Investing, Stock Market and Retirement Planning Thread

columbia
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Postby columbia » Tue Feb 06, 2018 4:00 pm

Danke

Thoughts on the flash crash?

Miami Vice
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Postby Miami Vice » Tue Feb 06, 2018 4:25 pm

I'd also like to add that I watched the first two season of the TV show Billions, and Season 1 Episode 4 was about lending's role and effect on hedge funds (sort of). That's one with the Metallica concert.

The hedge fund in the show has a short position in a stock. To short it they would have had to call their prime broker and asked them to locate the stock. The PB would likely call an agent lender (like me) to source the it. The agent lender is working on behalf of the beneficial owner of the stock. The beneficial owner lends it via their agent to the prime broker. Axe Capital would have an account at the PB, and that's where they would execute the short out of.

In the episode a rival of the hedge fund finds out about the short, and he calls in some favors from connections to force the PB to "recall" the stock. That's the term used when the lender of a stock formally asks the borrower to return it.

In a normal scenario that happens when the underlying beneficial owner sells the stock. Their agent needs to get it back into their account so the sell order can be delivered. The agent will recall the prime broker. The prime broker doesn't want to force their client (the hedge fund) to close out their short, so they will start calling around to other lenders looking for the stock. Assuming they can find another lender to supply it they will initiate a borrow from them and then use that stock to cover the recall on the original loan.

In the show the recall originated from the PB, and it wasn't due to market activity - it was (illegal) retribution from a rival. To the best of my knowledge a hedge fund has relationships with several PBs, even though it's depicted in the show that Axe only deals with one at a time. So in the real world if some PB couldn't find them another locate (or, in this case, wouldn't) to avoid the recall the hedge fund would call one of their other PBs to source it. In the show it was depicted that Axe capital had to borrow it from ANOTHER hedge fund at exorbitant negative rebates. While that certainly could happen I think it's almost a definite that it wouldn't ever in real life.

The large holders of positions are publicly know, and the street is small enough that traders usually have connections to find something when they really need it.

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Postby Miami Vice » Tue Feb 06, 2018 4:29 pm

What do I think of it? My gut says two things. One is that people have gotten a little overzealous and excited over the past month, pushing stocks maybe a bit too high.

The sell off started last week when asset managers, with prospectus limits on equity vs fixed income concentration, had to begin rebalancing. They were way over weight in stocks and had to sell some. I think that just kind of started the ball rolling on a bit of a correction.

columbia
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Postby columbia » Tue Feb 06, 2018 4:31 pm

I rebalanced in December. :)

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Postby columbia » Tue Feb 06, 2018 4:37 pm

@tomas wouldn’t approve, but that took me to 60% stock/40% TIAA Trad at the time.

Unlike my misprint youth, I’m becoming more and more risk averse.

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Postby Tomas » Tue Feb 06, 2018 7:03 pm

@tomas wouldn’t approve, but that took me to 60% stock/40% TIAA Trad at the time.

Unlike my misprint youth, I’m becoming more and more risk averse.
I definitely don't feel to have enough expertise to be the benchmark for approvals. :)

That being said, do you know your own less stocks than Vanguard target fund 20 freaking 25? :)

That being said, the big 5-0 is less than 3 years away, so even this youthful lad will be entertaining some bonds soon (though I fully expect to use my sweet tenured status as my personal retirement insurance. :twisted:

columbia
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Postby columbia » Tue Feb 06, 2018 7:06 pm

Most of those target funds have upped stock holdings over the years, to juice returns. That’s fine; I’m cautious. :)

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Postby NTP66 » Tue Feb 06, 2018 7:09 pm

VG’s Target funds were just named Gold funds (only three achieved that) by Morningstar. And really, their TD funds are terrific for most investors, so long as you ignore the date and instead look at the AA/glide.

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Postby Tomas » Wed Feb 07, 2018 1:03 pm

I'd also like to add that I watched the first two season of the TV show Billions, and Season 1 Episode 4 was about lending's role and effect on hedge funds (sort of). That's one with the Metallica concert.

The hedge fund in the show has a short position in a stock. To short it they would have had to call their prime broker and asked them to locate the stock. The PB would likely call an agent lender (like me) to source the it. The agent lender is working on behalf of the beneficial owner of the stock. The beneficial owner lends it via their agent to the prime broker. Axe Capital would have an account at the PB, and that's where they would execute the short out of.

In the episode a rival of the hedge fund finds out about the short, and he calls in some favors from connections to force the PB to "recall" the stock. That's the term used when the lender of a stock formally asks the borrower to return it.

In a normal scenario that happens when the underlying beneficial owner sells the stock. Their agent needs to get it back into their account so the sell order can be delivered. The agent will recall the prime broker. The prime broker doesn't want to force their client (the hedge fund) to close out their short, so they will start calling around to other lenders looking for the stock. Assuming they can find another lender to supply it they will initiate a borrow from them and then use that stock to cover the recall on the original loan.

In the show the recall originated from the PB, and it wasn't due to market activity - it was (illegal) retribution from a rival. To the best of my knowledge a hedge fund has relationships with several PBs, even though it's depicted in the show that Axe only deals with one at a time. So in the real world if some PB couldn't find them another locate (or, in this case, wouldn't) to avoid the recall the hedge fund would call one of their other PBs to source it. In the show it was depicted that Axe capital had to borrow it from ANOTHER hedge fund at exorbitant negative rebates. While that certainly could happen I think it's almost a definite that it wouldn't ever in real life.

The large holders of positions are publicly know, and the street is small enough that traders usually have connections to find something when they really need it.
I don't know as much as I should about the institutional details of financial investments, and you have already explained a lot in the past. But, good deeds are always punished - so I have a few more questions! :lol:

- From your description it seems that PBs strive not to force their clients to close shorts, so the short-sale deals have an indefinite maturity. (A) Are there deals that explicitly state maturity - e.g. the client borrows the stocks for precisely X months? (B) What is the longest time you have ever experienced between opening and closing the short position (I know it took Bill Ackman something like 5 years to give up on Herbalife demise)?

- Is there ever a time for PBs to be concerned about open positions of their clients (if they see the client is losing money big time - either in the actual position or elsewhere) - or are the position values insured by e.g. a collateral?

- I remember - hopefully correctly - that you mentioned it is quite "cheap" to borrow stocks that are not in a very high demand. How expensive shorting can get for the high demand stocks as of Feb 2018?

Thanks!!

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Postby Miami Vice » Thu Feb 08, 2018 10:36 am

- From your description it seems that PBs strive not to force their clients to close shorts, so the short-sale deals have an indefinite maturity. (A) Are there deals that explicitly state maturity - e.g. the client borrows the stocks for precisely X months?
Right. From a purely business perspective once they close the short the PB isn't going to make money off it anymore. And strategically speaking they don't want to damage the relationship and send the hedge fund elsewhere looking to cover.

There are deals with what we call a term date. They are usually associated with either maturities on fixed income securities or (more interestingly) arbitrage trades around corporate actions (dividends, tender offers, etc). Take a look at these links https://seekingalpha.com/article/380305 ... nt-premium

https://www.specialsituationinvestments ... ferential/
. Alstom is buying back 30% of the outstanding shares. There is no odd lot provision...The offer is closed to US residents.
So there was a tender offer in the market, but ONLY non-US owners of Alstom could participate. I think it might have been limited to EU holders.

The arbitrage play was to find American holders and borrow their stock. It would be parked in an EU entity's account and tendered from there. Once the offer expired and the price reverted to normal levels the borrower would buy it at that lower price on the market and return it. The difference between that high tender price and the lower market price was the profit.

We knew roughly what the profit would be and when the offer would expire, so we backed into a price based on the number of days it would be outstanding. The loan "matured" once the tender expired.

My role was to solicit the clients in my book who held it and get a commitment from them that they would not sell their shares before the tender was over.
-(B) What is the longest time you have ever experienced between opening and closing the short position (I know it took Bill Ackman something like 5 years to give up on Herbalife demise)?
Don't really recall anything noteworthy or specific off hand, but I've seen loans out about that long.
- Is there ever a time for PBs to be concerned about open positions of their clients (if they see the client is losing money big time - either in the actual position or elsewhere) - or are the position values insured by e.g. a collateral?
Both. Even PBs might be cut off by the banks who originate the loans if their credit situation deteriorates. The PBs are also providing financing to hedge funds, so they're mindful of that too.

Every loan is collateralized before it goes out the door in case the borrower never returns the stock. Hedge fund provides collateral to PB, PB provides it to the lender. Some of the PB's risk as principal in the deal is that the hedge fund never closes their short. For the PB to take possession of that collateral they'd need to buy the stock and return it, and which point they'd get the collateral back and keep it. My risk as agent is that the PB never returns it. That's why we require collateral marks to market every day. When Lehman died we sold off all the assets we were holding as collateral (either stuff we bought with cash collateral or actual equities/debt we accepted as collateral). We used the money we made selling everything to start buying back all of our clients stocks, bonds, and treasuries.

- I remember - hopefully correctly - that you mentioned it is quite "cheap" to borrow stocks that are not in a very high demand. How expensive shorting can get for the high demand stocks as of Feb 2018?
The "pricing" on loans is expressed one of two ways. When the loan is against noncash collateral it's a simple fee. Daily cost = collateral value x rebate expressed in basis points x (1/360). The cheapest non-cash trade is probably US Treasuries vs US agency collateral. That would be about 8 or 9 basis points.

On loans vs cash the price is expressed as a rebate. The rebate is the cost to use the borrower's cash. Right now for a cheap security they are expecting about 133 basis points to be paid to them for using their cash collateral. So the money we make on the trade is the difference between what the investments we buy yield and what we have to pay back. Clients that only let us buy govt money market funds are only yielding about 90bps, so we could never make a trade for them on easy to borrow names. The clients who let us go out 3 years are doing 150 or more.

On a hard to borrow name we still express the cost as a rebate, but it's a negative number. On something like TSLA we are going to get a 50 bp premium from the borrower on top of whatever we make investing. The client with the conservative guidelines is going to get into that trade. The really in demand shorts collect a premium of 1000bps or more.

Thanks for taking an interest in my work. I never find anyone to talk to about it :)

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Postby columbia » Thu Feb 08, 2018 12:19 pm

For sh|ts and giggles, I bought 5 shares of VXX (Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN), as soon as the market opened.
Up 12.74% today. :lol:

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Postby NTP66 » Fri Feb 09, 2018 7:28 am

These past two weeks is surely going to test one's mettle when it comes to their AA. I took advantage of the massive drops to buy more shares in my brokerage account, but I know at least one other person who is seriously considering a 10% swing back to bonds (despite my advice to stay the course).

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Postby Tomas » Fri Feb 09, 2018 11:09 am

- From your description it seems that PBs strive not to force their clients to close shorts, so the short-sale deals have an indefinite maturity. (A) Are there deals that explicitly state maturity - e.g. the client borrows the stocks for precisely X months?
Right. From a purely business perspective once they close the short the PB isn't going to make money off it anymore. And strategically speaking they don't want to damage the relationship and send the hedge fund elsewhere looking to cover.

There are deals with what we call a term date. They are usually associated with either maturities on fixed income securities or (more interestingly) arbitrage trades around corporate actions (dividends, tender offers, etc). Take a look at these links https://seekingalpha.com/article/380305 ... nt-premium

https://www.specialsituationinvestments ... ferential/
. Alstom is buying back 30% of the outstanding shares. There is no odd lot provision...The offer is closed to US residents.
So there was a tender offer in the market, but ONLY non-US owners of Alstom could participate. I think it might have been limited to EU holders.

The arbitrage play was to find American holders and borrow their stock. It would be parked in an EU entity's account and tendered from there. Once the offer expired and the price reverted to normal levels the borrower would buy it at that lower price on the market and return it. The difference between that high tender price and the lower market price was the profit.

We knew roughly what the profit would be and when the offer would expire, so we backed into a price based on the number of days it would be outstanding. The loan "matured" once the tender expired.

My role was to solicit the clients in my book who held it and get a commitment from them that they would not sell their shares before the tender was over.
-(B) What is the longest time you have ever experienced between opening and closing the short position (I know it took Bill Ackman something like 5 years to give up on Herbalife demise)?
Don't really recall anything noteworthy or specific off hand, but I've seen loans out about that long.
- Is there ever a time for PBs to be concerned about open positions of their clients (if they see the client is losing money big time - either in the actual position or elsewhere) - or are the position values insured by e.g. a collateral?
Both. Even PBs might be cut off by the banks who originate the loans if their credit situation deteriorates. The PBs are also providing financing to hedge funds, so they're mindful of that too.

Every loan is collateralized before it goes out the door in case the borrower never returns the stock. Hedge fund provides collateral to PB, PB provides it to the lender. Some of the PB's risk as principal in the deal is that the hedge fund never closes their short. For the PB to take possession of that collateral they'd need to buy the stock and return it, and which point they'd get the collateral back and keep it. My risk as agent is that the PB never returns it. That's why we require collateral marks to market every day. When Lehman died we sold off all the assets we were holding as collateral (either stuff we bought with cash collateral or actual equities/debt we accepted as collateral). We used the money we made selling everything to start buying back all of our clients stocks, bonds, and treasuries.

- I remember - hopefully correctly - that you mentioned it is quite "cheap" to borrow stocks that are not in a very high demand. How expensive shorting can get for the high demand stocks as of Feb 2018?
The "pricing" on loans is expressed one of two ways. When the loan is against noncash collateral it's a simple fee. Daily cost = collateral value x rebate expressed in basis points x (1/360). The cheapest non-cash trade is probably US Treasuries vs US agency collateral. That would be about 8 or 9 basis points.

On loans vs cash the price is expressed as a rebate. The rebate is the cost to use the borrower's cash. Right now for a cheap security they are expecting about 133 basis points to be paid to them for using their cash collateral. So the money we make on the trade is the difference between what the investments we buy yield and what we have to pay back. Clients that only let us buy govt money market funds are only yielding about 90bps, so we could never make a trade for them on easy to borrow names. The clients who let us go out 3 years are doing 150 or more.

On a hard to borrow name we still express the cost as a rebate, but it's a negative number. On something like TSLA we are going to get a 50 bp premium from the borrower on top of whatever we make investing. The client with the conservative guidelines is going to get into that trade. The really in demand shorts collect a premium of 1000bps or more.

Thanks for taking an interest in my work. I never find anyone to talk to about it :)
This is so awesome on so many levels! Thank you for making me smarter!

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Postby Viva la Ben » Fri Feb 09, 2018 11:22 am

For sh|ts and giggles, I bought 5 shares of VXX (Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN), as soon as the market opened.
Up 12.74% today. :lol:
How were they at close?

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Postby columbia » Fri Feb 09, 2018 11:23 am

Up 24%

Down 6% today....It's for fun and little else.

Tomas
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Postby Tomas » Fri Feb 09, 2018 3:58 pm

For sh|ts and giggles, I bought 5 shares of VXX (Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN), as soon as the market opened.
Up 12.74% today. :lol:
Where do you buy ETFs like VXX? I am all for buying small amount of investments just to make me focus on following them (oil, commodities...), but I am too cheap to pay commissions... :)

columbia
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Postby columbia » Fri Feb 09, 2018 4:00 pm

Vanguard brokerage account - I think it''s 6.95 a trade (which is probably not competitive)....but I don't plan on buying any more. :)

columbia
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Postby columbia » Sun Feb 11, 2018 10:26 am

'Bond vigilantes' are saddled up and ready to push rates higher, says economist who coined the term
https://www.cnbc.com/2018/02/09/bond-vi ... rdeni.html

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Postby LITT » Mon Feb 12, 2018 2:49 pm

my company started a roth option with the equivalent match for the standard retirement plan. my understanding is that there is not a cap on the contributions to this roth consistent with the 5500 limit (no one has been able to validate this, just anecdotal).

moving my current contributions to a roth will not change my tax bracket. i should change my contributions to the roth, correct?

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Postby NTP66 » Mon Feb 12, 2018 3:05 pm

When you say a Roth option, are you referring to a Roth IRA or a Roth 401k? They act completely differently. See here for the general rule of thumb on the order of investments: https://www.bogleheads.org/wiki/Priorit ... nvestments

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Postby LITT » Mon Feb 12, 2018 3:15 pm

401k

NTP66
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Postby NTP66 » Mon Feb 12, 2018 3:18 pm

You'll want to read that wiki article, including the link to the 'Traditional versus Roth' page, because it's not a straightforward answer.

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Postby Beveridge » Mon Feb 12, 2018 3:53 pm

You're correct in that the 401k (Roth or Traditional) limits are different from the IRA (Roth and Traditional) limits.

There is a cap on both, however. You can contribute up to 5,500 as you said (6,500 if 50+) to the IRA option, you can do 18,500 (24,500) in the 401k option.

So you can do 18,500 at work through the Roth 401k and 5,500 in your own Roth IRA wherever it might be. The matching part will be taxable later in life either way. There is no employer "roth" match - just your part can be Roth.

Moving your current contributions *COULD* change your tax bracket for a portion of your pay - You make it sound like you know that it won't.
Most of the time, you do want to go Roth although it really depends on your situation.

I'm willing to pay whatever tax now on my contributions to avoid paying any tax on the earnings it makes over the next 30+ years.

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Postby grunthy » Mon Feb 12, 2018 4:02 pm

At my wife and I savings rate for retirement, we should have a very nice nest egg.

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Postby LITT » Mon Feb 12, 2018 4:20 pm

#humblebrag

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