Posting slow-down

Alright so a bunch of people have noticed that I've slowed down my posting significantly and have become quite erratic in my timing. Unfortunately I've gotten ridiculously busy over the past month or so. This blog ended up taking a back-seat. I plan to start posting on a regular basis again (it's one my new-year's resolutions. . .no not really, but it would be if I did new year's resolutions). Expect a post at least once a week.

I've also included some helpful links for those of you who don't feel like clicking back here every time (if I'm bookmarked, I thank you). You can now subscribe to this blog in a reader, via e-mail and on technorati. All these services are available on the right side of this page.

Thanks for your patience and readership.

Turn of Year

A lot has been said about the turn of year premium this year. I'm probably writing this post a bit later than I should have. This would have been a more timely post a month ago or even three months ago. Alas.

First off, what is the turn of year premium? Well, in fixed-income-land, the turn of year premium represents the extra interest one charges to lend money over new year's eve. Generally this year-end rate is significantly higher, say 8% when libor is 5%. Sounds kinda silly right? It's just an artifact of financial regulations and having to shore up captial at the end of year when regulatory numbers are checked. A similar event happens at the end of every month.

Why is this important? It represents financial institutions willingness to lend to each other at the year/month end. This is a proxy for the financial institution's confidence in it's capital ratios. If a financial institution is under-capitalized it can mean all sorts of bad things for them from a regulatory perspective (not to mention a investor-base's perspective).

In the 1999-2000 turn of year, this overnight rate had been predicted to be ridiculously high. 3 month libor (the rate at which banks were willing to lend to each other for three months) starting in september started sky-rocketing due to the rate that would be charged for that one night. The overnight rate had spiked to over 200% annualized. Why? Y2K. People were afraid everything was going to fall apart when computers broke down due to the Y2K issue, so they were un-willing to lend over that evening (if everything falls apart, they may never get their money back). Well, the Fed made sure to flood the monetary system with loads of free cash and the turn of year disaster was averted (in fact the turn of year was quite cheap that year). The entry into the year 2000 passed with no disaster.

This year we had a similar spike in libor year-end rates. Not a computer bug that frightens the world this year though, something much scarier (at least from my perspective). Everyone's heard of the credit crunch occuring from sub-prime mortgages by now. Sub prime mortgage defaults and resets on stupid mortgages made for the past decade are catching up to banks and other lenders. Capital is at a premium because all the banks are having to write down so many of their assets (loans are assets to banks, if people are defaulting they're not worth as much). In fact banks are scared shitless that the sub-prime issue is going to spread to all credit products, and for good reason. As balance sheet capital becomes more dear to banks, our year end premium starts flying. Of course in the past couple weeks the Fed has pumped the economy full of cash again and it looks like we'll have another smooth transition into the new year.

These year end and month end spikes are a big deal in the fixed income world, especially in fixed income derivatives. The ramifications of interest rates ripple into all other markets though, as discount rates for futures (in equity, commodities, forex, etc) all depend on how the fixed income market is setting rates.

Fucking up

It's a matter of fact. You will fuck up at some point. It will probably cost your firm money. The scary thing in finance is that when you fuck something up, it costs the firm a very tangible amount of money. One of my favorite quotes is a manager I knew who once said:
"Just promise me you'll make a small mistake."
Most people who survive in this business make one very memorable mistake and become paranoid to the point of never really making a mistake again. Among my friends, the average first mistake size was somewhere close to $400k. That's not too bad. My first mistake was worth about $1.5m. Yea, that hurt. So what do you do when you make a mistake?

1) Fess up. Let your boss know you made a mistake and make it clear you're about to fix it.
2) Fix it. That doesn't necessarily mean make back the money you lost--that may be impossible--but make sure you've made your clients whole and you've made yourself good with your business partners.
3) Think it through. Figure out what went wrong and address the problem. Was it communication? Was it just the fact that you never double-checked your work? Was it systematic?
4) Don't let it get to you. Everyone's made a mistake. People may yell at you as if it's never happened to them, but it probably has. You need to keep doing your job and doing it well. If an error rattles you to the point that you become useless at your job, then you may well be fired.
4) Don't do it again. Enough said.

Keep a clear head and navigate your mistakes. It is those who weather the hard times that will eventually make it to the top.

Small World

The world of banking is tiny, although it will seem large at first. No matter what field you are in, there are really only maybe a hundred people around the world who specialize in the same area. Are you a healthcare i-banker? You'll probably see the same 20 people at pitches and conferences over the next few years, over and over and over again. Are you a consumer discretionary analyst? You'll be on calls and conferences with the same 30 people every month. You trade the long bond? You'll know all 20 bond dealers intimately over the phone and on the screens.

I'm usually the last one to care about politics and relations, but for those who are like me, don't piss these people off! You need to keep good relations with the street. Especially if you plan to make a career out of this. It's like rival teams in a sport. You play hard when you're against each other, but you hang out together afterwards. When it comes down to it, when you're looking for that next job, it's usually one of those competitors that will pull you into their firm.

Another thing to think about is how lucky you are to have that position and that there are hundreds of people lined up outside the gates ready to take that position from you. Don't give them a reason to take it! You have a coveted seat as one of about 20 people who do your job (hopefully well). Count your lucky stars and don't give any reason to be replaced. As soon as you get complacent and take your place for granted, that next guy will eat you alive.

Let Loose!

What's the difference between a bond and a bond trader? Old joke. The bond matures. It seems true. People in the finance industry don't mature in the same way people in other industries do. The old timers will still party hard with the newbies.

Ever wonder why that is? Well, I think it's because this industry will eat you alive if you don't learn to let loose your pent up energies once in a while. Stress in other industries is simply not the same as stress in this industry. One off moment, one slip of the tongue, one day-dream and you can find yourself several million dollars in the hole with way of reconciling (I've seen people quote the bid-side when asked for an offer in size and had a huge hole to work out of. . . it happens in less than two seconds). That's a lot of pressure to hold yourself to every day. Then, for those who survive, there's the added pressure of never letting the young folks catch up. Those who really excel also work when no one else is looking. Things stack up, and you've got to let loose once in a while to not let it get to you.

It's Saturday night. 10:30pm. I just finished some research and for next week. Keeping myself ahead of the curve so I can start Monday ready to take on the world. There's hardly a moment I don't feel the pressure of those coming up behind me to take my seat, so I need to keep myself ahead and more ready than any of my competitors to take the next big seat that opens. The pressure is always on. You know what though? For a few hours tonight, when I meet up with my friends at the bar/club, it'll all be out of my head.

We all have different ways of escaping, but "a good book" just won't cut it for an escape from our world. If you're in it for the long haul, you'll probably need to find a way to get it all out of your head once in a while. Don't be afraid to let loose. Then again, I probably didn't need to tell you that.

Stay Aggressive

More than anything, you'll find this industry is about being aggressive. Maybe it's the same in every industry, but I think it is especially true in this one. It is up to you to step up and take what could/should be yours. Responsibilities don't just get handed out. They're usually given to the first person who steps up and says "I'll do that." In fact, even if it is outside of your current description, the guy who steps up and takes ownership will be th person who gets the assignment. There can be downside in being too aggressive--being labeled as a cut-throat bastard, being seen as not knowing your place, being labeled as immature, etc. But in the cases I have seen, senior people are willing to give you a shot on most things. If you can prove you can do something, then it's yours.

The skys the limits if you can convince people that you can handle the responsibilities that are available. Once you have responsibilities, you can ask for the commensurate promotion, more pay, etc with impunity.

Tracking Markets

I was recently asked how to track markets when you are not yet a market participant.  Those of us connected to the markets pay tens of thousands of dollars a month for up-to-date news and user-friendly interfaces.  If you can't spend a few hundred thousand dollars a year for data feeds, are you toast?  Well, yes, if you're actually trying to day trade off that crap data then you're screwed.  If you're a student just trying to track markets and maybe doing a bit of personal trading on a day-over-day basis, then there are lots of good free sources.

My personal favorite datasource when I was a student was yahoo finance (finance.yahoo.com).  They actually have a very good database of historical prices, historical financials, current financials and slightly delayed prices.  You can track all sorts of market from here.  Their news may not be the most timely, but there are better places to find news.  There are lots of free stock tickers out there you can download to set up a personal set of tickers to track daily.  Beyond whatever equities you decide to track, I would suggest tracking the following on a day to day basis:

• 2y notes
• 10y notes
• S&P 500
• FTSE
• Nikkei
• 30y mortgage rates
• 3m libor
• fed funds rate
• EUR
• JPY
• GBP

This should be enough to get you started.  There are some more obscure things to track, but these will give you a general idea of how the US markets are moving and a peripheral view of the rest of the world.  

For news I'd use www.cnn.com, www.bloomberg.com and www.wsj.com.  The most timely of these sources may be cnn and bloomberg, but if you're checking once a day the wsj actually does a great job of synthesizing the important parts.  Generally speaking, you really don't start caring about the daily specific moves of securities until you have some skin in the game (i.e. you're actually involved in the market and are dependent upon it for your livelihood).  One way to get involved is to have a small (SMALL) speculative account to keep yourself in the game.  You can do this as a stock portfolio or as a futures portfolio (I tend to like the latter, but that's because I'm a derivatives guy who does this stuff professionally--don't do this unless you really understand futures.  Taking delivery by mistake can be a bitch).  For most people I'd recommend just having some stocks in a small spec account (couple thousand) and tracking them daily.  I would tell anyone who isn't a professional trader NOT to be day trading and NOT to be leaving limit orders in the market.  

As a student, I tried to get myself involved in markets, and I think it helped a bit.  One of the old-fashioned things I used to do (and still do in a modified form) is writing down the closing levels of the various indicies and securities I tracked every day.  Then you have a personal record that you are forced to look at daily.  The physical act of writing them down makes you reflect on them.  You start to notice patterns and you notice trends in the market as well as stories that the market reacted to.  

Good luck.

Your Bonus and Your Future

There's a lot of talk amongst people about how they will be spending their bonuses this year. One thing that raises a red flag in my mind is the number of people who are looking to buy things with significant leverage. Be it a condo, a vacation house, a car, etc. I am the first to say you should be living your life to its fullest. Nothing wrong with spending fairly lavishly while you're making the big bucks. In fact, I'd recommend it--there's nothing like spending while you're young.

Here's the catch though, you can't be spending a lot on credit. As someone in the finance industry, one of the most volatile in the world, you simply need to play a little bit defensive in the debt game. A lot of places in NYC won't let you buy with high leverage because of the number of finance folks who commit to a lot of debt and then can't pay off in the future. I've known too many people blown out of the industry and have seen the devastating effects of high debt with no income. If you use leverage, make sure you're investing in something with a reasonable upkeep cost or positive cashflow. Keep in mind that you could be out of a job tomorrow, even if you think you have a relatively protected job. I've seen highly profitable people and extremely cheap labor blown out the door with little to no warning.

Enjoy your bonuses, you've earned them. Spend lavishly, you can. Heads up on that debt though, you haven't made a living of it yet.

Big Losses and Big Excuses

I'm kinda annoyed by how many excuses are being made for these people heading up big firms. Particularly the CEOs of Merril and Citi have come under fire. People are asking if they were taking excessive risk in order to get short terms gains. Others are asking if the right risk management controls were in place. Others yet are wondering if they were trying to hard to catch up to Goldman. Fact is, the answer is NONE OF THE ABOVE.

The single reason these staggering losses are coming out is STUPIDITY. Anybody else wonder why Goldman was ranked 13th on CDO distribution? Anybody wonder why they didn't hold any? Same goes for Deutsche. Anyone wonder why they didn't hold any part of the CDOs they originated? The truth of the matter is these folks at Merril, UBS, Citi HAD NO IDEA what they were getting into. You can bet on the fact that Goldman had a conscious decision not to enter into that market aggressively because they decided the tail events were too painful, and we all know they are not a firm to avoid risk. Let's all quit making excuses for these companies and just realize that it was a LACK OF UNDERSTANDING and perhaps more specifically A LACK OF GOOD MODELING that fell them. I had done a little bit of work with CDOs, and it was annoying to see how so many firms were using the same mediocre model. You can be sure Deutsche and Goldman had some development time to create some specific models and then realized they didn't want to be a part of the imminent collapse.

That being said, you can be sure there are some opportunities out there. I'd be willing to bet that Goldman will start accumulating some of this subprime mortgage and CDO stuff. Just like when they collected CDO equity tranches in 2005 during the autos crisis, they'll swoop in to pick up a lot of this stuff cheap too. In fact, they may even buy a whole company to manage the specific operational issues with these products.

Whitespace

Various people have always complained about how unfair it may be to ask a fresh college grad not to have whitespace on their resume. I'm not sure if this is necessarily an unfair thing to ask. Many college grads have full resumes filled with competitions, clubs, sports and jobs they participated in (yes, they're participating in jobs, quit bitching) during college. I don't think it's unfair to ask a student to have participated in two reasonable commitments during college. I think two is enough to fill up a resume. People are often in fraternities/sororities, sports teams, maybe a part-time job, maybe an internship, and a competition here or there. The key is to put the right amount of detail into your resume. Don't rehash the same thing over and over again (as some people I've seen have done) and don't write down meaningless bullet points like "assured continuity of business as usual" (yes, I've seen that as a bullet point).

So what sort of detail should you give? Remember in grade school when they told you that the key to a good expository is to give the "who, what, when, where and why?" That's pretty much it. In particular, "who, what, where" are usually the most important. You should make sure you always discuss the "who" in each line you state. Were you addressing clients? Management? New hires? Students? The what should be detailed. Was it a $10M account or a $10Bn account? Was the PnL +25M or -15M? Was the audience 8 people or 500 people? Were you serving 10 customers a day or 1000? As to where, did you do this at your firm? Did you travel at all? Were you at an off-site? When and why can be a bit redundant. Most of us won't care why. And the answer to why is often "because my boss told me." If you took the initiative to do it yourself, you should probably mention that. Initiative is often associated with risk--taking initiative means you're willing to take some career risk, which is good. As for when, it's usually during business hours, so no one cares. You might mention the when if it's past normal hours or something, but don't get too cocky with this. No one likes the asshole who stays late just to stay late. One thing not mentioned above is HOW. You can include HOW you did things to strengthen a resume. So you were a waitress? HOW did you make customers happy? HOW did you gain more tips? HOW did you decrease the wait time at the restaurant?

The details you include in your resume are important and can show a lot about how you dealt with various trials. In particular they can show how you are different from someone else who may have taken the same task, and that is the key. You need to differentiate yourself in the particular role you may have had. If the next guy would have done your job just as well, then you're basically a commodity. If you added special value in that role, then you're a valuable asset.

Good luck.