Investment News and Analysis

Forex – Dollar Mixed Against Rivals as Europe Debt Eears ebb

2010-05-13T10:43:00.000-07:00

May 12 (Forex Pros) – The U.S. dollar was mixed against other major currencies on Wednesday as fears over sovereign debt in the euro zone ebbed, and in the wake of worse-than-expected data on the U.S. trade deficit.

The greenback was down against the euro, with EUR/USD gaining 0.13% to hit 1.2677 after Spain’s prime minister pledged to cut state employees’ wages and slash investment spending in order to combat his country’s budget deficit.

Also Wednesday, a Commerce Department report showed that U.S. trade shortfall increased 2.5% to USD 40.4 billion from February.

The dollar also slipped versus the Swiss franc and loonie, with USD/CHF shedding 0.33% to hit 1.1081 and USD/CAD dropping 0.52% to hit 1.0165.

But the greenback strengthened against the yen and sterling, with USD/JPY rising 0.45% to reach 93.07 and GBP/USD sliding 0.69% to hit 1.4852. Cable fell earlier in the day after official data showed that the number of people unemployed in Britain rose by 53,000 to 2.51 million during the three months to March.

The greenback was also up against its Australian and New Zealand counterparts: AUD/USD slid 0.06% to hit 0.8947, and NZD/USD slipped 0.15% to reach 0.7154.

The dollar index, which tracks the performance of the greenback versus a basket of six other major currencies, was up 0.04%.

Earlier in the day, official data showed that Germany’s economy, the euro zone’s largest, unexpectedly expanded in the first three months of the year, spurred by company investment and exports.

FOREX – Euro Slips vs Dollar as Growth Worries Weigh

2010-05-12T10:23:00.000-07:00

FOREX – Euro Slips vs Dollar as Growth Worries Weigh

NEW YORK, May 12 (Reuters) – The euro dropped against the U.S. dollar on Wednesday, erasing early gains as worries about euro zone growth offset news of more spending cuts by Spain and a successful bond sale by Portugal.

Housing bubble? February home sales show signs of recovery

2010-04-06T11:59:00.000-07:00

By Steven Tarlow, your February home sales news source

February home sales are up, but remember it could just be a reflection of a new housing bubble. (Photo: ThinkStock)

Plenty of Real Estate experts have gone on record that a new housing bubble is forming, but others view increased February home sales numbers for the U.S. as a positive sign that the market is surging again. According to the National Association of Realtors, home sales in February 2010 rose 8.2 percent. Analysts had expected sales to continue to flat line, as credit for too many today is limited to the payday loan. This was in spite of the tax credit for home buyers. The tax credit was among the driving forces for sales increases in fall 2009, but the New York Times says that it has been a lesser force this spring.
Do February home sales equal a second surge?

National Association of Realtors Chief Economist Lawrence Yun says it is possible. A second Real Estate market surge would go a long way toward stabilizing home prices, placing that market very much on the same track as U.S. employment, where the service sector has been shown to be experiencing resurgence, even if it still has some distance to go before it reaches the break even point. The Institute for Supply Management also indicates that non-manufacturing jobs and exports are on the rise. Yet this does not take into account the perpetually “underemployed,” who have difficulty making ends meet and rely upon occasional payday loans.
February home sales: Good news for dark times

Let’s be clear about this: the increase in February home sales is all relative, for the U.S. Real Estate market is still in a deep rut. Foreclosures are still on the rise. Yet the February home sales report is a glimmer of hope. Areas of the country that experienced bad weather even showed an uptick; according to the Times, the Northeast and South – areas hard-hit by snow this winter – showed a nine percent increase in sales.

MoneyGram | Sending and receiving money for 70 years

2010-04-05T09:47:00.000-07:00

MoneyGram | Sending and receiving money for 70 years

MoneyGram International, Inc., the parent company for MoneyGram (aka Money Gram) is what is known as a “global payment services company.” Money transfers, money orders, bill payment and prepaid Visa debit cards are available in MoneyGram’s vast array of parent and agent stores across the globe or via its online portal, www.moneygram.com. Since 1940, MoneyGram has worked hard to become a highly efficient, economical and secure (See http://www.moneygram.com/MGIUS/CustomerService/ConsumerProtection
/index.htm) means for consumers and businesses to send and receive money. The small money order company known as Travelers Express that opened in Minneapolis, Minn., has grown by leaps and bounds to become a payment services leader.
MoneyGram doesn’t offer payday loans, but it is recognized worldwide

Through it all, MoneyGram’s corporate values of “respect, courage, passion, integrity and teamwork” have guided everything it does. A good business cannot be built without good people, and so MoneyGram has gone forward by “providing a challenging, friendly and rewarding environment” for its employees. Considering the company’s longstanding tradition of success in the global payment services market, it would appear that employees have risen to the challenge. Part of that challenge is MoneyGram’s initiatives that give back to the community (See www.moneygram.com/MGICorp/CommunityGiving/index.htm).
Loyal customers are rewarded for using MoneyGram

Customers want to be made to feel special at any business, which is why MoneyGram has programs like MoneyGram Rewards. The company will automatically keep track of the number of Eligible Money Transfers (See www.moneygram.com/MGIRewards/ProgramRules/index.htm) a customer makes via a MoneyGram Rewards card. It’s free, much like a standard grocery store savings card. The more times a customer sends money, the lower the cost for sending money becomes. Special promotions also become available to MoneyGram Rewards customers over time, a “Thank You” from MoneyGram to the customer for their loyalty.
How much do customers save with MoneyGram Rewards?
For three to five eligible money transfers per year: Save 5 percent off transfer fees!
For six or more eligible money transfers per year: Save 10 percent off transfer fees!
Other ways MoneyGram Rewards benefit MoneyGram customers
Speed – No forms to fill out, as identifying information is contained on a customer’s MoneyGram Rewards account
Control – Receive Notice instantly notifies customers when their sent money is picked up
Online metrics: How www.MoneyGram.com fares

Compete.com tells a story about MoneyGram’s online portal – www.moneygram.com – that mirrors its longstanding tradition of success. According to February 2010 numbers, www.moneygram.com received 217,393 visitors, an 8.22 percent increase over the previous month. Overall, 349,980 visitors came to the Web site in February, which actually reflects a 9.57 percent drop. That kind of fluctuation appears normal for financial service companies, however, based upon recorded numbers for the past 12 months.

In terms of referral share, Google.com sent the most traffic to www.moneygram.com in February (17.43 percent), while Yahoo.com (10.31 percent) and Emoneygram.com (9.89 percent) came in for show and place. Search share indicates that 33.87 percent of www.moneygram.com visitors used “moneygram” in their favorite search engine, while “money gram” (12.07 percent) and “moneygram locations” (6.73 percent were also significant.
When you go with MoneyGram, you go with a payment services leader

When friends or loved ones need a loan and live on the other side of the country – or in another country – MoneyGram is an excellent choice. Low cost, speed, efficiency and security have kept the business strong for 70 years.

The futility of active management - Investment News

2010-03-22T09:04:00.000-07:00

The futility of active management - Investment News:
"From 1994 through 2008, the average large-cap mutual fund that was in existence for the full 15-year period (some 400 funds) posted an annualized return of 5.61%, compared with 6.46% for the S&P 500.

And because some people claim that active managers are more valuable under the circumstances of a bear market than when the markets are trending up, Standard & Poor's looked at the percentage of mutual funds that failed to outperform their benchmarks between 2004 and 2008 during the last bear market: 66.2% of all domestic funds, 71.9% of all large-cap funds, 79.1% of all mid-cap funds and 85.5% of all small-cap funds."

Risky business | Penn State News | Business - Centre Daily Times

2010-02-25T00:13:00.000-08:00

Risky business | Penn State News | Business - Centre Daily Times:
"The Nittany Lion Fund, a $4.5 million mutual fund managed by Penn State students and advised by finance professor J. Randall Woolridge, teaches students the importance of risk management, ethics and money management in a real-world environment.

Smeal Dean Jim Thomas said the college also plans to add a major in risk management. The addition will be submitted to the Faculty Senate for approval in the near future."

The Intelligent Investor: Golden Pay for CEOs Could Be Bad for Stocks - WSJ.com

2009-12-26T06:00:00.000-08:00

The Intelligent Investor: Golden Pay for CEOs Could Be Bad for Stocks - WSJ.com:
"The first study, led by corporate-governance expert Lucian Bebchuk of Harvard Law School, looked at more than 2,000 companies to see what share of the total compensation earned by the top five executives went to the CEO. The researchers call this number—which averages about 35%—the 'CEO pay slice.'

It turns out that the bigger the CEO's slice of the pie, the lower the company's future profitability and market valuation...."

DNA-Based Investing Strategies - Barrons.com

2009-09-30T11:12:00.000-07:00

DNA-Based Investing Strategies - Barrons.com: "Science can tell the difference between nature and nurture. Personal investing strategies are based on genes, brain patterns, and human experience. Columnist Jason Zweig goes to the University of Pittsburgh to uncover whether science can tell whether he is more guided by his nature, or by his life."

How Scientists Helped Cause Our Financial Crisis

2008-11-26T13:54:00.000-08:00

Garbage in, Garbage out. Models are not reality. Models only help explain reality and therefore help our understanding of a reality that is generally too complex to fully grasp.

These ideas are taught in every stats, econometrics, and finance class worth its weight. On every test students use (indeed sometimes overuse) "data limitations", "it uses historical data", and "surprises (or black swans) can occur that would make our model incorrect" as problems with such and such model. And yet somehow, quantitative geniuses (or at least the traders and managers who relied on the models) seeming forgot (uh, looked the other way?) and ignored the problems.

So how did so many smart people seemingly forget? In part they were paid to forget (bonuses, promotions for big successes with little accounting for risks taken--for more of this see Taleb's "Fooled by Randomness".

Scientific America and ClusterStock look at this issue in How Scientists Helped Cause Our Financial Crisis
"In retrospect, the financial planning by our most sophisticated financial institution looks incredibly stupid. Merrill Lynch never included in its plans the risk that its counterparties could demand more collateral. Citigroup proceeded to dive headlong into the mortgage market on the assumption that a national housing decline was impossible. Everyone, it seems, failed to guard against the risk that they might be forced to sell assets to raise capital during a downturn. So it's worth asking: how did so many rich guys get so dumb?"
Scientific America quoted in the same piece:
"The causes of this fiasco are multifold—the Federal Reserve’s easy-money policy played a big role—but the rocket scientists and geeks also bear their share of the blame....The government bailout has already left the U.S. Treasury and Federal Reserve with extraordinary powers. The regulators must ensure that the many lessons of this debacle are not forgotten by the institutions that trade these securities. One important take-home message: capital safety nets (now restored) should never be slashed again, even if a crisis is not looming.

For its part, the quant community needs to undertake a search for better models—perhaps seeking help from behavioral economics, which studies irrationality of investors’ decision making, and from virtual market tools that use “intelligent agents” to mimic more faithfully the ups and downs of the activities of buyers and sellers....risk management models should serve only as aids not substitutes for the critical human factor. Like an airplane, financial models can never be allowed to fly solo."
Remember, models are representations of reality. Economic models, no matter how super, are no more reality than are super models are representations of the average Joe (or Jill or Jim or Jerry or Jane).

An Airline Shrugs at Oil Prices - New York Times

2007-11-30T17:18:00.001-08:00

An Airline Shrugs at Oil Prices - New York Times:
"Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years. Other major airlines passed on buying all but the shortest-term insurance against high fuel prices..."
That other airlines were not hedging (or at least not hedging long-term) has been one of my pet peeves going back as far as the newsletter days. Sure it costs money to hedge, and sure is not without some risks (see for instance this story on what happened when oil prices fell), but hedging makes too much sense not to do.

How does hedging work? Why? The best explanation I have ever seen comes from an old Corporate text book I once used by Rao (do not think it is still in print and I can not find my copy). In it he described how hedging allows management to worry about what they do well and can control (service, pricing, safety etc) and not what they can not control (oil prices in this case).

An other view (the two views are definitely NOT mutually exclusive) is that hedgers have both better access to capital markets and less need to go when the asset (oil) moves in teh 'wrong' direction. My favorite paper in this area has long been Carter, Rogers, and Simkins.

Of course that said, all of the good I can say about hedging goes out the window if firms use the same derivatives to speculate.

Thanks to Felix over at Conde Nast's Porfolio.com for the heads-up on this one.

An Airline Shrugs at Oil Prices - New York Times

2007-11-30T17:18:00.000-08:00

The News-Gazette.com:Top salaries continue to rise as UI competes for talent

2007-10-29T00:32:00.000-07:00

Well this was sent to me, it is not to as a means of saying so and so gets too much, merely to report that it really is a different world. This is from the University of Illinois.

The News-Gazette.com:Top salaries continue to rise as UI competes for talent :
"As of fall 2006, the average salary for a full-time professor at the UI was $95,700, up $13,400 or 16 percent since 2002. When comparing that average salary to those at the 21 institutions, the UI ranks third from the bottom, behind Michigan, Texas and North Carolina but ahead of Washington and Wisconsin....In recent years, as turnovers have occurred in high-level positions at the university, salaries for new employees have often risen well above the predecessor's pay. Four years ago, the UI's vice president for technology and economic development, David Chicoine, earned $262,500. UI College of Business Dean Avijit Ghosh will assume that post in January and earn $339,000....Of the more than 100 people who earn $200,000 or more at the UI, many are in the business and law schools. And many hold endowed chairs, meaning some of the salary is funded by a donor.Such top faculty earners include finance Professor Jeff Brown, who has the title of William Karnes Professor of Mergers and Acquisitions, and a salary of $245,000;"
This does show how much salaries can vary. At small schools (such as SBU) it may take the sum of four years to make that much. :( Oh well...having traveled to mid Ohio, Orlando, and NYC in the last three weeks, I can definitely say I would not want to trade places.

Do Finance Profs practice what they preach?

2007-10-27T10:22:00.000-07:00

Sometimes the most important finding of an article is not played up while lesser items (especially those that appear to more exciting or controversial) are given more play. For instance from SmartMoney:

Finance Profs Reveal How They Invest Own Money (The Pro Shop) | SmartMoney.com:
"Colby Wright, assistant professor of finance at Central Michigan University and James Doran, finance professor at Florida State University, [survey] ... finance professors. After all, they're arguably the most educated and well-informed people when it comes to understanding the mysteries behind stock price movements. [I think the article somehow left out 'best looking", funniest, and "nicest" as well.] So Wright and Doran set out to survey all the professors of finance in the U.S. and ask what's most important to them when investing their own money. The survey resulted in 642 usable responses. They published their results earlier this year in a paper titled 'What Really Matters When Buying and Selling Stocks?"
The findings were not exactly what we would think. For instance the survey suggests that PE ratios, market multiples, and momentum investing are among the keys and not CAPM, efficient markets and the market risk factors.
"Out of 43 variables given, the most important were a company's price/earnings ratio and how close a stock is to its 52-week high to low. Considering the material most finance professors teach their students as a way of explaining stock price movements — like the capital asset pricing model and discounted cash flows — Wright calls the findings surprising"
Which is true to a degree, but virtually all finance classes also cover market multiples, such as PE ratios, in some format. For instance in my classes I harp on the fact that both Discounted CAsh Flow analysis and multiples are really doing something very similar just in a different way and there is a place for both. In fact, we generally say that the time to perform a DCF projection is often not worth it for small investments.

Had that been the entire story it MIGHT have been blog worthy. However, after reading the actual article it screamed "Blog me!"

It could be argued that the main finding of the paper was not the reported use of mutliples and momentum investing, but that "...over two-thirds of the sample are passive investors, and not because they don’t have the time to invest."

Thus, the headline grabbing headlines were not from the entire sample but only a small subsample of active investors.

Which to my biased reading suggests that the majority of finance professors do appear to practice what they preach!

Hedge funds lure business school profs

2007-09-13T17:18:00.000-07:00

Hedge funds lure business school profs:
"The growing and lightly regulated hedge fund industry is attracting new players -- business school professors eager to test their theories in a field known for big risks and occasionally bigger rewards. Hedge funds are becoming a tempting tool for faculty members looking to sharpen research and giving a Wall Street perspective to their students, all while making some extra money."

Private lives of CEOs tied to profit, loss

2007-09-02T17:55:00.000-07:00

For a news paper article, this one is great! It is a series of summaries that basically show that CEO's personal life impacts the firm.

Private lives of CEOs tied to profit, loss:

"Should shareholders in a company care if the chief executive's child dies? What if the mother-in-law passes away?.....slid by about one-fifth, on average, in the two years after the death of a CEO's child, and by about 15 percent after the death of a spouse. As for an executive's mother-in-law, the old jokes seem to hold: The researchers found that profitability, on average, rose slightly after her demise."

More on Bear, Regulation, and transparency

2007-06-27T11:07:00.000-07:00

Mark Gilbert writing for Bloomberg has a well done piece on the implications of the hedge fund problems at Bear Stearns.

Bloomberg.com: Opinion:
Two lookins:
"The most stunning aspect of the demise of two hedge funds belonging to Bear Stearns Cos. is the almost total absence of transparency surrounding the bailout.

The debacle may finally provoke regulators, who have long suspected that buying derivatives is akin to running through a fireworks factory with a lighted blowtorch in each hand."

And later:
"The unraveling of the Bear Stearns hedge funds has pulled back one corner of the curtain shielding the activities of hedge funds and their investments in derivatives, giving a glimpse of who is on the hook if the bets sour.

It seems that the skin in the game isn't from other hedge funds, Asian central banks, or widows and orphans. Instead, step forward the usual Wall Street suspects: Merrill Lynch & Co., Lehman Brothers Holdings Inc., Bank of America Corp. and their investment-banking peers."

Bear lends $3.2b to its troubled hedge fund

2007-06-25T17:55:00.000-07:00

In what will no doubt be talked about in finance classes for years to come, the big news story today is that Bear Stearns has agreed to lend $3.2 Billion (about 25% (I did not verify this reported number) of its overall capital) to one of its troubled hedge funds.

First the reports:

Bear Stearns to Bail Out Troubled Fund - New York Times:
"Bear Stearns, the investment bank, said today that it would provide a secured loan of up to $3.2 billion to one of two troubled hedge funds operated by its asset-management business, in an effort to placate lenders and investors.

The move comes two weeks after banks that lent billions to the hedge fund, the Bear Stearns High-Grade Structured Credit Fund, demanded that it put up more money to make up for the losses in its portfolio of complex and hard-to-sell mortgage-related securities."
From Bloomberg:
"The funds speculated in highly-rated CDOs -- securities backed by bonds, loans, derivatives and other CDOs -- that were hurt in March and April as defaults on subprime mortgages to people with poor or limited credit histories increased. The fund also lost on opposite bets against home-loan bonds, which backed many of its CDOs.

As the funds faltered, Merrill [and others] sought to protect itself by seizing the assets that were used as collateral for its loans."

But had very limited success as there were few willing to buy at the prices being asked.
Keep it simple: So what happened? In as simple of terms possible, the hedge funds borrowed to buy "bonds" that subsequently went down in value. The collateral for this debt was the the bonds. Hence some borrowers demanded repayment and tried to sell the assets to raise cash. Fearing a fire sale Bear agreed to lend the fund $3.2 Billion to the fund in order to give it time to sell assets or for them to recover.

Is it catchy? The real question of course is whether this will lead to a contagion problem where other firms get in trouble and the possibly lead to a melt down. While it is impossible to say so soon, early guesses are that the problem is not very contagious and any major meltdown is highly unlikely. Why? For one thing almost everyone who has been paying any attention in the past few weeks(months?) has seen it coming.

If you think back to Long Term Capital Management, this was the big issue there as well and led to the Fed arranged bail out of that troubled fund. In many ways, the same thing will likely happen now. Assets will be sold in a more orderly fashion and in due time the fund will be closed.

Yes the risk does still exist (and always will), but it does not appear to be a catastrophic event this time. For one, there are many more hedge funds and private equity investments. thus, through diversification, the impact will be less. Moreover, while highly levered, first reports have leverage less than at LTCM.

What risk is Bear taking on in extending the loan? According to Bear CFO Sam Molinaro (who incidentally is an SBU grad) not much since the assets pledged against the loan are worth more than the loan. (Which of course is hard to say with certainty as evidenced by ML's difficulty in selling off the $850M in assets and getting bids as low as 30 cents on the dollar.

So what will happen? Most likely the funds will sell off their assets and eventually be shut down. But the loan from Bear will give the funds time to do so in an orderly fashion and not at 30 cents on the dollar the WSJ reported this morning that some universities were bidding for the debt.

Bloomberg.com: Worldwide

2007-04-24T00:32:00.000-07:00

Bloomberg.com: Worldwide:
"The U.S. Securities and Exchange Commission filed a lawsuit against two former Apple Inc. top executives for their roles in backdating stock-option grants, including some made to Chief Executive Officer Steve Jobs.

Former Apple General Counsel Nancy Heinen's lawyers have said she'll fight the case. The SEC settled with former Chief Financial Officer Fred Anderson. He agreed to forfeit $3.5 million and pay a $150,000 fine to resolve claims he filed false financial reports and had inadequate accounting controls at the Cupertino, California-based company, the SEC said."

How good of hedge is gold?

2007-04-16T00:23:00.000-07:00

Market.view | A fine and fickle friend | Economist.com:
"A recent paper...attempts to answer this question—or, rather, it attempts to answer two questions. Does gold usually move in the same direction as shares or government bonds? (In other words, is it a hedge in normal times?) And does gold move in the opposite direction when shares or bonds are falling sharply? (Is it a safe haven in extreme times?)

The academics looked at a period from end-November 1995 to end-November 2005. They found....[that] It does well in the short term when shares fall; but if shares fall for long enough, investors start to liquidate their portfolios and gold suffers with all the rest....So those investors who want to buy gold are really making a commodity bet or a currency bet. They are not protecting themselves against a prolonged bear market in shares and bonds.

The academic paper is by Baur and Lucey:
“Is Gold a Hedge or a Safe Haven? An analysis of Stocks, Bonds, and Gold"

CIBC analyst got death threats on Citigroup: report - Yahoo! News

2007-04-11T15:38:00.000-07:00

It is well known that there have traditionally been many more buy recommendations than sell. This has been largely explained incentives both of the analyst (who does not want to lose the information that comes from better access to management) and from the brokerage firm (who does not want to lose potential investment banking business). Recent research (Kadan, Madureira, Wang, and Zach) suggests that these problems have been at least somewhat mitigated by regulations, but not completely.

Why? Well in what sounds like a plot from a novel or movie, we may have to add another explanation: Death threats!!!

CIBC analyst got death threats on Citigroup: report - Yahoo! News:
"The analyst whose downgrade of Citigroup Inc sparked a broad stock market sell-off on Thursday said she has received several death threats stemming from her research, the Times of London said. Meredith Whitney of CIBC World Markets Inc late Wednesday downgraded Citigroup to 'sector underperformer,' saying the largest U.S. bank by assets might need to raise more than $30 billion of capital and cut its dividend. Her downgrade triggered a 6.9 percent drop in Citigroup's shares.... 'People are scared to be negative, especially when a company has such a wide holding,' Whitney told the Times of London in an article published Saturday. 'Clients are not pleased with my call and I have had several death threats,' she continued. 'But it was the most straightforward call I've made in my career and I am surprised my peer analysts have been resistant. It's so straightforward, it's indisputable."

Blaine Lourd Profile - Executive Articles - Portfolio.com

2007-01-12T15:38:00.001-08:00

What a great article! Inherently readable, a great story, and even ends up with a happy ending. I usually hate to give away the story, but in this case I will. It is the story of a stereotypical stock broker who sees the light and realizes that indexing is generally a better idea.

Blaine Lourd Profile - Executive Articles - Portfolio.com:
"As a group, professional money managers control more than 90 percent of the U.S. stock market. By definition, the money they invest yields returns equal to those of the market as a whole, minus whatever fees investors pay them for their services. This simple math, you might think, would lead investors to pay professional money managers less and less. Instead, they pay them more and more...Nobody knows which stock is going to go up. Nobody knows what the market as a whole is going to do, not even Warren Buffett. A handful of people with amazing track records isn’t evidence that people can game the market. Nobody knows which company will prove a good long-term investment. Even Buffett’s genius lies more in running businesses than in picking stocks. But in the investing world, that is ignored. Wall Street, with its army of brokers, analysts, and advisers funneling trillions of dollars into mutual funds, hedge funds, and private equity funds, is an elaborate fraud."
And later on some so-called experts:
" There's a shelf of financial bestsellers whose titles now sound absurd: Ravi Batra's The Great Depression of 1990; James Glassman's Dow 36,000; Harry Figgie's Bankruptcy 1995: The Coming Collapse of America and How to Stop It. There’s BusinessWeek’s 1979 description of "the death of equities as a near permanent condition,"

and after he finds DFA (yeah Eugene Fama's firm) and comes to realize that indexing is probably the way to go.
"I think more and more brokers will move to an efficient-markets strategy, because all of their products go bad.

Blaine Lourd Profile - Executive Articles - Portfolio.com

2007-01-12T15:38:00.000-08:00

Cost of Nymex trading seat falls as screen trading surges

2006-12-04T13:05:00.000-08:00

Don't think electronic market is changing the market landscape? Think again! case in point, the price of a seat on the NYMEX fell by a staggering 75%!

Cost of Nymex trading seat falls as screen trading surges:
"THE cost to lease one of the 816 seats on the New York Mercantile Exchange, the world's largest energy market, has plunged 75 percent as electronic trading overtakes the traditional open-outcry system.

Three new seat leases, which give the holder the right to trade on the Nymex floor in Manhattan, were issued starting on Friday at US$5,000 a month, and several renewals were also signed at that price. Last month, seats were leased for as much as US$20,000 a month, according to data on Nymex's Website."
and later:
"The shift to electronic trading is drying up liquidity on the floor," said Robert Webb, a finance professor at the University of Virginia and a former trader on the Chicago Mercantile Exchange. "It's totally a reflection of a lack of potential profit opportunity by trading on the floor.""

And from Bloomberg:
"As part of the IPO process, seatholders were issued 90,000 shares in Nymex for each seat they owned. Those shares are now worth about $11 million. Prior to the IPO, Nymex members traded the shares among themselves, often for about $45 each, valuing a seat at about $4 million just a month ago.

The trading right component of a Nymex seat yesterday sold for $500,000, according to Nymex's Web site."

So while trading is still taking place, it is migrating more and more to electronic markets and not the floor

Common Investment Mistakes

2006-08-24T13:11:00.000-07:00

Could almost be called "Behavioral Finance in Practice" by the Wall Street Journal's Jonathan Clements from MoneyWeb:

Some look-ins:
""People tend to buy the investments they wish they had bought last year," says Terrance Odean, a finance professor at the University of California at Berkeley. "Partly, people simply extrapolate the past trend. But also, people feel that the markets are more predictable than they really are."
If we were rational, we would grow leery as an investment rises in price, because we are now paying more for the same investment. Instead, however, we are drawn to hot stocks and hot mutual funds, because we assume that the future will look like the immediate past."
"Rather than accepting that market conditions have changed, home sellers today are often fixated on the price they paid or the price they could have gotten at the market peak. Indeed, whether it is real estate or stocks, folks like to "get even, then get out."

This, of course, is partly about making money. But it is also about avoiding regret"
"According to the Commerce Department's Bureau of Economic Analysis, the U.S. savings rate turned negative over the three months through June 2005 and it has remained that way ever since.

Partly, this reflects our struggle with self-control. Instead of rationally socking away money on a regular basis, we prefer to spend today and put off saving until tomorrow.

I suspect the negative savings rate, however, is also driven by our overconfidence"

As always Clements offers some good advice in a readable fashion.

globeandmail.com : Mergers hit $166-billion

2006-04-28T13:13:00.000-07:00

Takeovers have been coming fast and furious of late in Europe and North America. The NY Times' Deal Book reported on trend from a global perspective today. I'll try to further summarize this activity.

First Canada' Globeandmail.com reports on the large spike in Canadian activity: Mergers hit $166-billion:
"Merger-and-acquisition activity in Canada jumped 47 per cent to a near-record $166-billion last year amid “ideal market conditions,” investment banker Crosbie & Company Inc. said Monday.

All told, there were 1,244 announced transactions in 2005 — a rate of more than three a day, seven days a week, and a 42-per-cent increase over the 875 deals in 2004."
The large number of deals has of course drawn politiacl interests as politiicans in many countries try to block some deals. From the NY Times:

"In the past month, efforts in continental Europe to keep foreign buyers out have spread. In the latest instance, French politicians said last weekend that the private utility Suez and Gaz de France would merge, effectively halting a bid by Enel, an Italian company, for Suez.

Elsewhere, the intrusion has been subtler, but palpable. In the United States, lawmakers have raised security concerns over Dubai Ports World's takeover of the British company Peninsular & Oriental Steam Navigation, which manages some United States ports. In Britain, officials fretted earlier this month over scrutiny by Gazprom, the Russian government-controlled monopoly, of the British gas company Centrica as a possible takeover target.

Around the world, globalization has lowered barriers to entry. But some of its costs, like large-scale job losses, have created fertile conditions for politicians hoping to build national champions and keep out foreign buyers. Also, national security concerns — about everything from energy sources to ports — have coalesced into government action to keep strategic assets out of foreign hands."

(for more on this protectionism see Business Week as well)

Finally Bloomberg reports that the surge in M&A activity has led to higher profits at banks such as the Bank of Scotland:
"Revenue gained 14 percent to 25.6 billion pounds....[at the] Bank of Scotland, the biggest arranger of leveraged loans in Europe, benefited from a surge in takeovers by buyout firms that spurred borrowing last year.

globeandmail.com : Mergers hit $166-billion

2006-03-28T13:13:00.000-08:00

globeandmail.com : Mergers hit $166-billion

2006-02-28T13:13:00.005-08:00

globeandmail.com : Mergers hit $166-billion

2006-02-28T13:13:00.004-08:00

globeandmail.com : Mergers hit $166-billion

2006-02-28T13:13:00.003-08:00

globeandmail.com : Mergers hit $166-billion

2006-02-28T13:13:00.002-08:00

globeandmail.com : Mergers hit $166-billion

2006-02-28T13:13:00.001-08:00

globeandmail.com : Mergers hit $166-billion
Takeovers have been coming fast and furious of late in Europe and North America. The NY Times' Deal Book reported on trend from a global perspective today. I'll try to further summarize this activity.

First Canada' Globeandmail.com reports on the large spike in Canadian activity: Mergers hit $166-billion:
"Merger-and-acquisition activity in Canada jumped 47 per cent to a near-record $166-billion last year amid “ideal market conditions,” investment banker Crosbie & Company Inc. said Monday.

All told, there were 1,244 announced transactions in 2005 — a rate of more than three a day, seven days a week, and a 42-per-cent increase over the 875 deals in 2004."
The large number of deals has of course drawn politiacl interests as politiicans in many countries try to block some deals. From the NY Times:

"In the past month, efforts in continental Europe to keep foreign buyers out have spread. In the latest instance, French politicians said last weekend that the private utility Suez and Gaz de France would merge, effectively halting a bid by Enel, an Italian company, for Suez.

Elsewhere, the intrusion has been subtler, but palpable. In the United States, lawmakers have raised security concerns over Dubai Ports World's takeover of the British company Peninsular & Oriental Steam Navigation, which manages some United States ports. In Britain, officials fretted earlier this month over scrutiny by Gazprom, the Russian government-controlled monopoly, of the British gas company Centrica as a possible takeover target.

Around the world, globalization has lowered barriers to entry. But some of its costs, like large-scale job losses, have created fertile conditions for politicians hoping to build national champions and keep out foreign buyers. Also, national security concerns — about everything from energy sources to ports — have coalesced into government action to keep strategic assets out of foreign hands."

(for more on this protectionism see Business Week as well)

Finally Bloomberg reports that the surge in M&A activity has led to higher profits at banks such as the Bank of Scotland:
"Revenue gained 14 percent to 25.6 billion pounds....[at the] Bank of Scotland, the biggest arranger of leveraged loans in Europe, benefited from a surge in takeovers by buyout firms that spurred borrowing last year.

globeandmail.com : Mergers hit $166-billion

2006-02-28T13:13:00.000-08:00

Enron chief accountant expected to plead guilty - report - Forbes.com

2005-12-28T12:56:00.000-08:00

From Forbes:
Enron chief accountant expected to plead guilty - report - Forbes.com: "he former chief accountant at Enron Corp is expected to plead guilty to one or more criminal charges related to the collapse of the energy company, the Wall Street Journal reported.

In its online edition, the newspaper cited sources familiar with the situation as saying attorneys for accountant Richard Causey have spoken to prosecutors in recent days about a plea agreement.

A plea agreement could have a major impact on the cases against his co-defendants, former chairman Kenneth Lay and former president Jeffrey Skilling.

The three men face fraud, conspiracy and other charges in relation to the alleged financial and accounting practices at the company. "

Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance by Murray Carlson, Adlai Fisher, Ronal

2005-09-29T12:59:00.000-07:00

Using option theory to understand and explain firm and investor behavior often yields important insight. This is no exception.

Carlson, Fisher, and Giammarino (CFG) use real option analysis (real options are essentially the application of option theory to “real” assets) to investigate the stock behavior around seasoned equity offers (SEO). Many researchers (probably most notably Ritter 2003) have shown that prior to a SEO stock prices rise, then fall on the announcement, and then underperform over the following period.

Potential explanations to this include market timing and inefficiency stories that have managers selling overpriced shares to investors who willingly buy the shares but at only a partial discount. The real option view allows us to add a more rational explanation to these behavioral models.

The very quick explanation is that firms have options on growth (i.e growth options). These options are more volatile than both the firms’ assets as well as the assets that make up the growth opportunities. So, when the firm uses the proceeds of the SEO to expand (which is to say to convert growth options into assets in place), the value of the firms’s equity drops.

In the authors’ words:

“Equity issues are associated with firm expansions. When firms invest, they convert growth options to assets in place. Even when the new assets are risky, they will be less risky than the options they replace. Although both size and book-to-market effects are present in our model, standard matching procedures fail to capture the dynamics of risk and expected return.”

How cool is that?!
And yes this is similar to the real option papers that try to explain the internet bubble away.

Cite:
Carlson, Murray D., Fisher, Adlai J. and Giammarino, Ron, "Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long-Run Performance" (December 5, 2004). 7th Annual Texas Finance Festival Paper. http://ssrn.com/abstract=562942

FTR I stumbled upon this paper while researching Real options for my advanced corporate finance class. I feel bad I had missed it for so long. And yes I will have to be redoing my notes for the umpteenth time. :)

Islamic Investing

2004-12-19T13:53:00.001-08:00

Consistently one of the most popular pages on FinanceProfessor.com is the Islamic Finance page. One reason I beleive is that so few people understand what Islamic Finance is.

From the executive summary on FinanceProfessor Islamic Finance page:
"Islamic Finance is based on interpretations from the Qua ran. Its two central tenants are no interest can be earned on loans and socially responsible investing. The key difference from a financial perspective is the no-interest rule since the Islamic socially responsible investing paradigm is not much different than what other religions do."

Islamic finance, and the majority of all socially responsible investing (SRI), is different from "regular investing" that ignores social factors. SRI is based on the premise that by investng responsibly, we can improve the world. SRI has taken on many aspects: economic, environmental, social, and even whether the firm encourages gambling, drugs, or other so-called vices.

Many of the differences in Islamic Finance (especially Islamic banking) revolve around the no interest (no-riba) principle. For example, Islamic banks must take equity positions in homes rather than taking a traditional mortgage. Others examples include profit sharing plans, leasing, and repurchase plans. These allow the financial institution to make money while satisfying the no-interest principle.

While still a relatively small percentage of the overall financial market, Islamic Finance is a fascinating, important, and often overlooked area. Moreover, its importance will only increase as nations with large Islamic populations play a increasing role in world markets.

Therefore, I was quite excited when I received a link to AIF Investor Services. AIF is designed to help make Islamic Investment easier by not only explaining what Islamic Finance is, but also by rating firms (only a few at the present) on how well they abide by Islamic rules.

While making recommendations on for-profit firms is well beyond the scope of this blog, I can say I learned several things by reading their site and especially will recommend the FAQ page on Islamic Investing. It is good!

Google Gives Employees Another Option

2004-12-13T15:08:00.000-08:00

Google Gives Employees Another Option:
"Google (GOOG) plans to give employees a novel method of cashing in their options starting next April. The search giant will let employees sell their vested stock options, which give the holder the right to reap the difference between the initial price and the current price, to selected financial institutions in an auction marketplace it's setting up with Morgan Stanley"

Still looking for Finance and Accounting news?

2004-10-28T00:52:00.000-07:00

AccountingWEB - News and resources for accountants and accounting professionals.

A few weeks ago I apologized that because of a lack of time and the proliferation of anti-spam software, the FinanceProfessor.com newsletter was not really working as I had hoped. Thus, I offered my view that the blog was the future. Not surprisingly, I had a few complaints from those who liked the newsletter format better.

However, I also got a few subscribers saying that they would like more news (instead of reviewing academic articles. To this I would say that there are so many good sites out there, I am not sure what value I can add. Specifically, I suggest the NY Times Deal Book which is how I start most days. Sign up for it!! It is free and HIGHLY RECOMMENDED!

That said, I know many of you are also interested in accounting stories, so I would like to suggest the Financial Accounting Blog and the newsletter from AccountingWEB.com. Both are very informative and interesting! I read the blog through my MYYahoo page and have subscribed to the AccountingWEB weekly newsletter!

BTW, no I do not get anything for these plugs, I am just trying to help! And to lessen the complaint letters that I get! ;)

The Politics of Internal Capital Markets

2004-08-26T18:41:00.000-07:00

As we have repeatedly seen, conglomerate firms trade at a discount to focused firms. This is not new. (See Comment and Jarrell 1995 for more). The short version of the discount is that for some reason, 1+1 =1.5

With such an important finding, there are of course many potential explanations as to why the discount exists. A far from complete list includes:
Poor managerial incentives
Poor Monitoring and a lack of transparency (hard to tell who is doing what, so why not shirk)
Inefficient internal capital markets (so money is wasted through misallocation)
A lack of loyalty on mangers' and employees' behalves---this would lead to reduced performance and higher expenses.

There really is little doubt that all of these play a role in the discount. Moreover, we should still consider the possibility that there may not be a real discount since the firms do freely chose to become conglomerates. This endogeneity may be the result of a discount that would have been larger had the firms not become conglomerates. (A view which I doubt, but do consider worthy of attention).

At the upcoming FMA convention in New Orleans, McNeil and Smythe will present their paper that supports the view that internal capital markets are not as efficient as many would like to believe.

The authors report what every upper and middle level manager in the world already knows: that politics matter.

More specifically McNeil and Smythe write that lobbying by divisional managers plays a role in the allocation of capital. This is a problem because if the internal market were perfect, the allocation decision would be based soley on the merits (the risk and returns) of each project.

In their words:
"To test the Lobbying Power Hypothesis, we examine the sensitivity of business
segment capital expenditures to segment manager characteristics expected to
contribute to a manager's lobbying power for a sample of firms that have
identifiable division/segment managers....There are several division manager
characteristics, such as tenure as suggested by Wulf (2002b), that could be
connected to lobbying power. We collect information on division manager tenure
with the firm, time in position, salary level relative to the CEO, membership on
the board of directors, age, and whether the manager is one of the firm’s top
five executives. Each characteristic could indicate and/or impact the degree of
a manager's lobbying power. In the analysis, we examine the association between
division capital expenditures and each of the aforementioned division manager
characteristics."

and the findings?

"We find evidence that segment level capital expenditures are associated with
division manager characteristics which, we argue, reflect division manager
lobbying power. For example, the results indicate that relatively high q
segments receive lower capital expend itures when headed by a manager with low
tenure or by a manager competing with multiple top executive/segment
managers."

VERY INTERESTING!!!!

http://207.36.165.114/NewOrleans/Papers/1101756.pdf

SSRN-Which Institutional Investors Monitor? Evidence from Acquisition Activity by Lily Qiu

2004-07-16T12:38:00.000-07:00

SSRN-Which Institutional Investors Monitor? Evidence from Acquisition Activity by Lily Qiu: "Which Institutional Investors Monitor? Evidence from Acquisition Activity by LILY QIU "

There has been quite a bit of evidence of late that all shareholders do not do equal jobs of monitoring management. For example Barclay, Holderness, and Sheehan find that private placements (which have been long seen as a means of improving monitoring) may actually reduce monitoring and help to entrench managers because many of those purchasing the blocks are not actively monitoring management.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=471720

Yale’s Lily Qiu dives into this question further and finds evidence that suggests that large public pension funds (PPF) may do a better job monitoring than insurance or mutual funds. Qiu's case is built on the finding that firms with large public pension fund holdings “engage in less merger and acquisitions activity.” Moreover, when M&A deals are done, Qiu reports that “The presence of PPF ownership is…significantly and positively associated with long-term M&A abnormal returns…[and]with post-M&A improvement in asset turnover rates.”

Not convinced yet? Qiu is not done: “the negative association between PPF ownership and M&A likelihood is concentrated among cash-rich and low Q firms; among M&A firms, those with higher PPF ownership are less likely to engage in "buying growth" acquisitions.”

A quick explanation of the last sentence? Ok, low Q values (technically Tobin's Q which is market value divided by replacement value) and high cash firms are often cited as being where the Free cash flow problem (see Jensen 1986) is the worst.

Thus, at these firms mergers and acquisitions are often seen as negative projects that only serve to make managers better off. That it is at this
type of firm where the PPF influence seems the strongest, suggests that PPF are stronger monitors of management than other blockholders.

http://papers.ssrn.com/paper.taf?abstract_id=521803

Cite: Qiu, Lily, "Which Institutional Investors Monitor? Evidence from Acquisition Activity" (December 2003).
Yale ICF Working Paper No. 04-15. http://ssrn.com/abstract=521803

BBC NEWS | Business | Mr Greenspan's balancing act

2004-06-16T19:31:00.000-07:00

BBC NEWS | Business | Mr Greenspan's balancing actWhy does inflation seem higher than economists are reporting? A big reason is that economists are more concerned with what is called teh core inflation rate. This core ignores volatile food and energy prices. You and I however have to eat and drive, so those prices appear in our mental calculation of inflation.

Morocco signs Free Trade Agreement with U.S

2004-06-16T15:34:00.000-07:00

In a move that will no doubt pay dividends to both countries, Morocco and the US agreed to "immediately eliminate tariffs on more than 95 percent of bilateral trade in consumer and industrial products. All remaining tariffs on these goods are to be eliminated within nine years - the best market access package of any U.S. free trade agreement with a developing country signed to date. The agreement also significantly reduces

Another look at retirement planning. Are equities the way to go?

2004-04-21T12:37:00.000-07:00

As hoped and expected, the recent post on Ahmet Tezel's article in the Journal of Financial Planning on how much a retiree could safely take out of his/her retirement account has sparked further discussion.

SSRN-Irrational Optimism by Elroy Dimson, Paul Marsh, Mike Staunton: "Although the probable rewards from equity investment are attractive, stocks did not and cannot offer a guaranteed superior performance over the investment horizon of most investors. Furthermore, their prospective returns are lower than many investors project, whereas their risk is higher than many investors appreciate. Investors who assume that favorable equity returns can be relied on in the long term or that stocks are safe so long as they are held for 20 years are optimists. Their optimism is irrational. "

On one hand it is true that given the track record of equities, the more money invested in equities, the more that can generally be taken out. But equities are also risky so the more invested, the higher probability of the portfolio suffering economically significant declines. (that word generally will always get you in trouble ;) )

This is particularly important because we do not know the future and any model we use is "assumption dependent." These assumptions are not as easy to make as some may believe. For instance, consider without searching the web or a book, what is the historical return on equity investments? No doubt many of you (myself included) figured somewhere around 12% for large stocks (see virtually any investment text for these numbers) which corresponds to a risk premium of around 8%. (keeping math simple ;) )

However, Dimson, Marsh, and Staunton report that this is probably an overly optimistic number. Not because the expected equity risk premium is expected to fall in the future because the market is currently overvalued as those in the Campbell-Schiller camp believe (although it may be), but because we are not looking at the right historical returns! (BTW for more on the Campbell-Schiller view see the January FinanceProfessor newsletter Investments section)

So what is wrong? Virtually every finance text book dutifully reports US equity returns from 1926 to the present. However, this is a period where the US stock market was a very strong performer. Dimson, Marsh, and Staunton do two things to adjust for this: 1. they go back further--to 1926 and 2. they look at global returns and not just US returns. Their findings? Stocks have had lower returns and higher risks.

For instance, it has been widely reported that in the US the stock market has never lagged inflation over a 20 year period. Many have concluded therefore that stocks are safer than they really are. However, looking more globally this is not true. As the authors write: "We find only three non-US equity markets (with a fourth on the borderline) that never experienced a shortfall in real returns over a 20-year period. The worst 20-year real returns of 11 countries were negative. Historically, in 6 of the 16 countries, investors would need to have waited more than 50 years to be assured of a positive return."

Therefore, the authors conclude that investors who rely on the optimistic US-only data are irrational: "prospective returns are lower than many investors project, whereas their risk is higher than many investors appreciate. Investors who assume that favorable equity returns can be relied on in the long term or that stocks are safe so long as they are held for 20 years are optimists. Their optimism is irrational."

So what is one to do? My favorite idea comes from Zvi Bodie who applies modern hedging theories to retirement planning. As he wrote in in 2001 Retirement Planning: a New Approach paper the first part of the plan is to assure some minimum standard of living (this is the minimum amount that you will need) by investing in "inflation-protected bonds and annuities as the way to guarantee a minimum standard of living in retirement."

The second part is to determine when you will need the money. Obviously the longer you wait to start taking money out, the more you can take out and the more risks you would be willing to live with. Bit he is careful to warn that just because you have a longer holding period, it does not mean that equities are the right investment: their risk goes up as well. This is driven home in his interview with Financial Advisor Magazine: "If stocks are safer the longer you hold them, Bodie says, a put option should be cheaper with a longer time horizon. But the cost of put options generally rise proportionally to the number of years going out."

Finally, and maybe most importantly, Bodie suggests that rather than merely investing the remainder of your portfolio in equities, you "use call options to lever potential income gains." That is, you buy long term call options to allow you to participate in stock gains without putting as much of your money at risk. This solution is not costless as options are generally not available in maturities matching the investor needs so they will have to be periodically updated, but overall it is a great (and very low risk) strategy!

Still unclear? Bodie has written a great deal on this issue. Financial Advisor Magazine has a very good article on Bodie's strategy. I highly recommend it (both the article and the strategy!)

Bodie did an interesting interview with Business Week on his strategy and of course his book Worry Free Investing focuses on the issue. (FTR I have not read his book--Sorry!)
http://www.financialadvisormagazine.com/articles/jan_2004_stocks.html

SSRN Cite:
Dimson, Elroy, Marsh, Paul and Staunton, Mike, "Irrational Optimism" (December 2003). LBS Institute of Finance and Accounting Working Paper No. IFA397. http://ssrn.com/abstract=476981