Tuesday’s Rally Led By Heavily Shorted Stocks

July 8, 2008

Hickey and Walters (Bespoke) submit:

The average stock in the Russell 1,000 was up 2.42% today. We broke the index into deciles (100 stocks in each decile) based on each stock’s short interest as a percentage of float to see how the most and least heavily shorted shares performed today.

As shown below, the decile of the most heavily shorted stocks was up an average of 4.42% today, while the decile of the least heavily shorted shares was up 2.02%. The market definitely saw its fair share of short covering today.

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Tuesday’s Rally Led By Heavily Shorted Stocks

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Avoiding Beta That Masquerades as Alpha

July 8, 2008

Kevin S. Price submits:

We’ve argued repeatedly that investors and advisors should be more aware of the distinction between alpha (idiosyncratic, manager-driven returns that are relatively uncorrelated to any underlying asset class or benchmark) and beta (systematic, market-driven returns that track underlying asset classes or benchmarks).

Two recent items suggest that such awareness is on the rise among institutional and individual investors. Here’s an excerpt from Pensions and Investments:

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Avoiding Beta That Masquerades as Alpha

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Fed Dictates: Mortgages Must Be Affordable

July 8, 2008

Michael Steinberg submits:

Excerpted from Federal Reserve Chairman Bernanke’s speech at the FDIC’s Forum on Mortgage Lending for Low and Moderate Income Households (July 8, 2008):

“Next
week, the Federal Reserve Board will issue new rules on mortgage
lending, using its authorities under the Home Ownership and Equity
Protection Act. These new rules, which will apply to all lenders and not just banks,
will address some of the problems that have surfaced in recent years in
mortgage lending, especially high-cost mortgage lending.”

The New York Times “Fed to Clamp Down on Exotic and Subprime Mortgages” reports that all are not happy with the proposals. I first detailed these in “Common Sense comes to the Fed”.
The Fed received over 5,000 critical letters from the mortgage and
housing industries. The American Bankers Association, the Mortgage
Bankers Association and the Independent Community Bankers of America
trade groups had no compliments either. All this because our Fed
Chairman wants home buyers to be able afford their mortgages without
having to sell their homes.

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Fed Dictates: Mortgages Must Be Affordable

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A Look at Long-Term Stock Valuations

July 8, 2008

Felix Salmon submits:

Rob Bennett emails to tell me about a handy little tool
he’s constructed, which looks at stock valuations and calculates what
kind of real return you can expect to get from investing in US equities
over the next decade or six. The tool is based on one of Robert
Shiller’s favorite indicators, P/E10, or price to previous ten years’
average earnings. Here’s how P/E10 evolved between 1881 and 2006:

Right now, P/E10 is at about 22, which mean that stocks are
expensive, by historical standards: Rob reckons that fair value, for
stocks, is about 14 or 15, and that anything above 20 is “truly
dangerous”:

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A Look at Long-Term Stock Valuations

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What Is a Covered Bond?

July 8, 2008

Felix Salmon submits:

What
is it about covered bonds which makes them so impervious to English?
Hank Paulson had nice things to say about them today, but if you didn’t
know what they were already, the WSJ explanation would hardly shed much light on the matter:

Covered bonds, which are widely used in Europe, are a
mortgage-backed security that usually provides funding to a commercial
banks through a secured debt instrument collateralized by a pool of
residential mortgage loans that remain on the issuer’s balance sheet.
Interest is paid to investors from the issuer’s cash flow, as Mr.
Paulson noted.

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What Is a Covered Bond?

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Wednesday Outlook: Bulls Storm In

July 8, 2008

David Fry (ETF Digest) submits:

Bulls, desperately seeking any good news, jumped on hopes for a mortgage relief bill from the senate, Bernanke’s willingness to open the Fed window to Wall Street banks through 2009 (both measures are a raid on your wallet) and another decline in oil prices. These combined with oversold conditions allowed bulls to storm markets late in the day.