Being a trader for an investment bank has never been a stress free job. Besides the usual demands to generate profit, you are either looking ahead at your next opportunity, or over your shoulder to see if an axe is heading your way. It is not uncommon for some firms to over-hire in the good times, then conduct mass layoffs when things eventually turn sour. This time around, everyone is a little more tense and still waiting for someone to sound a horn signalling all clear.

There have been two rounds of layoffs at the firm where I work, both were very frightening experiences. Investment banks are run a littke bit differently compared to a typical business, so here’s a rundown of what a layoff day is like in my world:

7:15am: Arrive at work as usual, begin preparations for the day.

7:45am: Quick team meeting announced. In the boardroom we learn that “things will go down today” and to keep your head down and focus on your work.

9:20am: The trader to your left gets a phone call asking them to go upstairs. You don’t notice him leave. He is never seen again.

9:35am: You notice the trader to your left is missing. Shit.

10:15am: You take a moment to stand up and look around the trading room. You see empty chairs and wonder if people are on vacation or cut.

10:30am: People start talking about the day’s casualties, everyone wonders if it’s over yet.

11:10am: Your Managing Director walks around announcing who is no longer with the firm.

11:11am: The responsibilities of the departed are spread around the desk, on a temporary basis.  

2:40pm: Discussions begin on who will permanently cover now vacant jobs. This is your only opportunity to be proactive and try to increase your value (and hopefully save your job down the line).

4:00pm: Trading day winds down. Training begins on any new roles you’ve added to your job.

6:00pm: Go home and have a stiff drink.

Repeat this time-table for every round of layoffs. Obviously, for those who are left, priorities become very different. Very few people are looking ahead to new opportunities. Very few people are that concerned what their bonus will look like. Everyone is happy to still be employed. They are, however, conscious that as a survivor, their stock has gone up. The time will come, eventually, when traders again will look ahead to the next opportunity and realize they are in a better position than before.

From the wire:

-BANK OF CANADA CUTS KEY RATE BY 25 BP TO 0.25 PCT; NARROWS OPERATING BAND TO 1/4 POINT FROM 1/2 PT

BOC - WILL PROVIDE FRAMEWORK ON THURS FOR NONCONVENTIONAL POLICY, DOESN’T COMMIT TO IMMEDIATE ACTION

BOC-OVERNIGHT TARGET RATE BECOMES DEPOSIT RATE, WHICH IS LOWER LIMIT OF OPERATING BAND

-KEY RATE CAN BE EXPECTED TO STAY UNCHANGED UNTIL END Q2 2010, CONDITIONAL ON INFLATION OUTLOOK
-BOC SEES GDP GROWTH -3 PCT IN 2009 (REV FROM -1.2 PCT IN JAN), +2.5 PCT IN 2010 (REV FROM +3.8 PCT)
-BOC SEES 2011 GDP GROWTH +4.7 PCT,  PRODUCTION CAPACITY REACHED IN Q3 2011 (REV FROM MID-2011)
-BOC SAYS REVISES DOWN POTENTIAL GROWTH DUE TO RESTRUCTURING IN SEVERAL SECTORS
-BOC-CPI TO TROUGH AT -0.8 PCT IN Q3 (REV FROM -1 PCT), RETURN TO 2 PCT IN Q3 2011 (REV FRM MID-2011)
-BOC-CORE CPI TO DIMINISH THROUGH 2009, RETURN TO 2 PCT TARGET IN Q3 2011 (REV FROM MID-2011)
-BOC-RISKS TO INFLATION PROJECTION ARE TILTED SLIGHTLY TO DOWNSIDE
-BOC TO ROLL OVER PORTION OF EXISTING TERM PRA AGREEMENTS AT LONGER TERMS TO REINFORCE OVERNIGHT RATE
-BOC TO TARGET BALANCE OF C$3 BLN IN SETTLEMENT SYSTEM INSTEAD OF C$25 MLN TO REINFORCE O/N RAT

I’ve highlighted the most important part of the Bank of Canada announcement. The fact that the bank will keep interest rates at 0.25% for over a year will have a significant impact on the marketplace. Already yields on short term investments have plummeted. If the government plans on quantitative easing (printing money to buy government bonds), then yields will drop on longer term investments.

This will have an eventual impact on mortgage rates, to the benefit of borrowers. So for all those thinking about switched from variable to fixed mortgages, wait a little while longer. Rates are deffinetely not going up any time soon.

In truth, it’s more like what can they do. With rates already at historical lows, another 0.25% cut will likely have a small impact on lending. Most economists are predicting the bank will stand pat and not cut. However, the futures market where people are placing bets on the decision tell a slightly different story:

Probability is the likelihood that the Bank of Canada will either increase or  
decrease the Overnight Target Rate.                                             
                                                                    
===========================================
 Meeting                 Implied     Implied      Prob. Of     Prob. Of       
  Date                       Rate            BP                 0.25%        0.50%          
—————————————————————————–
21-Apr-2009       0.3620      -13.80       55.21%       44.79%       

What we can decipher from the above table is that traders, or people who are willing to bet real money on where interest rates are headed, believe that there is a 55% chance that the Bank of Canada will cut interest rates 0.25% tomorrow, the opposite view of most economists.

Ultimately, cut or no cut, the main focus tomorrow will be on quantitative easing. In simple English, quantitative easing is simply when the governement creates (prints) more money and uses it to buy bonds. The result is often a jolt in the arm to the economy …… and inflation. For now inflation isn’t really a problem and the amounts of money needed to be printed will be modest. We’ll know more tomorrow at 9am Eastern when the Bank’s announcement is published.

Many individual investors are completely unaware that some of the industry’s most powerful and meaningful tools are available free online. One of those tools is bank written economic reports.

While most financial research written is intended for client use only, economic reports tend to be public. One of the major driving factors behind this is media exposure. Business journalists need access to economic reports to write stories and quote authors. The more an economist is quoted in the media, the more credible they become.

The payoff is that the bank can then bring their oft quoted on tv/radio/print economist to client meetings and leverage them one of the benefits of doing business with the bank.

While individual investors won’t get any face time with economists, they can still read the reports that are published online regularly. The information contained, while somewhat bland, often yields nuggets of perspective that can be beneficial on analyzing future expectations.

Below are links to the economic publications of Canada’s big 5 banks. If you have time this weekend, take a few minutes to go over the weekly reviews published every Friday. It’s time well spent.

Econ Reports:

• Bank of Montreal
• Scotiabank
  
• Canadian Imperial Bank of Commerce
• Royal Bank of Canada
• Toronto Dominion Bank

The latest chapter in this hallowed story will be completed before April 27th. That date appears to be the deadline for GM’s planned all-equity offering for bondholders.

GM currently has a total of about 27.5 billion dollars worth of debt that is held by bondholders. Unfortunately for them, they don’t have the money to pay off these debts as they mature.

The bond market is already discounting this fact in its pricing. Take for example the GM bond that matures on July 15th 2033 and pays 8.375% annually. GM issued $3 billion worth of this bond back in 2003 and it currently trades on the market for 10-cents on the dollar, or a annual yield of about 82%.  Who wouldn’t want an 82% return for nearly 30 years?

However you won’t get that yield because GM doesn’t have the money to pay you. If they can’t pay the bondholders, they go into default and then bankruptcy. So now they want to convince the holders of all their debt to swap their bonds for shares.

How many shares per bond? Nobody knows.

Is it a good idea? They really have no choice.

It will be interesting to see how this pans out. If GM goes through with this proposal and offers debt holders equity, what percentage of GM will they own? If the amount is too low, debtors will be inclined to push the company into bankruptcy in hopes that they can more of their money through liquidation of GM’s assets. Or perhaps the government will step in and declare a value for the bonds. Will it be 10-cents to the dollar? 20? 5?

Get your gambling visor on, some one’s going to make a killing/go broke.

Dow Jones Industrial Average on April 15 2009

On March 6th 2009 the Dow Industrial Average (DJIA) bottomed out at 6,469.95. As we write this commentary, the Dow has risen to 7,960, an increase of 23% in just 40 days. Of course, compared to the 52 week high of 13,136.69, the Dow is still down about 40%. So the question is: Has the Dow peaked?

Looking at the attached chart, we can see that market has been in a defined downward trend. The technical analyst in all of us would then look to see if there is any evidence that the downward trend has been broken, in this case there clearly is no break, yet. The market currently sits atop a bear rally that has been losing momentum the past few days. Then again, we here at INVESTIZMO central are not big fans of technical analysis, so don’t forget your proverbial grain of salt.

Fundamentally, things aren’t that much better. Deflation, poor earnings, and overall lack of consumer confidence doesn’t usually equate to a strong equity market.

Question: So what can be done?

Answer: Hedge!

Besides selling all your stock to crystalize the past 40 days of gains, investors can look to alternative strategies to soften the blow if the market does a quick u-turn and tanks all over again.

DXD

The ticker DXD is a leveraged 2-for-1 inverse hedge against the Dow 30.  In plain English: for every 1 percent decrease in value of the Dow, DXD will increase by 2 percent. Of course if the opposite happens, you stand to lose a lot very quickly. The theory is that if the Dow rockets up, you’ll be happy taking a big loss DXD because the rest of your portfolio will be singing. DXD trades like a stock and is very easy to purchase.

PUTS

For the more advanced investor, now might be a good time to purchase a put option on your favorite index linked product, or even the index itself. A put option can give you many times more leverage with a fixed risk profile.

It should be an interesting few weeks to watch the Dow.

We're 1 Today!

One year ago today INVESTIZMO was launched, and what a ride it has been. Looking over some of our early posts, one has to wonder who could have predicted the outcome of  the past 365 days. We had some correct calls, some, not so much.

Highlights:

•  Tutorial on Asset Backed Commercial Paper
• Foreshadowed US Economic woes
• Silly, Bubbly, then Insane Oil Prices

Unfortunately, markets took a bit (read: huge) of a dive in the summer of 2008.  Priorities changed and posting stopped. Boo on us.

We promise to make year 2 a lot better!

Education

At a minimum a University Bachelor in Commerce/Economics and preferably some industry courses. All the large institutions recruit at the major Universities in September for positions beginning after graduation in June/Aug. There are usually two types of positions, Analyst & Associate. Analyst is for Undergrads and Associates for MBAs. 

To be considered you’ll need to have a strong GPA, expect to be asked to include a transcript.

Ability

You have to be able to show your interest and experience in the field. There are both very important and an interviewer can see right through you if you aren’t sincere. It is also important to research what EXACTLY you want to do & why. There are many different positions and desks and too many people seem unsure why they’re even applying for the position other than a “desire to be a trader”.

Personality

If you posses the education and ability, the next important thing is personality. Traders work in very close quarters. There are no cubicles or offices, just long desks. You have about 3-4 feet of space separating the staff. Employers want to make sure you’ll fit in with the corporate culture and that you will be able to handle the lifestyle. There are no real breaks, lunch is eaten at your desk. There are many cases of the top student with the perfect CV not getting a second round interview because they didn’t have the right personality ‘fit’.

Drive & Luck

If you don’t get an offer through campus recruitment (and very few do) all is not lost. If you have the ability, education & personality, then all you need is a lot of drive and a little luck. Get experience working in different financial jobs, make as many contacts as humanly possible and don’t be afraid to set up information interviews with firms where you’d like to work. In time, you should land some interviews and if you meet all the criteria, eventually get an offer.

So that’s it, now just spend your summer preparing for your application in September.

The Financial Times has a great article on an “error” found in the rating algorithms of rating agency Moody’s.  Apparently once Moody’s discovered the problem, they decided it was best to keep the investment’s inflated rating instead of adjusting it downward to the correct level.

Here is the evidence, the proof, that ratings agencies have fundemental biases and flaws. The system doesn’t work if they are not honest, much like similar work done by financial auditors.

In order for investor confidence to return, investigations must take place and we need to understand the full extent of their misappropriations. If it is determined that Moody’s or any other agency was aware in advance of the true risk of the structured credit products that had their highest ratings, then they deserve the same fate as Enron’s partner in crime, Arthur Andersen.

There should be no room in the the marketplace for deceitful watchdogs.

Today the Toronto Stock Exchange Index (TSX) hit 15,000 points, its highest number ever.

Even though 15,000 is purely a nominal number, skewed heavily by a small number of companies granted heavy weightings by the indexing formula, now is as good a time as any to reflect on the past 10 years.  

Why 10 years? Well, firstly that is as far back as my graph will go. More importantly, it is a period that encompasses two market cycles (the second is yet to be completed).

Looking at the far left In the above image, we can observe the effect of the tech bubble on the TSX index. A very quick boom was following by an equally quick bust. During the boom, the hot stock in the index was Nortel Networks. At one point, Nortel represented over 32%of the entire index. It was the market darling. It didn’t last. Today, Nortel trades at about 8 dollars, but it is really worth 80 cents after you account for the marketing wonders of stock splits (Nortel had a 1-for-10 reverse split).

Moving on over to the right, we can see that the current bull run does not appear to be too similar to previous bubble. Here we have a much slower and paced increase. There are however, some similarities.

Three companies: RIM, Encana & Potash Corp. account for over 20% of gains in the index over the past 5 years. The good news is that currently we have three firms leading the way, not one. There are also two sectors involved: Tech & Energy.  The last positive note is that the banking sector appears to be regaining steam. The big five Canadian banks haven’t been contributing much to the index the past few months as they struggled with write-offs from the credit collapse. If they continue to perform, it will provide a good hedge against a slowdown in Energy, assuming commodity prices begin to come back down to earth.

It is important to remember that the past will not reflect the future. Do not think that there is anything in the above chart that will hold the magic key to unlocking where the market will go next. Charts are only useful for giving us the ability to take a minute and reflect on how we got to where we are, so that our minds are a bit more focused as we decipher where it will go next.