Value at Risk

On Wall Street, what happens in the tails doesn't stay in the tails.

Joe Nocera at the New York Times today writes a fantastic article on Value at Risk, Nassim Taleb and what went wrong with Wall Street's ability to measure the risk it was taking, either intentionally or unintentionally.

"Yet even faulty historical data isn’t Taleb’s primary concern. What he cares about, with standard VaR, is not the number that falls within the 99 percent probability. He cares about what happens in the other 1 percent, at the extreme edge of the curve. The fact that you are not likely to lose more than a certain amount 99 percent of the time tells you absolutely nothing about what could happen the other 1 percent of the time. You could lose $51 million instead of $50 million — no big deal. That happens two or three times a year, and no one blinks an eye. You could also lose billions and go out of business."

You should read it.

My Intraday Analysis

1. The sellers didn't come into the office.

2. The long-only guys don't want to fall behind in an up market if they didn't lose their jobs in a down market.

Have a nice weekend. Looks like it just started snowing here.

Oil etc.

That ridiculous chart is the 2 year look at the Nymex crude oil price, courtesy of the Wall Street Journal, whose web site keep getting better.

I think we've established that the marginal buyer and seller of the futures contract has not the been of late the user of the physical product, but rather financial players.

A technical analyst would not be calling for a rally based on that chart until the intermediate-term downtrend is broken, so we are in one of those sublime TA moments when "it's not going to go up until it goes up." If I were a betting man, which I am, I wouldn't be betting on crude, which I'm not. As an interested observer, I'd expect continued daily volatility around this level. Russia threatening to stop shipments to Ukraine seems like a big deal to me, and it was in Europe for about a day this week, but nobody in this country seems to care.

Futures are up nicely for no particular reason. Optimism? You don't say.

Mad as Hell or Just Fed Up?

The Financial Times is reporting that the numbers for 2008 mutual fund flows are in and they are ugly. Investors pulled a net $320 million out of U.S. mutual funds last year, a record.

Investors always sell at the bottom but big numbers are in now way proof that we have reached a bottom. If you like me expect unemployment to go significantly higher, you can't be overly constructive on fund inflows (new money) overall to get stocks going. It is at least a strong indication that expectations are low and many don't care.

Even More Irrelevant

I'm sure that a little part of Microsoft was hoping that its huge flop mp3 player Zune would just fade away. Who would want to keep getting their butt kicked by Apple? If Microsoft has a real music hardware strategy - one that will put a serious dent in Apple's market share - I haven't heard it.

The press coverage today is embarrassing. Evidently thousands of Zunes worldwide stopped working because of a glitch in the internal clock. Last year was a leap year so part of the Zune thought it was still 2008, part of it knew the difference so it stopped working.

A Very Quiet Revolution

"Who would’ve thought ringtones would work - and that people would pay more than they pay for a regular song?" - I can't remember who...

I'm sure you saw some of what was coming in the music business but did you notice it happening?

The New York Times writes:


"Since the industry’s peak in 2000, album sales have declined 45 percent, although digital music purchases continue to grow at a rapid rate.

Just over a billion songs were downloaded, a 27 percent increase from 2007, and some record companies say they are finally beginning to wring significant profits from music on Web sites like YouTube and MySpace.

Record companies counter that album sales alone do not give a full picture of the complex new economics of the industry. Rio Caraeff, the executive vice president of Universal Music Group’s digital division, eLabs, said other income, like the fees collected when users stream a video online, had become an essential part of the pie. Twenty percent of Rihanna’s revenue, he said, has come from the sale of ring tones."

It has been easy to say for the last decade that CD sales were likely to be decimated by the digital thing in general, and the jury is still out on whether digital will be a positive or negative for the music industry long-term. My view is that there is plenty of money to be made in the business. Streaming video, ringtones, the rent vs. buy vs. steal nature of the online industry are all wild cards but change will continue.

So far Apple is the big winner of course.