David Thornburgh of the UCLA Anderson Forecast talks about the housing bubble. An excellent and entertaining summation of the facts, although the politically correct conclusion is inconsistent with the details of his presentation. Clearly a well-trained Keynesian (the business cycle is the result of “shocks”), he rebuts many of the myths about housing, although he fails to talk about some of the key issues - exotic financing, speculation, etc. Definitely worth the hour, though. David Thornburgh on Google video.

Note that this dates from February 2006.

Stanford MS&E242S: Investment Science - Everything you need to know for retirement investment management, is included in this summer program from the Stanford Center for Professional Development.

Emphasis is on a cash flow approach. Topics include deterministic cash flow analysis (time value of money, present value, internal rate of return, taxes, inflation), fixed income securities, duration and bond portfolio immunization, term structure of interest rates (spot rates, discount factors, forward rates), Fisher-Weill duration and immunization, capital budgeting, dynamic optimization problems, investments under uncertainty, mean-variance portfolio theory, capital asset pricing, and basic options theory. Goal is to create a link between engineering analysis and business decision making.

Prereqs: Calculus, probability, and optimization. Students should be well versed in multivariable differential and integral calculus, including Lagrange multipliers and the theory of constrained optimization. Students should also know probability with a single and multiple random variables. Familiarity with Excel is helpful.

Text: Investment Science by David. G. Luenberger (Oxford Press, 1998)

http://www.stanford.edu/class/msande242s/

The financial press is full of speculation that the end of the Fed’s rate-raising cycle is near. When the Fed is done, so goes the spin, the economy will take off, freed from the Fed’s dead hand, and the markets stage a spectacular rally. There are a couple of problems with this theory. First, historical precedent says that when the Fed comes to the end of a string of rate increases, the stock market falls. Secondly, Bernanke has made it clear that he will be “data-driven”. Just what that means isn’t really clear, but it is a good bet that the Fed will stop based on signs of economic weakness. Any economic weakness will show up in corporate earnings and personal incomes, which will not be good for the markets.

Does all of this mean there won’t be a rally? Of course not, especially as in recent years public market predictions such as the “fall rally” have become self-fulfilling prophecies (or staged events, depending upon your willingness to accept conspiracy theories). However, it does mean that it is unlikely to turn into renewal of the bull market, especially considering the technical weakness of the market in recent weeks.

The (supposedly final) report on the wrongdoing of Fannie Mae (FNM) management has been released.

“‘The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,’ James Lockhart, the acting director of OFHEO, said. ‘Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing.’”

The FNM offenders are members of the political elite. That’s how they got the jobs in the first place. As such, they are immune from prosecution for all practical purposes. They may receive a slap on the wrist and have to return a small portion of their bonuses, but, mark my words, they won’t go to jail. Although they should.

Bought Rydex Precious Metals. If the bounce comes, metals should be carried along. If not, I don’t think there is much downside risk.