said, if
tension in Kenya might spread into Nigeria….

As far as ‘speculators’ are concerned, we can make money selling markets, too, not just bidding up prices endlessly.

Essential
raw commodities must be priced by the marketplace. Will prices go too
high or too low on the fringe, sure, but that is how prices are
discovered. How many consumers were complaining when a gallon of gas
was $1.00? Price too low? Well, there wasn’t enough incentive for oil
companies to invest in more production. So when an supply shock
happens, prices have to rise to provide an incentive to produce more.

During
all the 90s, food prices were so low and crops yields came in so high,
that countries began imported food on an “as needed” basis. Stockpiles
of grains for a rainy day dwindled.
Well, over the past two years,
because of poor yields in wheat around the globe and increased demand,
supplies of food have decreased materially, and created a panic in
wheat prices. But what did producers do in response? They planted a
record amount of wheat this past year. That is what markets do.

The
high price of oil is bringing changes. People are changing habits,
trying to reduce demand. New technology is heavily researched and
hybrid cars are rolling out. But it will take years for new oil wells
to be drilled, and it will be costly.

From Exxon: Exxon Mobil is
the largest U.S. oil and gas company, but we account for only 2 percent
of global energy production, only 3 percent of global oil production,
only 6 percent of global refining capacity, and only 1 percent of
global petroleum reserves. With respect to petroleum reserves, we rank
14th. Government-owned national oil companies dominate the top spots.
For an American company to succeed in this competitive landscape and go
head to head with huge government-backed national oil companies, it
needs financial strength and scale to execute massive complex energy
projects requiring enormous long-term investments.

To simply maintain our current operations and make needed capital investments, Exxon Mobil spends nearly $1 billion each day.

Iranian oil is a heavy sour crude oil. It is more expensive to refine
into products than light crude oil, like that of Saudi Arabia and WTI.
That’s the reason that WTI oil is usually priced lower than Brent Oil.
Crude oil is not the same where ever its drilled from. It comes in many
different grades and some are much cheaper to refine than others. So
Iran has a surplus of heavy sour that isn’t as valuable right now.

Second,
OPEC only accounts for 40% of the worlds oil supply. You know who the
largest supplier of oil to the US is? The United States of America! If
congress ever let oil companies drill off the Pacific coast and the
eastern shore of the Gulf Coast, we would be swimming in oil and
natural gas. Our second larget supplier of crude? CANADA. Third?
MEXICO. OPEC is only part of the equation.

Thirdly, we don’t
have to run out of oil before prices go up. OPEC typically producers a
surplus of oil of about 2.5 million barrels per day. That surplus
production however, dropped by 80%, from 2000 to 2005. The price of oil
in 1999? $10 a barrel.

Why should OPEC pump oil for $10 a barrel? oil prices bottomed in 1999 and rallied to $35 a full year before 9/11?
Can you explain how prices more than trippled from ‘99 to ‘00?
Easy, there was huge excess supply in the market. Oil producers cut back on production.

Uh
oh, then 9/11, concern about flow from the Middle East. Uh oh,
economies in India and China begin cranking up. Uh oh, huge hurricane
in the US wipes out oil production in the Gulf of Mexico. Uh oh,
violence in Nigeria wipes out 500,000+ barrels per day for over a year.
Uh oh, Iran working on nuclear weapon. Uh oh, China begins creating
stockpiles of raw goods. Uh oh, 30 year old refineries in the US can’t
keep up with demand for products. Prodcution in Alaska is declining.
Production in Mexico is declining. Venezuela nationalizes most of the
oil industry. Production in Venezuela drops.

We will come out of
this bubble in prices, but as the saying goes, “The cure for high
prices is higher prices.” High prices encourage more supply to come
online, encourages alternatives, or reduces demand. The market, however
painful, is doing its job. If prices have overshot ‘fair value” then
prices will correct.

New technology will compliment crude oil, not completely replace it.

Think
of all the plastics that are produced today. The only known substitute
currently is bio-oil and then we’re entering the food/fuel debate. But
certainly if we get the food situation cleaned up and streamlines (no
thanks to Argentina) then we can continue to produce some excess
bio-oil for manufacturing processes.

Crude oil and its
products are portable energy. Why in the world do we use oil to produce
electricity in stationary power plants? Nuclear power is one solution.
As is clean coal technology. So are other renewable sources. Many of
these ideas of been on the board for quite some time (geo-thermal,
solar, hydro, wind, etc) but have been too costly in comparisson to
fossil fuel. That’s all changing. Its not to say that eco-friendly
solutions are necessarily pocket-book friendly solutions, but it does
add some spare capacity to the system (think ethanol).

Definition of Level 1, 2 and 3 Assets: FASB: Summary of Statement 157

PIMCO - Secular Outlook “A Tale of Two Cities”

• Continued robust global growth that, in composition, is less G-3 centric and driven to a greater extent by emerging markets that are in the midst of a development breakout phase
• An upward trend in global inflationary pressures reflecting the spillover of global demand into commodities, gradually rising wage rates in emerging economies, industrial/developing policy responses that place greater emphasis on employment and social spending, and a U.S. monetary policy that may be domestically appropriate but internationally inflationary
• A reversal in the secular bullish run for corporate profits in industrial countries, overall and relative to labor
• Institutional re-alignments in the global financial sector: In industrial countries, this will be driven by regulatory changes and post-crisis balance sheet management; and in emerging economies, it will be driven by the further maturation of capital markets and the evolution of sovereign wealth funds

Haha!

Blackstone’s Annual Report: Link

Via Felix Salmon – Market Movers – Portfolio.com

Federal Reserve Chairman Ben S. Bernanke lunched on
March 11 with a Who’s Who of Wall Street leaders, including JPMorgan
Chase & Co.’s Jamie Dimon, three days before the central bank
rescued Bear Stearns Cos. from bankruptcy.
Other guests included
Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein, Lehman
Brothers Holdings Inc. CEO Richard Fuld, Morgan Stanley President James
Gorman, Citigroup Inc.’s Robert Rubin, Blackstone Group CEO Stephen
Schwarzman and Merrill Lynch & Co. CEO John Thain. Alan Schwartz,
the CEO of Bear Stearns, was not listed among the attendees.

Also on the guest list: Tim Geithner (natch, since he was hosting),
Stone Point Capital LLC Chairman Stephen Friedman, Citadel Investment
Group LLC CEO Kenneth Griffin, American Express Co. CEO Kenneth
Chenault, Duquesne Capital Management LLC CEO Stanley Druckenmiller and
Caxton Associates LLC Chairman Bruce Kovner. Plus two executive vice
presidents at the New York Fed: William Dudley, head of open market
operations, and Terrence Checki, who oversees emerging markets and
international affairs.