Fung, Ko, & Yau, Dim Sum Bonds

Let’s start with a definition. Dim sum bonds are, as the subtitle says, “the offshore renminbi (RMB)-denominated bonds.” Since 2007 they have been issued in Hong Kong and, as such, are available to investors worldwide. Dim Sum Bonds, coauthored by Hung-Gay Fung, Glenn Ko, and Jot Yau (Wiley, 2014), offers a “panoramic view of [this] bond market that has played a pivotal role in China’s grand scheme of making the RMB a global reserve currency.” (p. xii) The offshore RMB market also serves two other major goals of the Chinese government: to “control smooth cross-border capital flows to China so as to harness the inflation in mainland China” and to tap foreign capital. (p. 4)

The RMB bond market serves not only the Chinese government and Chinese financial institutions. Foreign firms operating in China who need RMB funding “can raise longer maturity RMB funding through the dim sum bond market instead of relying on shorter-term borrowings from Chinese banks.” (p. 18) The first foreign company to take advantage of the RMB bond market was McDonald’s; since then Caterpillar, Ford, Unilever, BSH Bosch, and Siemens have also issued bonds. Foreign corporations account for 6.15% of the total number of issues and 8.84% of the total RMB amount. They are, as one might suspect, dwarfed by banks (predominantly Chinese), which make up just over 50% of the total RMB amount.

Who invests in the nascent dim sum bond market? The major holders are investors based in Asia, but the authors predict that interest in this market will become more global. It’s too early to say whether dim sum bonds can be considered an asset class and whether they play an efficient diversification role in portfolios. Between 2011 and 2013 the Bank of China (Hong Kong) Dim Sum Bond Index showed relatively low or, in a few cases, negative correlations with other assets such as the JPM Global Aggregate Bond Index and Barclays U.S. Aggregate Bond Index, the Nikkei 225 in equities, and the Japanese yen, Brazilian real, and British pound sterling in exchange rates.

Even though individual investors are unlikely to buy dim sum bonds in the near future, this book is still worth reading. It sheds light on Chinese currency issues as well as on Asian investor sentiment. And it is vital for anyone who wants to know more about the offshore RMB bond market.

Horan, Johnson, & Robinson, Strategic Value Investing

The three authors of Strategic Value Investing: Practical Techniques of Leading Value Investors (McGraw-Hill, 2014)—Stephen M. Horan, Robert R. Johnson, and Thomas R. Robinson—are all Ph.D.s with ties to the CFA Institute. Their credentials shine through in this cogent, comprehensive book.

The authors advocate strategic value investing, where by “strategic” they mean “being thoughtful about the characteristics of a particular security rather than blindly applying some sort of trading or classification rule.” (p. 21) There are no magic formulas to successful strategic value investing. Each investor has to find his own style, do his own leg work, and remain patient and disciplined.

The book is divided into three sections—introduction, measuring value, and value investing styles and applications. In the section on measuring value the authors discuss concepts of value, dividend discount models, free cash flow models, asset-based approaches, residual income models, and relative valuation. The most interesting section, at least for someone with a grasp of the principles of value investing, is the third. There the authors address value investing styles, choosing the right style and valuation model, distressed investing, and applying value investing to the market.

They introduce the chapter on value investing styles with an apt quotation from Christopher H. Browne: “Value stocks are about as exciting as watching grass grow. But have you ever noticed how much your grass grows in a week?” (p. 227) Here they examine the styles of nine noted value investors—Benjamin Graham, Warren Buffett, Seth Klarman, Bill Ruane, John Neff, Tweedy Browne Company, Wally Weitz, Charles Brandes, and Bill Miller. Bill Miller is presented as a “cautionary tale”: “Confidence is a positive quality in an investment manager. On the other hand, overconfidence can be lethal. Value investors often see falling prices as buying opportunities. If you like the stock at $30 per share, then you should love it at $20 per share. Miller underestimated the depth of the financial crisis and kept purchasing shares of financial stocks as prices continued to weaken. This overconfidence was exemplified by his remark that ‘the only way he would stop buying more when a stock’s price fell was when we can no longer get a quote.’” (p. 243)

Although, over time, value stocks outperform growth stocks and small stocks outperform large stocks, the authors point out one major downside to value investing—that “value stocks tend to have greater variability in returns than growth stocks, and small stocks have greater variability in returns than large stocks.” (p. 250) Value investors therefore have to decide how much volatility they can tolerate in their portfolio at every stage of their investing career.

Halsey, Trading the Measured Move

David Halsey throws out the old notion of a measured move: that you copy an AB move up (or down) and paste it on a retracement low (or high) of C to get your price target D. In Trading the Measured Move: A Path to Trading Success in a World of Algos and High Frequency Trading (Wiley, 2014) he substitutes Fibonacci levels.

He uses three trade setups: the traditional 50% retracement measured move (MM), the extension 50% MM, and the 61.8% failure. When a trade is entered, its target is 123% from a swing high or low (and sometimes from a breakout) that is followed by a retracement (50% in the traditional setup). That is, the target is AB + 23%. Halsey shows both successful and failed MM trades on charts—unfortunately usually grey bars on a black background, which makes them hard to decipher.

The measured move trade setups are not stand-alones. Halsey discusses the use of multiple time frames, seasonality, NYSE tools, tick extremes and divergences, and gaps. He also discusses how to manage positions and take profits, advanced (actually, pretty basic) risk management, trading psychology, and having a trading plan and journal.

The virtue of this book is that it touches on almost everything a short-term trader needs to consider when devising a trading plan. Some things will eventually be discarded, others will be tweaked. And even though Fibonacci levels are not necessarily the best ways to organize price data, they do bring some order, real or imaginary, to price fluctuations.

Trading the Measured Move can be supplemented with educational videos on the author’s website, eminiaddict.com, although much of the material there is for members only.

Roose, Young Money

You’re a college student with a yen to go to Wall Street and become a master of the universe. Well, you might want to rethink your dream. In Young Money: Inside the Hidden World of Wall Street’s Post-Crash Recruits (forthcoming, Grand Central Publishing, 2014) Kevin Roose profiles eight of the seemingly lucky ones. Most of them got two-year contracts as analysts in the investment banking divisions of major Wall Street firms. Although they knew the work would be demanding, they started off full of excitement and determination. Soon enough reality set in.

The problem wasn’t simply the long hours first-year analysts are expected to put in. It was the lack of control of the hours. “At-will scheduling is the bane of the young analyst’s existence. It means that every evening activity is subject to last-minute cancellations, that stress-free vacations and personal trips out of town are impossible, and that work-issued phones function as permanent third limbs.” (p. 40) Why the hundred-plus hour weeks of on-call work? They are, people told Roose, “one half of a grand, unspoken social contract that had existed on Wall Street for decades. As part of the basic bargain, analysts were asked to demonstrate full loyalty to the firm by becoming a slave to its demands. In order to fully belong, the first-year analyst had to realign his priorities, replacing his own with his bank’s. And seen in this light, all the young banker’s cancelled dinners and broken relationships aren’t just unpleasant externalities—they were central to the process.” (p. 107)*

Another problem the young recruits faced was that “Wall Street … makes its workers feel expendable; many entry-level bankers conceive of themselves as lumps of flesh who perform uncreative and menial work. “ (p. 43) They are nothing like those senior investment bankers described in the 1976 book The Financiers who have lavish offices and dress in expensive suits and who are the “richest wage earners in the world.” Today the offices of the young bank analysts “are covered in moldy takeout containers and pit-stained undershirts. They dress in whatever is left in the clean laundry bag from last week, and haven’t seen sunlight in two months. They make pitch books for clients who will never read them, and get yelled at for improperly aligning cells in Excel, all in hopes of a year-end bonus number that won’t make them want to jump in front of the 4 train. They are the young investment bankers of Wall Street, and they just want some sleep.” (pp. 43-44)

Some of these young analysts became almost morbidly depressed. One coped with the help of a countdown clock which he set for 336 days—the amount of time between the day that his equally miserable Goldman friend gave him the clock and when he estimated the following year’s bonuses would be paid. Although he might not be able to handle an entire career at Goldman, he figured he could make it through 336 days.

In some cases the unhappy analysts plotted their escape to ostensibly greener pastures, like Silicon Valley. In other cases they failed to make the grade and got their walking papers after their two-year stint. Still others decided to tough it out and remain in finance. In fact, according to one headhunter, “only 10 percent of young Wall Street workers ever leave to work in a completely different industry.” (p. 225)

Roose’s book focuses on the toll that Wall Street took on these young financiers. Over the three years that he tracked them, they changed in troubling ways. “I’d seen most of them become less happy and optimistic, more cynical and calculating. They were slower to smile and quicker to criticize. Many of them began to talk about the world in a transactional, economized way. Their worlds started to look like giant balance sheets, their appetite for adventure waned, and they viewed unfamiliar situations through the cautious lens of cost/benefit analysis. … There is, in other words, an enormous cost associated with our nation’s long-standing practice of sending huge numbers of our most promising college graduates into finance. These financiers form an elite class that will go on to become influential in the top ranks of government, technology, and culture. And if they all share the experience of having spent their formative years working as entry-level bank analysts, performing and internalizing the ethos of the financial sector, it means that, in a way, we’ve allowed Wall Street’s culture to enter our national bloodstream. It’s the consequences of that cultural contagion—and the genuine misery I saw Wall Street inflict on so many young people—that makes me glad that the financial sector is smaller and less dominant now than it was before the crisis.” (p. 234)


*James Surowiecki, in his January 27 “financial page” for The New Yorker, addresses the changing cult of overwork. He writes: “Grinding out hundred-hour weeks for years helps bankers think of themselves as tougher and more dedicated than everyone else. And working fifteen hours a day doesn’t just demonstrate your commitment to a company; it also reinforces that commitment. Over time, the simple fact that you work so much becomes proof that the job is worthwhile, and being in the office day and night becomes a kind of permanent initiation ritual. The challenge for Wall Street is: can it still get bankers to run with the pack if it stops treating them like dogs?”