Twitter is finally hitting the mainstream. The University of Washington Men’s crew team is announcing its race LIVE during the Oxford fixture in London this weekend. You can follow the tweets at http://twitter.com/uwhuskycrew.

I’ve been spending a lot of time thinking about the effects of the increasing popularity of ETF’s as investment vehicles. Although ETF’s are a fantastic way to make “macro” bets on the market, there are some fundamental issues that may arise in conjunction with their popularity.

1. ETF’s will increase the correlation of a certain sector or basket of goods. This effect may seem trivial at first, but in a state of market deleveraging, or releveraging, they have the potential magnify the correlation effects of market swings. Additionally, because they are marketed as “better alternatives” to mutual funds, because of the significantly lower cost basis, if investors begin to have a greater desire to hold a “market portfolio”, their popularity may continue to rise. 

2. ETF’s funnel cash into equities in their basket blindly based on some type of weighting. Because of an ETF’s primary role to index a basket of securities, investors may be holding companies that they do not truly understand. This lack of information is dangerous, because if these individual companies get bad press and the stock drops, the industry as a whole, due to correlation, might take a larger-than-deserved hit from that information, and the investor could suffer. Additionally, this increased volatility would warrant an increase in the premium of volatility-linked derivatives.

In my opinion, ETF’s create significant market inefficiency, so as their popularity rises, there is more opportunity for investors who can keep an eye out for types of mispricings in individual securities.

For example, if an ETF holds Biotech company A in its basket, and the industry as a whole is doing quite well, but after researching the company you realise that it is doing horribly-yet its stock price is increasing due to this correlation, it might be a good strategy to go short the individual security, and go long the weighted percentage of the ETF (obviously, the spread capture would be smaller, because of a higher correlation). The theory behind this is that the ETF will overvalue the crap company, or undervalue a fantastic company.

In conclusion, I’m short the correlation that these ETF’s are creating as a byproduct of their increasing popularity. I think it will create more irrational market pricing of individual securities. Remember that this reason for correlation is not because of a fundamental rule, like two companies who are exposed to the same market risk, but instead due to the fact that investors have become more lazy and would prefer to hold a market basket, rather than individually analyse securities. 

I’d love to hear your thoughts on this one.

Well this should come as a no-brainer to anyone who ever considered that the scarcity of resources probably leads to more conflict and struggle over them. The financial times quotes the retired director of national intelligence,  Admiral Dennis Blair, as saying, “Statistical modelling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period.” 

Obviously, there are a few factors that have been beneficial to emerging countries, who are more sensitive to commodity prices. As a result of deleveraging, many sustenance-related asset prices have fallen to affordable levels, however with credit markets still at inefficient levels, food manufacturers may not be able to pass on substantial consumer savings.

Intelligence chief warns of security threat: FT

Update: I’m usually more macro-theme oriented, but armored money carriers like Brink’s Co. who generate almost 45% of their revenue from EMEA, could see more demand for their services. Hedging out some S&P risk to take this strategy long seems like it could have some upside.

Obama did a pretty amazing job on the Al Arabiya TV interview yesterday. I think he had both the courage to openly acknowledge the depressing reality of our previous foreign policy in the region, but also had a pretty universal message of moving forward.

Al Arabiya – Obama Transcript

Its pretty clear I’m not bullish on the US consumer’s ability to make smart financial decisions right now. I would just like to show two charts that I think are representative of the credit-financed disneyland we have been living in. The first is the percentage of consumer debt outstanding with relation to GDP. The second is the percent savings rate of disposable income in the US.

I’d just like to say “bravo!” to all those policymakers and complacent voters who let this kind of economic policy become the norm.

I will talk more about this topic later, but I see the UnConvention (see BarCamp) method of aggregating ideas and thoughts, in addition to efficiently parsing and developing theories to be a very exciting development for our society. I attended the MindCamp 5.0 UnConvention this weekend and was amazed at the depth and thoughtfulness of content that people were sharing.

The format and content is mostly dictated by the type of attendees, and it is feasable to create an unconvention for basically any intellectual community that exists on this planet. The open nature of the conference allows anyone with an interesting idea to develop it with the community, and the more active the conversation, the more beneficial it is for all parties involved.

I always look for activities to do that will do a good job of stretching my brain about new concepts and ideas, and I think this is probably the most interesting angle I have found to accomplish that goal.

Pulling up the CDS charts on some popular clothing retailers, we can see that investors are bearish on the high-end clothing retail industry. Spreads have widened significantly within the last few weeks with firms like Saks and Niemann seeing close to 2000 basis points.

Right now there are a few sites out there that allow you to track your market performance versus others and the market. Today I stumbled upon Marketocracy. Similar to CoVestor it allows you to compare your asset allocation skills with others. Unfortunately, it is still heavilly focused on equity investment (As far as I know). It would be nice to be able to build and track a more diversified portfolio like you can with Bloomberg’s PBSK and PRTU functions. Obviously the most significant barrier to entry for a site like that right now is the high cost of market data on OTC products.

The WSJ has a quick financial breakdown of Citi’s current losses and liabilities. I think they are in for a pretty interesting ride in the next few days/week.

My favorite highlight:

“$800 million – The price that Citigroup paid to acquire Old Lane, Vikram Pandit’s hedge fund.

$165.2 million -What Vikram Pandit earned from the sale.

$202 million – [Writedown before closing the fund]“

This may also be of interest, since Citi probably isn’t the only bank that has stakes in SIV’s.
Citi ends SIV foray as last $17.4bn is returned

I’m just saying… might be worth taking a second look at as a long-CDS candidate.

I’ll revisit this post in a month.