Quantitative Contemplations

Interview Questions

2009-11-11T20:18:00.001-06:00

Most of the interview advice I've read focuses on how to answer the interviewer's questions. It is very important to learn how to present yourself to a potential employer, but the interview is also the best time seriously investigate whether the position would suit you.

I've used the questions below to gain insight into the details of a job opportunity as well as the dynamics of the group of people I would be working with. You'll notice that I ask the same questions of management as I do co-workers. I generally hope to hear the same answers from each group because divergent answers can signal trouble.

Of every interviewer:

What is your education and employment experience?
Of your education and prior professional experience, how much do you use those skills in your current position?
Why did you choose to work here, and what keeps you here?

Of your potential manager:

How long have you managed this team?
Is this a new position? If not, why did the last person leave and where did they go?
What is your "growth plan" for my first six months? What skills will I develop that I don't currently have?
Do you have any questions or concerns about my ability to perform this job?
Can you give me examples of how you've dealt with employee's frustration and how you've dealt with your frustration with them?

Of your potential co-workers:

How would you describe your organization's and manager's personality and management style?
How does communication flow between you and upper management? How often do you talk with people several "rungs" above you?
When an urgent matter comes from your manager, how is it delivered and managed?
Can you give me examples of how management deals with employee's frustration and with their frustration with you?

Of both your potential manager and co-workers:

How many meetings a week does your team have? How long do last? What is their purpose? How productive are they?
What skills are required to be successful at this job?
When top performers leave the company why do they leave and where do they usually go?
How are new ideas, procedures, tools, etc. received?
What kind of work are people with analytical backgrounds involved in?
What kind of people get promoted?
How are project assignments decided?

Please feel free to make your own suggestions in the comments. I'll add worthy contributions to the post.

Fiscal Haiku

2009-11-21T21:17:00.002-06:00

After sharing one of my favorite haikus:

Haikus are easy,
but sometimes they don't make sense.
Refrigerator.

with a friend, he pointed me to fiscalhaiku.com. This prompted me to create my very own fiscal haiku, but I decided to post it here rather than on their site. It's based on the writings attributed to Alexander Tyler.

Vote the treasury
and destroy fiscal restraint.
Vote the nation's fall.

Office 2007

2009-10-27T12:47:00.000-05:00

My employer just "upgraded" to Office 2007. Among all the new annoyances, this is my favorite:

I open a file and I'm greeted with a message box that reads, File error: data may have been lost.

Could they have possibly come up with a more ambiguous and vague error? Data may have been lost? That seems like something important enough to provide more than a message box with an "OK" button to press. No "click here for more information", just a button to acknowledge that something bad may have happened.

Office 2007, the Vista of office suites.

Chuck Norris Facts

2009-05-05T08:47:00.005-05:00

If you're not familiar with Chuck Norris Facts, I suggest you check them out. These were sent to me by Dirk Eddelbuettel via email.

Chuck Norris, investment banker
from Felix Salmon by Felix Salmon

If you haven't subscribed to The Epicurean Dealmaker's twitter feed, do so now. This morning he decided he was going to go all Chuck Norris Facts on us, and came up with some absolute classics:

Little-known Chuck Norris Fact: Chuck Norris does not mark to market. The market marks to Chuck.

Chuck Norris does not go bankrupt. Chuck Norris ruptures banks.

Source of hedge fund survivorship bias?: Funds that pay Chuck Norris 2 and 20 survive; others don't.

Private equity: Chuck Norris does not believe in leverage. Chuck Norris believes in crowbars.

Investment banking: No-one defers Chuck Norris's compensation.

Capital structure: No-one subordinates Chuck Norris. All his equity is preferred.

If Chuck Norris devised the bank stress tests, not even the Treasury Department would survive.

Mixed Freight Indicators

2009-03-19T21:13:00.005-05:00

Over the past few weeks, Calculated Risk has several posts on freight activity, here, here, and here. The highlights:

Container shipping is at an all-time low.
ATA truck tonnage ticked up in March.
LA port traffic took at 35% year-over-year nosedive in February.

The charts below show three ETFs - the iShares Dow Jones Transportation Index (IYT) and the Claymore/Delta Global Shipping Index (SEA), respectively. They both have rebounded off recent lows but IYT - which has more significant volume - has shown declining volume as the rally has progressed.

The ETFs seem to be responding to the recent news, not discounting the future continued/likely declines in transportation companies.

The Best Policy

2009-03-17T08:45:00.000-05:00

No Follow-Through

2009-03-11T21:49:00.002-05:00

Today's market was interesting. Lots of movement, but didn't really get anywhere. Volume was about as heavy today as it was yesterday.

This is a bad sign for those hoping for the rally. I expect a bear-market rally, but to at least test this market's lows.

The Cap-and-Trade Tax

2009-03-03T22:06:00.003-06:00

John Mauldin raises an interesting point about President Obama's cap-and-trade proposal. I'm not convinced the proposal would cause utility companies to raise prices though - mainly because most have government-regulated prices.

If the costs aren't borne via higher prices to consumers, John's conclusions won't follow. That said, the increased costs will have to be dealt with somehow.

And I definitely agree that GDP is going to be *way* below the 4% forecast. The economy has been above the natural rate of growth for many years and tends to revert to the natural rate, which means we should anticipate years of sub-3% real GDP growth.

Obama wants to create a cap-and-trade program for carbon emissions. This is expected to generate $79 billion in 2012, $237 billion by 2014, and grow to $646 billion by 2019. These will be payments by energy (primarily utility) companies to the government. That will cause utilities to have to raise the prices they charge customers for energy. Such a level of taxation is eventually 4-5% of total US GDP. That is not small potatoes. And since the wealthy do not use all that much more power than the rest of us, it will affect the lower incomes disproportionately.

It will take money out of consumers' pockets and transfer it to the government. You can call it cap-and-trade, but it is a tax. And a huge one. Anything that will take 4% of GDP away from consumer spending is not business friendly. And by driving the cost of energy up, it will drive high-energy-using businesses away from the US to developing countries where energy is cheaper. It will make it even harder for people to save money and drive up costs for the elderly and retired. But it will make the environmental lobby happy.

Further, Obama's accounting magicians assume that the US economy is going to grow by 1.2% this year and 3.2% next year and at a blistering 4% pace after that. Since that is not likely to happen, the deficits will be far worse than projected. Since large taxpayers can see the tax increase coming, it is likely that they will shift behavior, and tax revenues will be less than projected.

Source:
Buy and Hope Investing
John Mauldin
Thoughts from the Frontline Weekly Newsletter, 2/27/2009

Tracking the Recession

2009-02-27T09:33:00.013-06:00

The Saint Louis Fed recently created a brief report that tracks the current recession via the behavior of GDP components and four economic indicators: industrial production, real income, employment, and real retail sales.

The report graphs multiple business cycles, by aligning the months in which each business cycle peaked. This allows you to compare the months leading up to, and following, peaks in the business cycle. In addition to the current series values, the average, highest, and lowest series values are displayed.

During this recession, the US has experienced the worst declines in industrial production and real retail sales, and is close to showing the worst decline in employment.

The GDP numbers do not appear quite as dire. Personal consumption expenditures are showing a historically severe decline, which aligns with the real retail sales data. Real imports have also shown a significant decline during this recession.

R/Finance 2009: Applied Finance with R

2009-02-20T13:03:00.004-06:00

The International Center for Futures and Derivatives at UIC, REvolution Computing, Windows HPC Server 2008, insight algorithmics, and members of the R finance community are pleased to announce:

R/Finance 2009: Applied Finance with R
April 24 and 25, 2009, in Chicago, IL, USA

Scheduled Keynote Speakers:

Patrick Burns Burns Statistics, London, UK
Robert Grossman Director, National Center for Data Mining, UIC, USA
David Kane Kane Capital, USA
Roger Koenker University of Illinois, USA
David Ruppert Cornell University, USA, Statistics and Finance, an Introduction
Diethelm Wuertz ETH Zurich CH, Rmetrics
Eric Zivot University of Washington, USA, Modelling Financial Time Series with S+

The conference website has details on:

the agenda and speakers,
travel accommodations,
registration, and
sponsors, who made the conference possible.

Hope to see you there!

Stock Surge Off New Lows

2008-11-13T21:17:00.006-06:00

Both the S&P500 and the Nasdaq Composite registered fresh 52-week lows around 1:00EST during today's session. Soon after, they both began rallies and would close a massive 10% higher than their intra-day lows. Volume surged on both the NYSE and the Nasadaq (see charts below - or links in the blog's right-hand column) as the rally progressed.

NYSE:

Nasdaq:

The charts above show that volume picked up during the rally and was much higher than the past several days on both exchanges. (The bottom portion of the chart shows today's volume relative to yesterday.)

Further, breadth was impressive: advancing issues outnumbered decliners on both the NYSE (2,650/919) and NASDAQ (2,089/799). Up volume accounted for 77% of the NYSE volume, while 89% of the Nasdaq volume was positive.

Could this rally mark the end of this devastating - in both speed and magnitude - bear market? Stay tuned...

Will US Bancorp cut its dividend?

2009-01-27T08:40:00.004-06:00

I've been following US Bancorp (USB) pretty closely through this credit crisis -- thanks to Jim Jubak. He thinks it is one of the few banks that will emerge from this crisis victorious, and I tend to agree with him.

The stock currently yields ~12%, but much of that is due to the fear of a dividend cut caused by the most recent earnings release. Jim Jubak's comments are below.

Will US Bancorp follow the lead of so many of its peers in the banking industry and cut its dividend? The question isn't academic to me: I had added this stock to Jubak's Picks in April 2008 because it then paid better than 5%.

Since the company's Jan. 21 announcement on fourth-quarter earnings, a majority of investors on Wall Street have been thinking the dividend is headed for a cut. A stock-price drop of 12.5% on Jan. 22 left the yield on the shares at 12.1%. You don't see that kind of a yield on a bank stock unless the market is convinced the company will cut its payout.

I can certainly see why investors think that. The bank didn't exactly give a ringing defense of the dividend in its earnings conference call. Executives said the company believes it will be able to cover the dividend from earnings in 2009 but noted that it reviews the dividend every 90 days -- which puts the next review in March -- and that the bank has no intention of continuing the current dividend if earnings don't cover the payout.

The real issue then, as the company said in its statement, is earnings for the rest of 2009. On Jan. 21, US Bancorp reported earnings of 15 cents a share. That's a profit -- unusual for a bank these days -- but still 7 cents a share below what Wall Street had expected. The problems? There were $253 million in losses on securities and a $635 million increase in provision for credit losses. All in all, charges and losses chopped 34 cents a share out of earnings.

It's also clear that the bank's business, like that of all banks I know of, is still getting worse. Nonperforming assets climbed to 1.14% in December, and the bank said it anticipated that nonperforming assets -- that is, loans that the bank can't collect on in a timely fashion -- will continue to climb in 2009. It's cold comfort to investors that the bank's performance continues to be so much better than other banks'. The increase in nonperforming assets to 1.14% in December is only a modest increase from the 0.88% in September. That indicates the bank's lending standards continue to hold up to a very difficult economy.

The bank's operating results, in fact, were quite impressive. Loans grew 17% (12.7% excluding acquisitions) and deposits 15.2% (9.6% excluding acquisitions) from the fourth quarter of 2007. (In November 2008, the company acquired Downey Savings and Loan and PFF Bank and Trust from the Federal Deposit Insurance Corp.) Net interest income grew 22.6%. Tier 1 capital remained at a strong 10.6%.

So will US Bancorp cut the dividend or not? Unfortunately, it's a danger and, also unfortunately, uncertain. It depends on how long the economy struggles and how big the losses get on the bank's portfolio of loans. I still think US Bancorp will be a winner in the current crisis, and this quarter's results are evidence that the bank is picking up loan and deposit volume as customers opt for the bank's relative safety.

Source:
Fed looks like one more shaky bank
Jubak's Journal, 1/23/2009 12:01 AM ET

Bad Timing, or Bad Reasoning?

2007-05-29T23:32:00.000-05:00

My employer sends a small newsletter with each quarterly 401(k) statement. I skim over them, since they usually contain fairly basic information. This quarter, one of the articles was a little too basic...

The article discouraged participants from "timing" the market. I generally agree with that principle, but not for the reasons given. The article concluded that timing the market is risky because (1) if you missed the market's top-performing days, your portfolio's overall return would drop dramatically (see Chart 1), and (2) many mutual funds have rules against "market timing" (I think they really meant "rules against frequent trading").

My first thought after reading the first point was: what would have the performance been if I had missed the market's worst-performing days? When I look at Chart 2, I can't help but wish I would have missed those 10 worst days and doubled my annual average return over the period.

Granted, it's extremely improbable to be able to miss the 10 worst performing days; but I would think it equally improbable to happen to miss the 10 best performing days.

(Note: the charts above use S&P 500 returns net of dividends. Including dividends would not change the analysis in a meaningful way, since the dividends lost over 5 or 10 days would be negligible.)

As I mentioned, I would generally agree trying to time the market isn't a good idea; but it's not because you might miss those best days. Timing the market is extremely difficult and most would be better off with a well diversified portfolio.

Is Inflation Moderating?

2007-06-09T18:24:00.000-05:00

Beginning with the March, 2007 FOMC statement, the Fed has stated that its primary concern is that inflation will not moderate as expected. The FOMC statement and minutes from the May, 2007 meeting and a CNBC interview with Chicago Fed President Michael Moskow on Friday reiterate this concern.

This suggests the inflation measure(s) the FOMC consults when determining monetary policy are at the upper end of their (collective) comfort range. The two charts below (click for larger image) show headline/core CPI and PCE inflation from 2000 to the present. Contrary to traditional headline/core inflation measures, the core inflation measures created by two regional Federal Reserve Banks show that inflation has not fallen from its levels of 2005 through early 2006.

Both year-over-year CPI and PCE headline inflation have decreased significantly from their levels of 2005 through early 2006. Compared to the same historical period, both measures of PCE core inflation have barely budged, and all measures of CPI core inflation have risen.

Both the PCE less Food & Energy and the Dallas Fed's Trimmed Mean PCE inflation measures have declined slightly since their respective peaks in late 2006. The Trimmed Mean PCE has fallen slightly less, however. Also worth noting, the spread between PCE less Food & Energy and Trimmed Mean PCE seems to be a pretty steady 20-30 bps.

CPI inflation is more interesting. CPI less Food & Energy inflation has fallen from its late-2006 peak of nearly 3% to less than 2.3% in April, 2007. However, 16% trimmed mean inflation has only fallen from 2.9% to 2.75% over the same period. Further, median CPI inflation remains near its levels (3.5%) of late 2006.

Moskow said, "The last quarter, GDP growth was very low – six-tenths of a percent. That’s history now. This quarter should be much stronger and, as we move through this year into next year, I see us moving toward potential growth, or long-term trend growth, in the economy." But if productivity continues falling and wage growth continues accelerating, I'm not sure what the Fed expects will contain inflation pressures. Then again, maybe that's why the FOMC's primary concern is inflation failing to moderate as desired...

I'll provide an update when May's CPI data come out on 6/15.

CRB Core Inflation? Hardly.

2007-11-05T22:30:00.001-06:00

Barry Ritholtz uses the CRB "excluding food and energy" in a post today to show how high 'core' inflation is. I found the data in the post's chart at www.economagic.com. A bit of investigation into the data revealed the "ex food & energy" series to be the CRB Raw Industrials Index.

The Raw Industrials Index is composed of hides, tallow, copper scrap, lead scrap, steel scrap, zinc, tin, burlap, cotton, print cloth, wool tops, rosin, and rubber. All but hides, tallow, rosin, and rubber are contained in two other sub-groups:

The "metals" sub-index (40% of the 'core' index) contains copper scrap, lead scrap, steel scrap, tin, and zinc.
The "textiles and fibers" sub-index (30% of the 'core' index) is comprised of burlap, cotton, print cloth, and wool tops.

Therefore, this 'core' index is mainly composed of 5 metals and 4 textiles. Further, if you decompose the rise in the raw industrials index into its two main components - metals and textiles - you can see that the recent rise in metals prices is the main cause of the rise in its parent index (see chart - click to enlarge).

Barry has presented some good arguments against the use of core inflation in monetary policy. This is not one of them, however.

UPDATE: I should have guessed, Barry intended to be a bit over-the-top in his post...

For those interested, the R code used to create the chart is below.

require(fImport)

rawInd <- economagicImport("crb/crb12", freq="monthly")@data[-(1:7),]
rawInd$DATE <- as.Date(rawInd$DATE)
textiles <- economagicImport("crb/crb13", freq="monthly")@data[-(1:7),]
textiles$DATE <- as.Date(textiles$DATE)
metals <- economagicImport("crb/crb14", freq="monthly")@data[-(1:7),]
metals$DATE <- as.Date(metals$DATE)

plot( rawInd$DATE, rawInd$VALUE, type="l",
ylim = range( c( rawInd$VALUE, textiles$VALUE, metals$VALUE ) ),
main = "Selected CRB Indicies",
xlab = "Date", ylab = "Index Value",
lwd = 2 )
lines( textiles$DATE, textiles$VALUE, col="red" , lwd = 2 )
lines( metals$DATE, metals$VALUE, col="blue", lwd = 2 )
legend( "topleft",
legend = c("Raw Industrials","Textiles Sub Index","Metals Sub Index"),
col = c( "black", "red", "blue" ),
lty = c( 1, 1, 1 ),
lwd = c( 2, 2, 2 ),
bty = "n", inset = 0.05 )

savePlot( "Select_CRB_Indicies", type="png" )

October Inflation Reports

2007-11-18T19:11:00.000-06:00

Both PPI and CPI inflation reports were released last week. PPI came in below expectations, while CPI was in line with the consensus estimate.

The chart below shows both headline and core PPI near the top of their range since 2000. Further, PPI inflation has been increasing since mid-2006. This doesn't bode well for moderating CPI inflation, if PPI leads CPI.

As expected, there was a sharp increase in YOY headline CPI inflation in October, while CPI inflation ex food and energy remained near 2.5%. In this week's Thoughts From the Frontline, John Mauldin shows YOY headline CPI inflation will remain high for the rest of 2007, due to last year's low index levels. He also describes the changes made to the CPI index in the early 1990's (substitution and hedonics).

The chart below shows two lesser-known 'core' measures of CPI inflation created by the Cleveland Fed. Both the median and trimmed-mean CPI show an increase in October. Further, Mauldin's analysis suggests we should expect these two core measure to increase in the next two months.

While the Fed doesn't have explicit inflation targets, it's believed 1-2.5% is in their comfort range for core PCE inflation. All three measures of core CPI inflation shown above are at or near 2.5%. As many have noted, this doesn't leave the Fed much room to cut thier target rate if the economy begins to slow substantially.

Do the opposite

2008-01-22T07:23:00.000-06:00

That's probably the best advice I can give, since US stock futures are currently off about 5% from Friday's close.

Slowly increase over the next week or two... fall off a cliff the very next trading session; same things, right? At least I didn't open any positions based on my "thoughts"...

Wikipedia Errors

2008-01-25T19:11:00.001-06:00

Wikipedia has been said to have fewer errors than Encyclopedia Britannica but, as one of my co-workers said, "I bet Encyclopedia Britannica doesn't have errors like this!"

I stumbled on this as I was surfing the web this morning. I was searching for ideas of potential names for a new R bundle I'm working on. It literally made me laugh out loud.

UPDATE: I think my previous image was deleted because of the 'content'. Here's the image, censored. And yes, it's a four letter word; but you can say it on television... I guess just not in front of those two words (I'm not sure what the phrase means).

January Inflation Reports

2008-03-04T20:45:00.007-06:00

The inflation numbers for another month are in, and the results do not look very good. The charts and brief commentary below summarize the changes.

Today Calculated Risk noted that, "inflation expectation have surged recently." They cite a Bloomberg article that charts the spread between the 5-year TIPS and the 5-year Treasury. You can find an interactive chart of the spread between those two rates on the Cleveland Fed's website.

At this point, I think it's safe to say that - contrary to what the FOMC has to say - both inflation and inflation expectations are not well contained.

Annual core PPI inflation has moved from its 2006 lows near 1% to hovering above 2% in the second half of 2007.

Core PCE inflation has jumped back above 2% and trimmed-mean PCE inflation is nearing 2.5%.

CPI inflation is worst of all; core is near 2.75%, 16% trimmed-mean is approaching 3%, and the median CPI is closing on 3.25%.

The Cause of the Liquidity Crisis

2008-06-10T14:45:00.001-05:00

Classic!

Source:
www.dilbert.com

10-year Treasury at 2.995%

2008-11-26T09:50:00.002-06:00

The 10-year Treasury briefly dipped below 3% this morning. Is this a reflection of fear, deflation, or a result of all the money being poured into the system over the past few months?

Fed Holds Rates Steady

2008-10-29T21:00:00.003-05:00

The opening sentence of today's FOMC statement reads:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

Decided today, really? By looking at the effective federal funds rate, it looks like this policy action was decided two weeks ago.

Last-Minute Rally

2008-10-23T18:54:00.007-05:00

With one and a half hours left in today's session, the S&P 500 rose from its intraday low of 860 to 908 at the close. That's a 5.6% intraday move to close the session up 1.26%. That's quite an impressive rally, but how was volume and breadth?

The chart above shows NYSE volume was much heavier today than the past couple days. The bottom portion of the chart shows today's volume relative to yesterday.

Cumulative volume compared to yesterday increased steadily all day, as stocks fell, until the last couple hours of trading. This suggests buying was sparse even though the price movement was strong.

Further, breadth was not at all impressive: declining issues outnumbered advances on both the NYSE (2,152/1,291) and NASDAQ (2,032/824).

New Blog - FOSS Trading

2008-10-23T09:50:00.003-05:00

I've started a new blog to focus on trading and quantitative finance using free open source software. I will post updates on my R packages on that blog instead of Quantitative Contemplations.

You can find the new blog at http://blog.fosstrading.com.

September Inflation

2008-10-22T22:36:00.006-05:00

The chart below shows headline and core CPI have climbed sharply since mid-2006. Headline CPI is currently near 5% year-over-year, while all measures of core CPI are at 3%.

Why, even though inflation is high and has been increasing, does the Fed consider inflation expectations to be contained? The Fed noted the fall in commodity prices, which will dampen inflation in coming months, in their October 8th statement. They also noted inflation expectations have diminished.

The following chart shows inflation expectations via the spread between the 10-year constant maturity Treasury rate and the corresponding TIPS rate. Expectations currently stand at an average of 1% per year for the next 10 years. I seriously doubt this will be realized; it's more likely a function of the current market pessimism.

Two important caveats: (1) the spread has two components - expected inflation and inflation risk premium, and (2) TIPS yields have a liquidity premium. Given the short-term nature of our comparison, neither of these caveats should be too problematic.