Last time this happened was around 25 years ago

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/03/14/bcnbear414.xml

As discussed in the counterparty example a couple of days ago

http://www.noelwatson.com/blog/PermaLink,guid,98491b4a-d1ef-40a0-b115-3252e87ae62a.aspx

Firstly Ben proposed that lenders allow borrowers off some of the principal

http://www.federalreserve.gov/newsevents/speech/bernanke20080304a.htm

as this will be cheaper than allow the borrower to foreclose

Then we have Darling saying that we should have a gold standard of mortgage to get the MBS market moving again

http://www.ft.com/cms/s/0/cfb0b2ca-ea2f-11dc-b3c9-0000779fd2ac.html

No doubt this will make the same flawed assumptions that the other rating agencies made - using historically low levels of defaults and not taking into account fat tails in their calculations.

I think these two should stop trying to influence the market and let it run its course - even if there is some pain along the way

On a related note, Darling is planning to exclude Northern Rock from the budget

http://business.timesonline.co.uk/tol/business/economics/article3486125.ece

thereby keeping the net debt below the 40% GDP rule (something that Gordon has manipulated in the past). I wonder if PFI will make an appearance

http://www.guardian.co.uk/business/2008/feb/19/northernrock.banking3

Until recently, Xenomorph has been using a proprietary model to store data. However, reading in the latest Wilmott magazine (January 2008 - "Spreading Wings"),

(article should appear here at some point)

http://www.xenomorph.com/news/

CEO Brian Sentance talks about how Xenomorph are working with Microsoft to store the data on SQL Server. It will be interesting to see what performance can be achieved in the relational world (assuming that is how it is implemented).

On a related note, SQL Server is falling down the rankings on the TPC-C league

http://www.tpc.org/tpcc/results/tpcc_perf_results.asp?resulttype=noncluster

if SQL 2008 offered any tangible performance improvements I would have expected to see an entry by now

There are new records in other areas

http://blogs.msdn.com/sqlperf/archive/2008/02/27/sql-server-2008-launched-today-with-great-performance-amp-scalability.aspx

http://www.tpc.org/tpce/tpce_perf_results.asp

but could this be down to hardware improvements? Furthermore, the absence of competing databases implies that other vendors don't take this as seriously

First SocGen and Risk Magazine's award of Equity Derivatives House of the Year

http://www.risk.co.uk/public/showPage.html?page=685494

now Peleton and EuroHedge awarding credit prize

http://www.hedgefundintelligence.com/Event.aspx?ProductID=7122

I was looking at MoneySupermarket and comparing mortgage rates. A mortgage from Cheltenham and Gloucester came up as having the best rate of 4.99%, but further investigation showed that it came with a 2.5% initial fee

I therefore wrote a very simple calculator to work out how much the total cost of an interest only mortgage is for a given set of criteria taking the initial fee into account

In the example shown above, for a 2 year £100000 mortgage with an interest rate of 5.49% and fee of £899, the total cost is £11273.

http://www.bankofengland.co.uk/monetarypolicy/pdf/cpiletter070417.pdf

http://www.hm-treasury.gov.uk/media/FEE/3D/chxresponse_170407.pdf

I am confident that inflation will not return to 2% unless rates are raised significantly

Not entirely unexpected - to me it seems that the Bank were trying to keep CPI as close to 3% as possible without breaching it rather than aim for their official 2% target. RPI is now at 4.8%.

http://www.statistics.gov.uk/pdfdir/cpinr0407.pdf

http://www.statistics.gov.uk/pdfdir/cpi0407.pdf

http://www.bloomberg.com/apps/news?pid=20601087&sid=ahFq3UK672s8&refer=home

The minutes of the April meeting will be out tomorrow - I would be surprised if people are now not losing faith with the ability of the MPC to make the tough decisions when necessary.

Of course, real inflation is much greater than 3.1%, but we are stuck with this measure for the time being. I calculated my inflation and it was substantially more than the headline rate.

http://www.telegraph.co.uk/money/graphics/2007/03/31/YourInflationMar07.xls

The pound is very close to 2 dollars

and Betfair are showing an almost guaranteed interest rate rise next month

CVC's attempt to buy J Sainsbury appears to be over

http://news.independent.co.uk/business/news/article2442076.ece

with the 5Y CDS spread trading at  ~45 bps, down from its peak of ~130 bps, but still above the spread of ~25bps 6 months ago.

However, as can be seen from the chart below, the share price hasn't decreased by as much. If it mirrored the CDS spread, i would expect it to return to below £5.00.

Two things to note:

• Usually share prices and CDS spreads move in opposite directions - if a company is in trouble the shares go down as the perception is that the company is worth less and the CDS spreads increase because there is more likelihood of default. A leveraged buyout is different. The CDS spreads increase because the buyout will be financed using debt, making the company more risky, and the share price usually increase because the potential bidder tends to offer more than the market value to tempt people to buy into the offer
• In common with several other entities (Nokia being one that springs to mind), Sainsbury does not have any unsecured debt outstanding

http://ftalphaville.ft.com/blog/2007/04/11/3757/cds-report-market-awaits-cvcs-next-move-on-sainsbury/

I used to hold SBRY when it paid a good yield (around 6%) but sold it when the dividend cut was announced. If I were to attempt to make money from my above beliefs, I would either

• Go short on SBRY stock
• If I was worried about a buyout still happening (and assuming I could trade CDS as a private investor), I would buy CDS protection as a hedge.

http://www.finextra.com/fullstory.asp?id=16606

http://www.finextra.com/fullstory.asp?id=16254

The FTSE dipped below 6000 yesterday

As soon as 6000 was breached it quickly fell another 10 points before recovering later in the day

Even after the last week, FTSE volatility is still historically low (EWMA 5 day window)

Below shows the volatility of the ITRAXX Xover vs. FTSE 100 over the last few months

I haven't plotted the volatility of the main ITRAXX Europe index, but if it remains high, it will be interesting when the CPDO's come to roll on the 20th of this month.

The article below discusses the markets over the last week

http://www.ft.com/cms/s/7be783ec-cb51-11db-b436-000b5df10621.html

http://www.theserverside.com/news/thread.tss?thread_id=42563

Very biased towards Java (banks do write real time trading applications in .NET - my client is one of them), but worth listening to as it gives a good idea of what tools are being used in banks i.e. Tibco Rendezvous, and what the Java equivalent is for the .NET stuff we do.

Also worth reading the comments in the thread afterwards. One of the things discussed is "in memory" databases -

http://www.oracle.com/timesten/index.html

Oracle have TimesTen, but I can't find anything being developed over at Microsoft.

After the failure of LTCM

http://www.amazon.co.uk/gp/product/1841155047/026-8787779-9446068?v=glance&n=266239

it appears that Robert Merton's latest hedge fund related venture, IFL continuum, hasn't been too sucessful either

http://www.bloomberg.com/apps/news?pid=20601087&sid=api7F5j8W_nY&refer=home

http://www.amazon.co.uk/gp/product/1861977905/026-8787779-9446068?v=glance&n=266239&s=gateway&v=glance

An interesting book, and worth reading after Taleb to compare the two

http://www.noelwatson.com/blog/PermaLink,guid,f783a888-3239-433a-a850-db28dcc1994e.aspx

Mandelbrot differs from Taleb in that he thinks share prices are not random. Where they both agree is that share returns are not normally distributed.

As one of the reviewers on Amazon points out, a lot of talking is done about multifractals and how they can be used to generate accurate share price histories, but using fractals to assist with modelling is not really covered.

Now that I no longer pay for a service (Hemscott), I have found it difficult to get detailed information on shares - this site is one of the best I have found

http://fool.digitallook.com/?action=financials&ticker=BT.A&sub_action=fundamentals&page_view=financials

(Link shows BT Group's fundamentals)

I was reading this blog yesterday. The author talks about how some fund managers outperform the market, and a list of names are given. This is interesting to me after having just finished reading "Fooled by Randomness".

http://bigpicture.typepad.com/comments/2006/07/outperforming_f.html

Taleb believes that with a big enough pool of fund managers, probability dictates that some will outperform the benchmark, even over a long period of time.

I am currently reading Mandelbrot - the two authors have some contrasting opinions - review to follow

http://www.amazon.co.uk/gp/product/1861977905/026-8787779-9446068?v=glance&n=266239

UPDATE: After the comment from Barry, I thought I would give my opinion on outperformance. For a number of years I have invested my money using various mechanical strategies including:

• Stephen Bland's High Yield strategy

http://www.fool.co.uk/valueinvesting/2006/vi060630.htm?source=EDSP

• Validea

http://www.validea.com/home/home.asp

As can be seen from the links, these have outperformed their respective benchmarks over a timeframe of several years. If the market were truly efficient this shouldn't happen, unless we are at a particular point in the economic cycle that flatters these strategies. If I didn't believe outperformance were possible I would invest in a low cost tracker.

Other strategies that I've investigated but not yet invested are:

• Joseph Piotroski

http://www.alphaseeker.com/val03.htm

I wrote an application that downloaded all FTSE constituents (around 2200 at the time) from Hemscott and crunched the data to provide me with passing companies. I believe this strategy may be more suited to the U.S. as it requires quarterly reporting.

• Joel Greenblatt

http://www.amazon.co.uk/gp/product/0471733067/202-3803663-2591064?v=glance&n=266239

I was using Excel yesterday for some simple probability work, and what I was calculating as the standard deviation wasn't the same as what STDEV() was giving me. What I was doing was calculating STDEVP().

Difference shown below

Taleb has a blog on Wilmott

http://www.wilmott.com/blogs/kurtosis/index.cfm

and delivers a lot of lectures through 7city/Wilmott.

To summarise, Taleb proposes that success can be attributed to luck rather than skill. In theory, given enough investors, it is possible to produce another George Soros or Warren Buffett. When people fail, they put it down to bad luck, when people do well, they put it down to skill.

Futhermore, because the human mind tends to focus on the short term, people underestimate the risk of the "fat tail" event (one of LTCM's founders used this as an excuse for why the fund had failed). Taleb has a company, Empirica LLC, that takes advantage of this by buying options - on a typical day he will lose a small amount of money, but when a big market movement occurs (people selling the options underestimate this risk), he will make more than the amount he has lost, in theory.

http://www.amazon.co.uk/gp/product/0812975219/026-8787779-9446068?v=glance&n=266239

Free Office developer event in London

http://msevents.microsoft.com/CUI/EventDetail.aspx?culture=en-GB&eventid=1032301774

http://uk.finance.yahoo.com/q/hp?s=GM

This is useful for analysing characteristics of U.S. stocks (volatility, drift etc.) but is more limited for U.K. companies

http://help.yahoo.com/help/us/fin/quote/quote-12.html

http://www.wilmott.com/blogs.cfm

There are some impressive people blogging on Wilmott including authors of books I've read

• Satyajit Das
• Emanuel Derman
• Nicholas Nassim Taleb
• Paul Wilmott

http://www.amazon.co.uk/exec/obidos/ASIN/0273704745/qid=1150275471/sr=8-1/ref=sr_8_xs_ap_i1_xgl/026-8787779-9446068

This book has been discussed on Wilmott, with a few people moaning that it puts their profession in a bad light despite having not read the book.

http://www.wilmott.com/messageview.cfm?catid=11&threadid=38376

Das claims to have been in the industry for 25 years and has published a number of books

http://www.amazon.co.uk/gp/search/026-8787779-9446068?search-alias=stripbooks&field-author=Das,%20Satyajit

After reading Liar's Poker a while ago

http://www.amazon.co.uk/exec/obidos/ASIN/0340839961/sr=1-2/qid=1150275862/ref=sr_1_2/026-8787779-9446068?%5Fencoding=UTF8&s=books&v=glance

I hoped we'd get another similar book to carry on where that one left off. I personally feel that Traders Guns and money has almost pulled it off. The material in this book is very up to date, even discussing the GM downgrade in May 2005.

http://www.financialpolicy.org/fpfspb26.htm

There are a few good quotes in the book, including

"Selling options is like eating like chickens and sh*tting like elephants"

I felt that the book was maybe slightly too long and it drifted a bit after in the second half, but certainly worth reading

I spent some time looking around other parts of Bloomberg on Friday (I normally spend most time on AXCD). Looking at FTSE, I was comparing the index level with BBC and Yahoo, and discovered that Yahoo leads both BBC, and surprisingly Bloomberg.

• Yahoo

• BBC

• Bloomberg

http://www.amazon.co.uk/exec/obidos/ASIN/0471770574/qid=1148567945/sr=8-1/ref=pd_ka_1/203-6138512-1161516

Aaron Brown posts on Wilmott regularly

http://www.wilmott.com/tombstone.cfm?ProfileID=18

and the book was discussed on here

http://www.wilmott.com/messageview.cfm?catid=11&threadid=34004

This hasn't been reviewed on Amazon.co.uk yet, but has several reviews on the U.S. site

http://www.amazon.com/gp/product/0471770574/qid=1148567945/sr=8-1/ref=pd_ka_1/103-6532838-8605402?n=283155

Definitely a book worth reading - but it would be good to have a bit more written about his trading experiences rather than poker

MiFID requires that you are giving your client best execution.

http://www.fsa.gov.uk/Pages/About/What/International/EU/fsap/mifid/index.shtml

http://www.exchange-handbook.co.uk/articles_story.cfm?id=54127

Section 4.29 states that CDS (single name and tranches) come under the requirement

http://www.fsa.gov.uk/pubs/discussion/dp06_03.pdf

although section 4.39 indicates that equities will require the most transparency.

The following link appeared on ContractorUK today

http://www.contractoruk.com/news/002671.html

The Sensex was extremely volatile on Monday

with the market having to be suspended for an hour after it plunged 10%. The police have been told to watch for suicide attempts at likely spots such as lakes and canals.

http://inhome.rediff.com/money/2006/may/23mkt1.htm

http://www.hindustantimes.com/news/5922_1703947,0015002500000000.htm

http://www.iol.co.za/index.php?set_id=1&click_id=126&art_id=qw1148291100209B253

Looking at the performance over the past five years, there may still be a long way to fall

I have commented on this previously

http://www.noelwatson.com/blog/PermaLink,guid,35888a0f-c06a-4e6c-a818-5d4871ed35b3.aspx

but came across a similar problem in Excel today. A trader is using the INT() function to remove decimal places. A number such as 23.59 will become 23. However, our solution (correctly I believe) interprets this as 24. It may be that the trader should've used ROUND().

http://support.microsoft.com/kb/q196652/

• Calculating simple and compounded spot rate with Act/Act in a stored procedure

DECLARE @DaysInYear DECIMAL (4,1)

SELECT @DaysInYear = CASE YEAR(GETDATE())%4
 WHEN 0 THEN
   CASE YEAR(GETDATE()) % 100
    WHEN 0 THEN 365.0
    ELSE  366.0
   END
 ELSE 365.0
END

SELECT CAST(((1/DiscountRate)-1)/(DATEDIFF(dd, GETDATE(), DATEADD(mm, Term*12, GETDATE()))/@DaysInYear)*100 AS DECIMAL (4,2)) As SimpleCompoundingSpotRate,
CAST(-LOG(DiscountRate)/(DATEDIFF(dd, GETDATE(), DATEADD(mm, Term*12, GETDATE()))/@DaysInYear)*100 AS DECIMAL (4,2)) AS ContinouslyCompoundingSpotRate,
DiscountRate, Term FROM Term

• Same as above but with 30/360

SELECT CAST(((1/DiscountRate)-1)/Term*100 AS DECIMAL (4,2)) As SimpleCompoundingSpotRate,
CAST(-LOG(DiscountRate)/Term*100 AS DECIMAL (4,2)) AS ContinouslyCompoundingSpotRate,
DiscountRate, Term FROM Term

• Calculating discount curve from sport rate and vice versa in a spread sheet (no day count convention)

Attachment

SpotRate.xls (18.5 KB)

References

http://www.moneychimp.com/articles/finworks/continuous_compounding.htm

http://www.riskglossary.com/link/fixed_income_term_structure.htm

http://www.euribor.org/html/download/euribor_2006.txt

http://www.riskglossary.com/link/compounding.htm

Active Credit Portfolio Management - Page 153

http://www.forbes.com/markets/feeds/afx/2006/03/05/afx2571014.html

I was discussing this is in the context of GM last week

http://www.noelwatson.com/blog/PermaLink,guid,7f056791-b34d-4d40-9554-ad772079878f.aspx

I'm not sure there are any companies with a higher spread than GM that haven't subsequently defaulted. I will be watching the GM spread with interest today.

http://www.topix.net/content/krd/14496815494907807422

I firmly believe in the mechanical investing approach and believe that taking the human element out of the decision making enhances returns. Modern computers offer the ability to crunch massive amounts of data, and although past performance doesn't predict future returns, I think this is the future for simple asset types such as equities.

 I use Validea to tell me which shares I should be holding.

http://www.validea.com/home/home.asp

I always knew this to be true, but didn't realise until after I'd read the Fischer Black book that it had a name

http://mathworld.wolfram.com/SiegelsParadox.html

Following on from my discussion on active vs. Mechanical trading, I found the following on Wilmott

http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID881105_code191081.pdf?abstractid=881105&mirid=1

Note that this is taking into account fees.

This book detailed Black's advanced thinking and how his ideas were rejected by the economic community at the time. Of particular interest to me was his discovery that a typical active fund doesn't beat a passive tracker, and that value (low beta) shares outperform growth shares over the long run. This was back in the 70's, yet active funds are still very popular today.

http://www.amazon.co.uk/exec/obidos/ASIN/0471457329/qid=1139387144/sr=8-1/ref=sr_8_xs_ap_i1_xgl/026-0058056-7028455

http://www.math.uic.edu/~hanson/Finance/M_Page_QF.pdf

I've just finished Emanuel Derman's autobiography

http://www.amazon.co.uk/exec/obidos/ASIN/0471394203/026-8223383-2541264

I bought this book as I was interested to read about someone that was actually working with financial theory in the 80's and 90's on Wall Street. After discussion of his life as a physicist, the remaining half of the book talks about his time on Wall Street. Of particular interest is his discussion on the Black-Scholes model, and the problem with constant volatility and "the smile"

http://en.wikipedia.org/wiki/Black-Scholes

http://en.wikipedia.org/wiki/Volatility_smile

A recommended read - his site is good too.

http://www.ederman.com/new/index.html

Other non technical finance books that I recommend are

Liar's poker - discusses life in Salamon in the 80's - home of BSD's

http://www.amazon.co.uk/exec/obidos/ASIN/0340767006/qid=1138106679/sr=1-1/ref=sr_1_2_1/026-8223383-2541264

When Genius Failed - discusses the downfall of LTCM

http://www.amazon.co.uk/exec/obidos/ASIN/1841155047/026-8223383-2541264

Both books feature John Meriwether.

http://news.bbc.co.uk/1/hi/business/4623076.stm

Allegations of fraud from internet firm Livedoor caused the Nikkei to drop almost 3% - so far this week it has lost 6.8%.

What is surprising is that the market shut not because of the index dropping too much, but because volumes were too high - systems should be designed to cope with this.

There aren't that many books discussing both .NET and Finance

http://www.apress.com/book/bookDisplay.html?bID=10033

http://www.amazon.co.uk/exec/obidos/ASIN/1590595645/qid%3D1137504778/026-8223383-2541264

Published March 2006

Article in the Sunday Times yesterday

http://www.timesonline.co.uk/article/0,,2095-1985641,00.html

This isn't a new development - they were the most shorted back in November

http://www.timesonline.co.uk/newspaper/0,,2769-1879544,00.html

Data Explorers, the company that provides the data, has a graph showing the shorting

http://www.dataexplorers.co.uk/dxl/popups/mfi.html

Sells core brokerage business to private equity group for $768 million and Refco Inc. files for bankruptcy. None of the regulated subsiduaries have filed for Chapter 11.

According to The Guardian, hedge funds face crisis after a subsiduary of Refco suspended customer accounts

http://www.guardian.co.uk/usa/story/0,12271,1592054,00.html

Not sure how much of a crisis this will be - surely not as bad as the Ford/GM downgrades earlier in the year?

Listed below are some of the work related books I have read, newest to oldest, over the last couple of years.

.NET

• Effective C#

http://www.amazon.co.uk/exec/obidos/ASIN/0321245660/qid=1122547865/sr=8-1/ref=sr_8_xs_ap_i1_xgl/202-1389977-0403848

I bought this one from after a recommendation from a colleague. Managed to read within a day and learnt a few things, such as CLSCompliant attribute

http://msdn.microsoft.com/library/default.asp?url=/library/en-us/cpref/html/frlrfSystemCLSCompliantAttributeClassTopic.asp

• Customising the Microsoft .NET framework

http://www.amazon.co.uk/exec/obidos/ASIN/0735619883/qid=1122548063/sr=1-1/ref=sr_1_18_1/202-1389977-0403848

Not managed to read yet as other books have seemed more tempting

• Patterns of Enterprise Application Architecture

http://www.amazon.co.uk/exec/obidos/ASIN/0321127420/qid=1122548175/sr=1-1/ref=sr_1_3_1/202-1389977-0403848

A good read - helps you focus on reuse of code through identifying common problems and implmementing patterns.

• .NET Remoting

http://www.amazon.co.uk/exec/obidos/ASIN/0735617783/qid=1122549105/sr=2-3/ref=sr_2_3_3/202-1389977-0403848

Not that impressed. Maybe the book came out too early, but doesn't seem to follow best practice and isn't a patch on Rammer.

• Advanced .NET Remoting

http://www.amazon.co.uk/exec/obidos/ASIN/1590594177/qid=1122549105/sr=2-1/ref=sr_2_3_1/202-1389977-0403848

The remoting bible. Contains the vast majority of information you need on remoting. I have used code (encryption) from here in a production system. Supported by an excellent website.

http://www.thinktecture.com/

• .NET Components

http://www.amazon.co.uk/exec/obidos/ASIN/0596003471/qid=1122549335/sr=1-8/ref=sr_1_3_8/202-1389977-0403848

Read in conjunction with another O'Reilly C# book, Programming C#. Has been updated with 2.0 info

http://www.amazon.co.uk/exec/obidos/ASIN/0596007620/qid=1122549335/sr=2-1/ref=sr_2_3_1/202-1389977-0403848

• Programming C#

http://www.amazon.co.uk/exec/obidos/ASIN/0596006993/qid=1122549565/sr=2-3/ref=sr_2_3_3/202-1389977-0403848

A good introduction to C# and if you are a complete beginner, it may be worth reading the introduction book first

http://www.amazon.co.uk/exec/obidos/ASIN/0596003765/ref=pd_sim_b_dp_3/202-1389977-0403848

• Applied Microsoft .NET Framework Programming

http://www.amazon.co.uk/exec/obidos/ASIN/0735614229/qid=1122549739/sr=2-1/ref=sr_2_3_1/202-1389977-0403848

The .NET bible. This should be on every .NET developers bookshelf.

Finance

• Fixed Income Mathematics

http://www.amazon.co.uk/exec/obidos/ASIN/0786311215/qid=1122550071/sr=1-1/ref=sr_1_2_1/202-1389977-0403848

This book helps understand bond pricing calculations because it contains lots of examples with numbers. It is then easy to use the examples in code to arrive at the same result

• Paul Wilmott Introduces Quantitive Finance

http://www.amazon.co.uk/exec/obidos/ASIN/0471498629/qid=1122549959/sr=8-2/ref=sr_8_xs_ap_i2_xgl/202-1389977-0403848

Really easy to read - good introduction. Recommends the Fabozzi book in Chapter 14.