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Five Things You Need to Know: Sharpe Dressed Man, Gross!, What's the Big Doha-ha?, Appraisal Reprisals, Trapped in Reality


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. But Every Girl's Crazy 'Bout a Sharpe-Dressed Man!

The Sharpe Ratio, a measure of risk-adjusted return widely used by hedge funds as a key selling point, is deeply flawed, according to Nassim Nicholas Taleb, author of "Fooled by Randomness."

  • First, what is this so-called Sharpe Ratio?
  • The Sharpe Ratio is a widely-used measure of risk-adjusted performance of an asset or trading strategy developed by William F. Sharpe.
  • The Sharpe Ratio is the difference between returns and a risk-free interest rate - typically yield on US Treasury bills - divided by the volatility, or range of possible returns.
  • "It's used for marketing. It looks sophisticated, but the volatility part is not a good measure of risk," Nassim Nicholas Taleb told the Gulf Times.
  • Taleb says the root of the problem is the assumption that economics and finance are hard sciences that will allow for returns to be modeled according to a standard distribution.
  • If something is "normally distributed" that means most outcomes can be expected to fall within a narrow range on either side of the mean.
  • Taleb's view is that this idea of normal distribution cannot be applied to finance where extreme events challenge and dominate the normal distribution no matter how large the sample gets.
  • "The Sharpe ratio is like a horoscope," Taleb told the Gulf Times.
  • Below Minyanville lists the "Sharpe Ratio" for a number of different hedge fund styles

Minyanville Hedge Fund Sharpe Ratio "Horoscope" for August

  • Event Driven - Later this month, after peeling off your disastrous "Texas Hedge" on conflict in the Middle East, look for a new relationship to develop with government investigators. A new acquaintance advises you not to leave town for a while.
  • Equity Market Neutral - Some valuable items you thought were lost forever magically turn up in the account of a rival fund. These items are called the "capital of former clients."
  • Convertible Bond Arbitrage - Speaking of convertibles, in August your head trader will enjoy the wind blowing through his hair and a feeling of freedom and exhilaration... unfortunately, only after jumping out a window. Lucky numbers are 2,7, and 9, none of which are expected for quite some time.

2. That's Just Gross!

"Bill Gross, manager of the world's biggest bond fund at PIMCO., has history on his side when he predicts the ``bull market has begun'' for U.S. Treasuries," Bloomberg reports.

  • According to Bloomberg, citing data from UBS, 10-year Treasury notes rallied in 14 of the past 18 years from late July through the first week of October, a seasonal pattern that merits respect some say.
  • Gross, who manages Pimco's $93 billion Total Return Fund, said he has been buying shorter-term securities, according to Bloomberg.
  • The bet is that two-year notes will gain if the Fed pauses in its interest rate increases.
  • Meanwhile, Bloomberg notes that Treasuries have rallied in the period in the past largely due to increased purchases by Japanese investors beginning in the April period when their fiscal year begins.
  • Bloombeg notes that while many say the seasonal pattern demands respect, others say that the seasonality absent fundamentals reduces the patterns value.
  • Further complicating the seasonal pattern is that the Bank of Japan recently raised interest rates 25 basis points for the first time in six years, effectively ending their quantitative easing program.

3. So What's the Big Doha-ha?

Last-ditch efforts to unblock the Doha round of global trade talks have collapsed, with fears it will take months for negotiations to resume, the BBC reported. So what?

  • A meeting of leading trading nations hit a stalemate over the weekend in what some are calling a "major setback."
  • The EU, US, Brazil, Australia, India and Japan have been negotiating a deal to boost world trade in industrial and agricultural goods.
  • The key sticking point has been related to global farm subsidies.
  • Developing nations want Europe and US to lower farming subsidies and tariffs, while Washington and Brussels want greater access to manufactured goods markets, the BBC said.
  • So why do we care about this anyway? One word: Protectionism.

4. Appraisal Reprisals

Now that housing prices are beginning to level off, some homeowners are finding that the market value of their property is far below what past appraisals led them to believe, according to the Wall Street Journal.

  • According to a 2003 Office of Federal Housing Oversight national survey of appraisers, 55% said they had felt pressured to overstate the value of a property, the WSJ reported.
  • Why are appraisers pressured to overstate a home's value? According to the WSJ, generous appraisals help loan officers complete mortgages.
  • If a home is appraised at less than the amount the buyer is offering the deal will likely fall through unless the buyer is willing to put up more money up front.
  • In the 1980s, inflated appraisals were one factor in the loan losses that sank many savings-and-loan institutions that were holding collateral worth less than they believed, the Journal noted.
  • Further complicating the matter are the large number of adjustable mortgages coming up for interest rate resets over the next two years.
  • Meanwhile, the Journal notes, optimistically, that "most homeowners have enough equity in their homes so they don't need to worry much about whether past appraisals were realistic."
  • A more pessimistic view is that a combination of inflated appraisals, increasing supply and weakening demand is could act as a downward multiplier on housing prices.
  • What's that old saying? You can buy more real estate in a day than you can sell in a lifetime?

5. MySpace Power Outage Leaves Millions Trapped in Reality

A power outage affecting the popular social networking site has left as many as 95 million users trapped in reality for a third day.

  • As of 8:30 a.m. EST, the "social networking" site remains offline with a message reporting a power outage is affecting the site's data center.
  • The site has been offline since July 22.
  • was purchased by Rupert Murdoch's News Corp. a year ago for $580 million.
  • The power outage has left as many as 95 million individual MySpace users trapped in reality with no access to their virtual "social networks" of friends and loved ones.
  • Dale Peterson, 46, who posts to his MySpace profile page under the identity TawnyGirl1989, says the inability to access his social network has trapped him in a nightmarish hell of reality as an unmarried 46-year-old certified public accountant.
  • "It's hard," Peterson said. "Basically, I'm completely and totally socially isolated now and reality is beginning to set in."
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