Daily Speculations

The Web Site of Victor Niederhoffer & Laurel Kenner

Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.



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Market Calls of Paul DeRosa


Paul DeRosa is a partner of the New York-based Simpson & Co. hedge fund, one of the top-performing funds. We consider him the most astute fixed-income trader in the world. DeRosa began his career in the securities industry as the money market economist in Citibank’s bond trading division as the right-hand man of the legendary trader Mark Kessenich. DeRosa became the bank’s chief proprietary bond trader, and subsequently was named head of the bank’s financial derivative and capital markets businesses in North America. In 1986, DeRosa and Kessenich joined E.F. Hutton Co. as co-heads of bond trading with particular responsibility for mortgage trading and finance. DeRosa and Kessenich in 1989 established Eastbridge Holdings Inc., a bond and currency trading company in New York, where DeRosa eventually served as CEO. DeRosa holds a Ph.D. in economics from Columbia and has served as a staff economist for the Federal Reserve Bank of New York.


"Perhaps a Weak Bond Market Lies Ahead"

We have managed to keep our noses above the surface but I'm entirely bewildered by the bond market strength -- not what I would expect with the currency in free fall. It sometimes takes a while to sort things out, however, and perhaps a weak bond market still lies ahead. With dividends, the average return to the SP over the last 2 yrs is now over 15%, with the T-bill rate at 2%. Can the equity premium really be 13%?

"So What's Not to Like About Equities?"

The case for equities is very straightforward. Ninety percent of economic theory is about productivity and the gains from trade. The U.S. is in a sweet spot in both of those areas. As a result, the trend growth rate of the U.S. is at least 4% and could easily be higher. The current GDP is a good 5% below capacity and could easily grow at 5% or faster in each of the next several years. Interest rates and inflation are low, the credit markets are once again financing innovators, and the GDP is growing like Topsy. So what's not to like about equities?

On bonds, it seems to me that long-term rates are being held down by shorter-term rates, and short rates are being held down by the federal funds rate. In his December speech in Kansas City, Greenspan stated that the funds rate is lower than it should be. Now that the fear of financial collapse has passed, he is dragging his feet about raising it for two reasons -- employment growth is slow, and the core inflation is still falling. A change in either one of these will get rates going northward, but slowly. This is not a replay of 1994.


"Stock is the Better Choice Now"
In October 2002, during the depths of pessimism about the U.S. stock market, Pimco bond trader Bill Gross predicted that the Dow was heading toward 5,000. Paul DeRosa, partner of the Simpson & Co. hedge fund in New York, wrote a reasoned rebuttal on Oct. 9 that appeared on this site. The Dow fell 3% to 7286 that day, and that was as low as it went; it is now some 2,000 points higher than it was on Oct. 9. DeRosa wrote us Monday, Aug. 18, 2003, with the following update:

"We feel pretty comfortable with our stock positions and have covered all our bond shorts for now. It looks to me as if the BOJ has put a 119 ceiling on the yen, so shorting it is like owning a free option, although Zeus only knows when it would pay off.

"At the beginning of the year we thought that even though junk bonds and common stock were basically the same trade, the junk was the better of the two because it paid a big coupon while you waited for stocks to turn. Junk has backed up a good bit in the last three weeks, but I'm inclined to think stock is the better choice now because the money management crowd is tired of holding cash and annoyed they've missed the turn and won't take much encouragement to bid up the price of stock."