• Banks on Track to Make $38 Billion in Overdraft Fees
    Posted by on August 10th, 2009 at 9:14 am

    Banks are making loads of money, just not in banking.

    Overdraft fees accounted for more than three-quarters of service fees charged on customer deposits, he said.
    The most cash-strapped customers are the hardest hit by such fees, with 90 per cent of overdraft revenues coming from 10 per cent of the 130m checking accounts in the US. Regular use of overdrafts is most common among consumers with low credit scores, Moebs discovered.
    Banks say that the fees compensate for the risk they incur when they pay on behalf of customers who do not have enough money in their accounts. “Overdraft fees are there for a reason, we take on a lot of risk,” a senior banker said. “It’s a service to our customers, they want us to pay their overdrafts.”
    The highest overdraft fees were charged by the largest banks, said Mr Moebs. At banks with assets greater than $50bn – a group including Citigroup, Bank of America, JPMorgan Chase and Wells Fargo – the median overdraft fee is set at $33.
    At BofA, a customer overdrawn by as little as $6 could trigger a $35 penalty. If the customer does not realise they have a negative balance and continue spending, they could incur that fee as many as 10 times in a single day, for a total of $350. Failing to repay the overdraft within a few days results in an additional $35 penalty.

    So what do banks pay when they overdraft?

  • If You Test Every Correlation Possible, You’ll Eventually Find Something
    Posted by on August 10th, 2009 at 9:05 am

    Exact Prediction of S&P 500 Returns
    A linear link between S&P 500 return and the change rate of the number of nine-year-olds in the USA has been found. The return is represented by a sum of monthly returns during previous twelve months. The change rate of the specific age population is represented by moving averages. The period between January 1990 and December 2003 is described by monthly population intercensal estimates as provided by the US Census Bureau. Four years before 1990 are described using the estimates of the number of 17 year-olds shifted 8 years back. The prediction of S&P 500 returns for the months after 2003, including those beyond 2007, are obtained using the number of 3 year-olds between 1990 and 2003 shifted by 6 years ahead and quarterly estimates of real GDP per capita. A prediction is available for the period beyond 2007. There are two sharp drops in the predicted returns – in 2007 and 2009, and one strong rally in 2008. Equivalently, S&P 500 index should drop in 2007 and 2009 to the level observed one year before.
    Potential link between S&P 500 returns and 9-year-old population is tested for cointegration. The Engle-Granger and Johansen tests demonstrate the presence of a long-term equilibrium (cointegrating) relation between these variables. This makes valid standard statistical estimates. Correlation between the predicted and observed indices, including RMS difference, linear regression, and VAR demonstrate good prediction accuracy at two-year horizon, when the prediction uses 7-year-olds instead of 9-year-olds. The RMS difference between the observed and predicted returns for the period between 1992 and 2003 is only 0.09 with standard deviation of the observed series for the same period of 0.12 and the naïve (random walk) RMS deference of 0.18.

  • Traders Bet Rally Won’t Last
    Posted by on August 10th, 2009 at 8:43 am

    Historically, Septembers in the first year of a presidential administration have been tough for the stock market. For example, there was some unpleasantness in 1929, 1973 and 2001. Some traders are already bracing for trouble in September 2009:

    Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September, historically the worst month for U.S. equities.
    Traders are betting the VIX, a gauge of expected stock swings, will increase 13 percent in the next five weeks, according to futures prices compiled by Bloomberg. That’s the biggest spread since August 2008, right before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.
    (…)
    History shows that U.S. investors lose the most in September. The benchmark index for American equities fell 1.3 percent on average since 1928 that month, data compiled by Bloomberg show.

    (Via: Joe Weisenthal)

  • Poseur Alert
    Posted by on August 9th, 2009 at 10:59 pm

    Check out this lede:

    In the coda of the Passacaglia and Fugue in C minor, composer Johann Sebastian Bach repeats the same chord sequence over and over again, leading the listener to anticipate one resolution, only to provide a tone completely different.

    Can you guess what the story is about? If you said, the Nationals 9-2 victory over the Diamondbacks, congratulations.

  • The Semi-Good Jobs Report
    Posted by on August 7th, 2009 at 11:05 am

    After nearly two years of horrible jobs report, we finally got one that’s not so horrible. Though it’s not so good either.
    Let’s start with the good news. Nonfarm payrolls fell by 247,000 last month. That’s the shallowest decline in nearly a year. The unemployment rate ticked down from 9.5% to 9.4%. If you want to go out a few more decimal places, it fell from 9.507% to 9.360%.
    If we look at the numbers more closely, we see that the civilian labor force dropped by 422,000 last month (that’s seasonally adjusted) while the number of employed dropped by 155,000 (note that that is a different calculation from the NFP report).
    In other words, the increase in the employment rate is due to the fact that people are leaving the job market faster than people are losing jobs.

  • Junk Stocks Rally
    Posted by on August 7th, 2009 at 10:18 am

    Reuters reports:

    The junk-stock rally lives on.
    The biggest winners since the U.S. stock market got another dose of bull market fever in mid-July have been the companies with the most beaten-down shares and the ones whose business outlooks are seen as the riskiest within the Standard & Poor’s 500 Index.
    This winners’ circle has been dominated by 81 S&P companies with unspectacular credit ratings of “BB” or lower, also categorized as high-yield “junk.”
    The stock prices of these junk-rated companies have jumped on average by between 21 percent and 29.5 percent between July 10 and Aug. 4.
    In comparison, investment-grade companies rated “BBB” or above have seen their shares rise between 9.50 percent and 19.25 percent, according to data from Bespoke Investment Group, a financial research firm based in Harrison, New York.

  • The New York Times Fires Ben Stein
    Posted by on August 7th, 2009 at 10:09 am

    Apparently, you really need to go out of your way to get fired as a columnist at the NYT. This is vindication for Felix Salmon who’s been a constant critic of Stein. My only concern is that Stein wasn’t fired for his content but for appearing in a commercial.

  • Recession Plunges Upper Middle Class Family into the Moderately Upper Middle Class
    Posted by on August 6th, 2009 at 1:27 pm

    Break out the world’s smallest violin:

    Stacey: It used to be, she’d be bored on a Saturday and she’d say, “Let’s go get our nails done,” and I’d say okay. Now, I’ll sometimes say no — or we’ll go, but we’ll only do our fingers, not our toes.
    She used to do gymnastics, which she still wants to do. And she wants to do ice skating. But the cost of these extracurricular activities is so expensive that we can only afford to do the one. Even that one is a strain. Every time she tests for a belt, every six weeks, it’s $45, and sparring equipment is $200.

    The horror.

    Michael: We want the kids to see D.C. And I thought, the zoo — that’s a cheap thing to do. Well we went, and by the time we paid for pizza, two cups of coffee, hot chocolate and parking, it came to $100. We’re not going to D.C. again.

    Did he say really parking? They live in Ashburn and they drove to the zoo ignoring the fact that there’s a metro stop by the zoo. They spent $100 on going to the zoo and it’s somehow D.C.’s fault.

  • Spreads Continue to Tighten
    Posted by on August 5th, 2009 at 12:08 pm

    Want an explanation for the rally? Check out the dramatic widening and closing of the spread between long-term Treasuries and corporates. The gap is still over 300 points and it was often below 200 during 2004 to 2007.
    fredgraph080509.png

  • Scientists Crack Two-Envelope Problem
    Posted by on August 5th, 2009 at 10:33 am

    Here’s a fascinating story. Two Australian scientists have cracked the legendary two-envelope problem.
    Let’s say that there are two envelopes with money in them, one has twice as much as the other. You can open one see how much is there. You now have the option of switching or holding, what do you do?
    The CW says it doesn’t matter, you’re just playing the odds so why bother. Well, these two researchers have a way to beat the odds:

    The formula relates a particular amount of money (y) found in the first envelope to the probability (P) that you should switch envelopes to gain in the long term.
    For example, if you open the first envelope and see $10, the formula might tell you that the probability you should switch envelopes is 0.1 – that is once in every 10 games played.
    The formula calculates a smaller probability of switching the larger the original amount (y) is.
    Using the previous example, if y is $100, the probably might drop to 0.01, or 1 in every 100 games.
    Random strategy
    What’s key to this strategy is that the decision when exactly to switch – in which game – must be random, says McDonnell, who studies random processes in telecommunications and the brain.
    McDonnell says their solution is different to those that have gone before because of this random element.
    “Our solution is to switch randomly,” he says.
    “Each time you are offered two envelopes, you observe the amount in one envelope, and then the larger the amount observed, the less likely it is that you should switch, but the choice is still random.”
    “The key result is that this kind of random switching leads to a long-run financial gain in comparison with either (i) never switching or (ii) switching randomly in a manner that ignores the observed amount in the opened envelope.”

    So is there a stock market connection? You betcha.

    In real life, the actual gain will obviously depend on how much money is actually put in the envelopes, says McDonnell.
    Abbott says the growth in money seen in the two envelope problem appears to have some similarities to a theory known as “volatility pumping”.
    “Volatility pumping is a way of switching between poor investments and yet winning an exponentially increasing amount of money,” he says.
    “It suggests the power of changing your portfolio of stocks periodically, buying low and selling high.”