Benford's Law and Weezer

Credit spreads have spent much of the day wider post JPM earnings.

There are many items to discuss within their earnings release however I feel the most relevant to me, and my livelihood, is their FICC revenues which were down 14% (adjusted for one time costs). JPMorgan spreads (in cash bonds) were ~10bps wider on the day but are outperforming BAC and MS spreads which are ~15bps wider.

Morgan Stanley recently noted, in it's 10Q, that if it's credit rating were to be cut "we may be required to provide additional collateral to certain counterparties." (via UBS credit research).

There are a few data points that highlight how 'cheap' the high yield sector currently is. As of Q2, aggregate leverage has fallen from it's peak of 4.7x to it's current 3.6x. This is where it was in the beginning of 2007. In addition, the covenent stress index is approaching a historic low of 1.8% (all time low = 1.4% in '05). So why is the HY CDX index pricing currently reflecting a 50% cumulative default rate over the next five years? (data via UBS)

Dealbreaker posted an very interesting story about Benford's law. Benford's law posits that there is a natural distribution to all numbers in the universe (i.e. lengths of rivers, the populations of cities, molecular weights of chemicals). This professor had taken 43 financial variables from 20,000 firms and they fit the predicted outcome (of Benford's law) almost perfectly. However, she warns that recently, this same data set is no longer 'fitting' and the deviation is becoming an outlier. She warns that "accounting data seem to be less and less related to the natural data-generating process" and "Benford's law casts serious doubt on the reliability" of this data. No one would label me a quant, but this thesis seemed worthy of note to this layman as a warning that the reported numbers may be more 'adjusted' than we realize.

Today's 'off topic' note - Two weeks ago, the ex-bassist from the band Weezer tweeted that he dreamt he would die the following week of a heart attack in his sleep. Lo and behold, he died the following week of a heart attack in his sleep. ABC new story on this here.