Thursday, December 30, 2004

Red Cross Red Crescent - Make a donation-(updated)

Red Cross Red Crescent - Make a donation

At some level this is not the correct use of this blog, but on another level if it helps, I am willing to break the rules. So this is getting posted on all of my blogs and on the Website itself (later tonight).

After seeing the total destruction caused by the tsunami, I decided to end my week "vacation" and post a link for people to donate.

To say the destruction is horrific is an understatement. Money will not make bring back the lives (estimated now at almost 80,000 and maybe 100,000 or even more!) but may help reduce some of the suffering and even prevent the feared epidemics that the deaths may cause.

CNN has complied a list of aid societies. If you do not want to give to the RedCross/Red Crescent, then pick another. But please give some :)

Added 12/30/04
I was just sent this list of places to donate from as well.

(And yes I am putting my money where my mouth (fingers?) is, and just donated $100.)

Thursday, December 23, 2004

It's a Wonderful Life

Review: It's a Wonderful Life

I almost forgot, since it is Christmas time many of you will be watching one of my favorite movies of all time: It's a Wonderful Life.

As a teaching tip: the run on Savings and Loan in the movie makes an excellent point of discussion in Money and Banking classes and/or Financial Institutions classes.

If you have not seen the movie, look for it on Christams Eve and/or buy a copy for youself.

The closest I will ever give to a lock guarantee is that you will like it. :)

Merry Christmas Mr Bailey! :)

Happy Holidays!!!!

Hi everyone.

I just wanted to wish you all a very very Merry Christmas and a Super happy and healthy New Year.

Thanks for all of the kind comments this past year and I look forward to seeing the site and the Blog grow even more in the coming year!

Again Happy Holidays!!


who will probably be posting more before Christmas, but no guarantees.

Wednesday, December 22, 2004

Updated IPO numbers from Jay Ritter--his so-called "Factoids"

In my book Jay Ritter is known as Mr. IPO. So when I saw that he updated his famous IPO database yesterday, I knew it would be the first entry today! So here you go:

Among the many highlights:
  1. 188 firms went public in the US in 2004.
  2. The firms raised nearly $33 Billion
  3. The firms left about $3.9 Billion (about 11.7%) "on the table"
  4. For the first time since 2000 a IPO doubled in value on the first day of trading. (Jed Oil) (table 5--which is fascinating--look at 1999 and 2000)
  5. The spreads stayed very close to 7% AGAIN (table 9)

BTW this link only has the tables, there is very little "paper" but that said, Mr. IPO does his usual fantastic job on IPOs. (stay tuned for more of his research)

More of Jay Ritter's working papers can be found on his web site.

Real Estate Derivatives

Real Estate Derivatives

I am excited about this one!!! The only thing I can say is what took so long?

A simple explanation of why derivatives exist is that they allow people (or firms) to transfer risk. That is, derivatives allow those who want to to assume more risk to speculate and those who want to reduce their risk to hedge.

Given that for most people the most valuable single asset that they own is in real estate. It is troubling that real estate is also one of the most difficult assets to hedge. You can not short sell, generally (and there are some exceptions--REITs etc.) you have very limited ability to diversify, and until now no traded derivatives to transfer the risk.

That may be changing. From the NY Times Dec. 12,2004:
"Macro Securities Research, a company affiliated with Robert J. Shiller, the Yale economist, has reached an agreement with the Chicago Mercantile Exchange to list pairs of derivative instruments that are essentially index funds linked to home prices in certain markets. One instrument in each pair will rise as its market index rises; the other will rise as the same index falls. That will let investors bet on the direction of housing prices. Similar, but less sensitive, vehicles are being offered by HedgeStreet, a firm in San Mateo, Calif., that offers small-scale derivatives speculation online. "
Quoting from the NY Times, the Montpelier Times Argus (quite the name for a newspaper!) has the following:

"Another set of derivative products linked to home prices was introduced in October by HedgeStreet, which specializes in online trading of pint-sized contracts it calls "hedgelets." Each is a yes-or-no wager that a housing index will be in a certain range on a given date within three months. After that period, the contracts expire, and losing bets are worthless. There are three residential property bets, representing percentage moves in an index whose level may be higher, lower or even with the recent trend in home price movements, for each of six cities: New York, Miami, Chicago, Los Angeles, San Francisco and San Diego.But the value of each contract is a paltry $10, and they are infrequently traded, at best, so unless you live in a matchbox, it would be difficult and very expensive to buy enough of them to provide a practical hedge."

Robert Shiller adds in the Daily Times of Pakistan

"Well-developed markets for real estate derivatives would allow homeowners to kick the gambling habit. A liquid, cash-settled futures market that is based on an index of home prices in a city would enable a homeowner living there to sell in a futures market to protect himself. If home prices fall sharply in that city, the drop in the value of the home would be offset by an increase in the value of the futures contract.

That is how advanced risk management works, as financial professionals know. But the tools needed to hedge such risks should be made available to everyone.

Attempts to set up derivatives markets for real estate have-so far-all met with only limited success. In May 2003, Goldman, Sachs & Co. began offering cash-settled covered warrants on house prices in the United Kingdom, based on the Halifax House Price Index and traded on the London Stock Exchange."

Shiller goes on to add that the real benefit for the home owner will be when these derivatives securities are made more user-friendly:

"Because even many financially sophisticated homeowners will find direct participation in derivative markets too daunting, the next stage in the development of real estate risk management will be to create suitable retail products. For example, the derivative markets should create an environment that encourages insurers to develop home equity insurance, which insures homeowners not just against a bust but also against drops in the market value of the home." Such insurance should be attractive to homeowners if it is offered as an add-on to their existing insurance policies."

Isn't that exiciting? and what great use of finance :) I am so proud :)

BTW I have to admit I had missed the NY Times article, I happened upon it when reading Michael Stastny's blog. Check it out!

Monday, December 20, 2004

Bad economics = bad tomatoes

I am somewhat hesitant to cross-post this, but it is such a great example of why I do not like government intervention that I think I will post it here as well.

A bit of background is necessary. My family owns 4 small grocery stores in Western New York State. As a means of helping out, I also publish a blog for the stores. This is a story from there:

I saw this on ABC News yesterday. What an outrage!! The short version:Joe Procacci is a Florida farmer/saleperson. He has "developed" a tomato that looks and tastes much like many heirloom tomatoes that home gardeners grow. He calls his tomato the UglyRipe. (from

The problem? The Florida Tomato Committee says the tomatoes can not be sold out of state because they look ugly and...the ugly tomatoes would hurt the reputation of other Florida Tomato growers:

"Growers complain that Procacci's UglyRipes could wreck the reputation of Florida tomatoes. To allow misshapen and blemished tomatoes could open the way for a flood of ugly tomatoes to hit the market, says Reggie Brown, the tomato committee's manager." Yahoo News

Uh, folks, let's apply some economics here. If there is demand for the ugly tomatoes becuase of their taste, my guess is that people would eat them! And just for the record, it's taste, not looks, that matters when it comes to tomatoes!

More than likely the real reason for the The Florida Tomato Commission's crackdown is that allowing the UgliRipes to sell would...put other farmers at a competitive disadvantage.

The loser in this? The non Florida consumer who can not buy what they want (better tasting tomatoes).

The firm has established a site to protest the rules .

Congratulations to SSRN

From the desk of Michael C. Jensen: "SSRN is a collaborative of over 800 scholars worldwide who contribute their services"

I am sure many of you saw this already, but if not, I would like to add my congratulations and thanks to all who work on and help SSRN. But of course I would like to add special thanks to Michael Jensen and Wayne Marr. Their idea has really revolutionized the way research is distributed. I can only imagine how difficult doing somehting like this blog would be without their efforts.

So thank you and congrats a your ten-year anniversary!!

From Micheal Jensen: "SSRN's objective is to provide worldwide distribution of research to authors and their readers and to facilitate communication among them at the lowest possible cost. In pursuit of this objective, we allow authors to upload papers without charge. And any paper an author uploads to SSRN is downloadable for free, worldwide. We allow publishers and other institutions to charge users for downloading papers while encouraging them to charge fees that are as low as possible. Our rule is that the price for such papers on SSRN must be equal to or below the lowest price that such papers are available anywhere on the web to non-subscribers. The vast majority of downloads of papers from the SSRN eLibrary are free. In addition, SSRN provides free subscriptions to all of our abstracting journals to users in developing countries on request."

Congrats and keep up the great work!

Sunday, December 19, 2004

Islamic Investing

Consistently one of the most popular pages on 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!

Saturday, December 18, 2004

Tax year trading and wash sales--Grinblatt and Keloharju

With the end of the year rapidly approaching it is a good time to consider taking any tax losses that you can to lower this year's tax bite. And guess what? You will not be the only one doing this!

Grinblatt and Keloharju provide us an interesting look at tax year trading in the Finish Stock Market in their upcoming JFE article.

After showing that many researchers have hypothesized the existence of a large number of wash sales (example Ritter 1988), the selling of losers in December and then buying them back had not been empirically documented.

Finland, lacking all wash sales restrictions and with a remarkable electronic database on the trades of all domestic
investors, provides an ideal environment for analyzing the relation between the turn of the year and wash sales.

And sure enough, the authors find that investors do sell shares, recognize the loss, then are more likely to again buy shares in the same firm.

In the authors words:

First, we analyze, on a daily basis, the proportion of stocks with gains that are realized and the proportion of stocks with losses that are realized in the 50 trading days around January 1 of the years 1996-2000. We show that the ratio of these two proportions, aggregated over all Finnish households,
decreases markedly in the last eight trading days of December and then exhibits an abrupt increase commencing on the first trading day of January.

We also show that the rate of repurchase is highly linked
to the turn of the year and the size of the capital loss. This supports Ritter's hypothesis that repurchases are tied to tax-motivated sales....

To explore the role of firm size in this trading pattern, we show that the timing of repurchase activity as a fraction of volume in small stocks has much more of a turn-of-the-year seasonal than the timing of repurchase activity for large stocks.

Isn't it cool when something we thought was there really is! And to make things even better they also found more evidence that supports the Keim's (1983 and 1989) explanation of why small firms outperform large firms in January.

The paper concludes with the requisite discussion of the extent to which these findings can be generalized to other countries. Their conclusion, to which I agree, is that while tax laws are different (for instance in the US you can not immediately buy back the same stock, but rather have to resort to buying back a close substitute if your intent is to lower taxes), the idea likely does hold.

From the JFE--remember this will be moved once the paper goes to press:

From SSRN: (this is an older working copy version of the paper)

Friday, December 17, 2004

Cool site alert!!! an absolutely cool site. I love it and so will you!

I found this site a few weeks ago when the founder Jacob Bettany emailed me. Wow. It is just a wealth of information! While it is advertised as a Quantitative Finance site, it has sections on everything from behavioral finance, to game theory, to jobs in Q-Fin, to a list of blogs, an interview with Joel Hasbrouck,to discussions, to you name it!

In their words:
[We are] an open-access resource for academics and practitioners working in finance and economics, physics, applied mathematics and computing. We aim to provide the single most comprehensive aggregated source for information in the broad field of quantitative finance.

Go check it out now!!! You will definitely like it!

Total disclosure: MoneyScience does have as its feature link today, but that do not hold that against them. You will love the site!

Where do inefficiencies exist? Where imperfections exist!

Efficiency does not mean perfection!

This came up in class the other day, so I figured even though the Ofek, Richardson, and Whitelaw paper itself has been around for a while (it has been accepted but has yet to be published at the JFE), I would do a quick recap of the discussion and add the links to the actual paper in question.

We were speaking about market efficiency, and suggesting that if markets were not efficient, the inefficiencies could be from two main sources: 1. True irrationality or 2. market imperfections such as a lack of liquidity, short sales constraints, poor information, etc.

While acknowledging group irrationality can develop, its existence is (IMO) quite rare and a function of a lack of differing views. Hence the more participants in a market, the less likely group irrationality will develop.

Market imperfections can be broadly classified as transactions costs (lack of information, a lack of liquidity, high trading costs, short sale restrictions etc). These imperfections allow any temporary mispricing to continue by raising the cost of arbitraging the errors away. Additionally, to the degree that the imperfections shrink the size of the market, transaction costs also help to allow the group “irrationality” mentioned above to both develop and to persist.

It should be noted that the existence of these conditions does not guarantee inefficiencies. And even if the conditions and inefficiencies do exist, it very well may be that the market is still better than any other allocation mechanism. (So relax, I am still a believer in largely efficient, albeit not perfect, markets.)

Rather than consider this question from the emotionally charged debate on market efficiency, consider the question to be: “if I had to look for inefficiencies, this is where I would look.”

In a forthcoming JFE article, Ofek, Richardson and Whitelaw investigate the idea that imperfections may limit arbitrage in conjunction with the put-call parity relationship. (Put call parity states that the put + stock = call + PV (strike) (remember: all positive at Park and Shop ;) ).

This put-call relationship should always hold in equilibrium. The authors find that it does not hold in the presence of short sale restrictions.

In their words:
…consistent with the theory of limited arbitrage, we find that the violations of the put-call parity no-arbitrage restriction are asymmetric in the direction of short sales restrictions. These violations persist even after incorporating shorting costs and/or extreme assumptions about transactions costs (i.e., all options transactions take place at ask and bid prices).

Need more “evidence”? I will ignore the preponderance of existing literature on the topic (ask if you want some more) and give you some “real time” research. I am currently working on a paper with Jonathan Godbey and Rodney Paul that looks at this idea along different lines. We look at the predictive ability of implied volatilities of equity options. While the paper is still a ways off (hopefully it will be done in January), preliminary results suggest fairly convincingly that the efficiency of the option market (as measured by the ability to forecast future volatility) is strongly tied to option liquidity. That is, for active options, implied volatility works well, for illiquid options, it does not.

So what this all mean? I will give the same conclusion that ended our class discussion:

“From a societal point of view, we should strive to reduce market imperfections and lower transactions costs: Reduce barriers to entry, end short sale restrictions, increase competition. Why? Because where there are significant imperfections, the market prices we see are less likely to be “correct” and consequently allocational efficiency is suspect.

...Are markets perfect? No. Are they pretty good? Yes. Are they better in some incidences than others? Yes. It is this last area where we may be able to do something. As an investor (and not just in financial securities), look for areas where you have a sustainable advantage. It is unlikely, although not impossible, that this is in the area of financial markets. In the financial markets, you can earn a very good return, but it is unlikely that actually beat the market on a risk adjusted basis. "

The Ofek, Richardson and Whitelaw paper is available at:
Forthcoming JFE version remember it will be taken down when the paper goes to print
FEN-SSRN (working copy version)

Finally, finals are finished

Sorry for the absence of late. I got behind on about every front I can imagine. I was behind in correcting, in research, on sleep, on laundry, at the store, on you just about anything you name. So I took about a week off from the blog.

But yesterday was our December graduation ceremony and all grades have been submitted. In the research front, I THINK we (me and various co-authors) should have three papers out by the end of the month.

So I will get back to updating the blogs and FinanceProfessor website later today.

To the graduates, congratulations and best of luck in the future! May I suggest you look over my notes from the last class I taught for Finance401. I think you will like them! They are sort of a graduation address.

And to everyone going on break: happy holidays!


Tuesday, December 07, 2004

McKinsey Quarterly Interview on Corporate Governance

What a GREAT article! It is a McKinsey Quarterly Interview with Jack Creighton.

Yes, it is an interview and not based on a large database of firms, but that said, it is still EXCELLENT!

Some of the highlights:

"I'd require companies to have two different individuals playing the CEO and board chair roles. To put it simply, this is a question of internal control. You don't have the same person writing the checks and processing accounts payable. We have checks and balances in the accounting department; why don't we have them at the executive level?

Business is also becoming more complicated and, as a result of Sarbanes-Oxley, more regulated. There is enough "CEO work" for a CEO to give up the chairman's role. Or to put it differently, I think those two roles, in a company of significant size, require more time than one person can supply."

The Quarterly: How else might a CEO benefit from having an independent chairman?
Jack Creighton: .... I really believe that some CEOs we've seen get the ax would not have been let go if there had been an independent chair to counsel that CEO, to pass on the board's negative thoughts and discussions in a nonaggressive, noncombative way. The chairperson could say, "You know, the board is concerned. I'm starting to see some groundswell here, and you need to take action."

"One thing you don't want is to have management begin thinking that the chairman is running the company. Officers and employees need to understand clearly that the nonexecutive chair functions primarily as a resource for the CEO, the board, and the company."

EXCELLENT STUFF!!! It is a fast, easy, and informative read! I highly recommend reading it!!

BTW If you do not subscribe to McKinsey Quarterly, you should! It is free and just a tremendous resource.

Monday, December 06, 2004

The high price of subsidies--From the Buffalo News

What is wrong with government subsidies? A great deal!

Deciding what projects to invest in is hard work. And often times we do make mistakes, but time and time again the evidence shows that free markets make the best decisions. (In class terminology, markets make the best allocation decisions and funnel the money to its highest valued use.)

However, all too often politicians can not help but to play the game as well--but not with their money, but with taxpayers money.

This is a classic agency cost problem whereby the politician gets benefits while each tax payer pays a small portion. This is problematic because it often leads to investments in projects that yield no reasonable chance of being profitable. To make matters worse, there is often no easy way to measure success (unlike the stock market), and the project often being popular in some sense or to some people, or for a short period of time.

The result? More money is spent on the project than should be—in class terms we invest in negative NPV projects.

The SportEconomist has long railed against subsidization. For instance he posted a great article on the lack of success Cleveland has had after they funded their Gund Arena. (But even in this instance, note the difficulty in measuring success.)

I would like to extend the disagreement with subsidization beyond just Sports complexes and teams. It is unclear why governments should be allowed to pick favorites in any business.

Recently Buffalo and the state of New York granted tax breaks to Bass Pro Shops to open a new store in Buffalo. That Bass is coming to Buffalo is great. There are few cities that need more jobs more than Buffalo. I just wish Bass had looked at the area, and concluded that it was a good place to locate a business and do so without government spending.

Why? Because by picking Bass, the government is paying for a new project. Who is paying for it? Among others are other retail stores that will now face increased competition.

Why play favorites? What about all of the already struggling businesses in Buffalo and elsewhere in New York State that did NOT get tax breaks? A better idea is to lower taxes to all so that businesses (and not just Bass) would willingly relocate to New York State.

But of course the temptation is great. From today's Buffalo News - The high price of subsidies: The "'silver bullet' projects sometimes are off target. Just as Buffalo officials are celebrating the Bass Pro announcement, Rochester leaders are figuring how to bounce back from a celebrated public-private partnership that fizzled in their city. Rochester, New York State and the federal government contributed an estimated $35 million toward a high-speed ferry project, for a terminal and for the vessel. The goal of that project was similar to Buffalo's Bass Pro deal - to spur development of a city's waterfront. But the debt-laden private operator of the Rochester-to-Toronto ferry halted the twice-a-day round-trip crossings in September, just three months after launching the service. Now, Rochester Mayor William Johnson Jr. wants the city to buy the ferry for an estimated $40 million, using the proceeds of government-backed bonds. Service would restart in April under the proposal."

While the examples of this type of subsidization are ubiquitous, maybe, just maybe, economic sense is entering the picture.

From the Buffalo News article:
"The National Taxpayers Union views cash grants and tax abatements differently. "Giving tax abatements isn't a great idea compared to cutting tax rates across
the board,...." "

and some areas may be finally making the right choice:
Last month in Syracuse, Onondaga County lawmakers said they did not like the idea of a public subsidy worth at least $20 million for a 350-room hotel next to the county's convention center. That has delayed the deal as county officials and the developer look for ways to reduce the subsidy.

In October, Philadelphia Mayor John F. Sweet recommended rejecting developers' plans to redevelop a 13-acre riverfront site at Penn's Landing. Two finalists each proposed plans that needed a public investment of as much as $100 million, and Street called that "too much, given our priorities, and simply doesn't seem likely to happen," according to the Philadelphia Inquirer.

Do these successes mean we will see markets return to their role as allocator of capital and politicans look for ways to make sure investors have the money to invest (i.e. cutting taxes). I doubt it. Politicians have too much at stake to give up their pet projects so easily; projects all too often financed with our money.

Friday, December 03, 2004

Was it a Bubble?

A two-for-one deal! Send your paper to a conference and it is automatically considered for publication in the RFS!

August 12-13, 2005

ISDEX, an authoritative and widely cited internet stock index, rose from 100 in January 1996 to 1100 in February 2000 – an incredible increase of about 1000% in four years – only to fall down to 600 in May 2000 – an incredible decrease of about 45% in four months. Amongst big rises and falls in the history of stock market prices, this episode ranks amongst the most spectacular. The RFS-IU conference focuses on these recent financial market bubbles. It aims to address the following three questions: a) Was it a bubble? (How do you define bubbles ex-ante? Can you even define bubbles ex-post?) b) What caused it? (Investors? Managers? Financial advisors? Government policies? Media? Academics?) c) Did it matter? (Any real effects?)

The answers to these three research questions touch upon all sub-disciplines of finance – asset pricing, corporate finance, market microstructure, behavioral finance, international finance, law and finance, and real estate finance.

PROGRAM COMMITTEE: Brad Barber, Utpal Bhattacharya, Joshua Coval, John Graham, Craig Holden, Robert Jennings, Steve Kaplan, Alan Kraus, Maureen O’Hara (chair), Thomas Noe, Jay Ritter, David Scharfstein, Matthew Spiegel, Xiaoyun Yu and Jiang Wang.

SUBMISSION: There is no charge for submission. The RFS will consider all the papers accepted for the conference as submissions to the RFS, and will waive the RFS submission fees for these papers. If a sufficient number of conference papers are accepted by the RFS after their usual rigorous refereeing process, the papers will be published in a RFS special issue. Authors who do not wish to have their papers submitted to the RFS if their papers are accepted for the conference should indicate so at the time of conference submission. Authors are invited to submit theoretical or empirical papers. Papers should be written in English and not have already been accepted for publication. Papers will be blindly reviewed by the program committee. The conference organizers will reimburse reasonable travel expenses and will provide meals and lodging for paper presenters, discussants and session chairs.

SUBMISSION DEADLINE: Please send three hard copies of your paper, with a separate title page and abstract, by April 30, 2005 to:

Utpal Bhattacharya or Xiaoyun Yu
The RFS-IU Conference
Kelley School of Business, Indiana University
1309 East Tenth Street
Bloomington, Indiana 47405

Sponsored by The Review of Financial Studies and The Finance Department of the Kelley School of Business, Indiana University, Bloomington, IN.

Cash is up, but so too are Buybacks and reports that cash holdings are up.
In a survey of more than 360 midsize and large nonfinancial companies, Treasury Strategies also found that more than half consider themselves net investors rather than net borrowers....In other words, they have more short-term investments than short-term debt outstanding.

On the plus side, it appears that managers are giving more of this cash back to investors rather than wasting it on negative NPV projects!

To confirm this, also reports that dividends and stock buybacks are up this year: "Many cash-rich companies are giving shareholders an early holiday gift by buying back shares and boosting dividends"

Continuing from

"Companies have been buying back their shares this year partly to offset the increase in outstanding shares that resulted from option exercises and other executive and employee incentive plans involving shares, thus avoiding heavy dilution for existing shareholders"

And at the same time, dividends are also quite popular:

"...nearly half of the companies in the S&P 500 have raised their dividends this year, according to USA Today, which cited Standard & Poor's. What's more, in 2004 at least 10 companies in the index started to pay a dividend for the first time.

Companies have also been aggressively increasing their dividends since last year, when President Bush cut the tax rate for dividend investors."

BTW in a totally unpaid endorsement, if you do not subscribe to's weekly newsletters, you are missing out on a great source of information! Highly recommended!!!

Thursday, December 02, 2004

Covered shorts: the long and short of it

The New York Times has an interesting article on covered shorts. That is the tactic where you are both long and short the same stock.

This is what The Perry Corporation, a New York-based hedge fund seems to have done by buying shares in Mylan Pharaceuticls while simultaneously shorting shares (or more technically having Bear Stearns and Goldman Sachs short the shares).

So if the shares go up, Perry makes money on the long position but loses on the short position. On the other hand if the shares go down, Perry will lose money on their stock position, but make it up on the short position.

Of course this begs the question, Why? Why incur the transaction costs etc for no gain. The short answer is that they now have voting rights without being exposed to price fluctuations.

These voting rights are especially valuable in this case since the firm whose stock is being bought and sold is King Pharaceuticals. King is involved in a drawn out proxy contest as they are being taken over by Mylan. This takeover has grown heated as Carl Icahn (a shareholder in Mylan) moved to block the deal.

Not surprisingly, Icahn and shareholder rights groups are not pleased with Perry's deal.

"If hedge funds or any other investors are permitted to dictate the outcome of corporate elections without having economic interest in the companies, then any semblance of corporate democracy we still have in our country would become a travesty"

Nell Minow of the Corporate Library:
"It undermines the whole concept of linking ownership and control. It is not illegal, but the question is, 'Should it be?' I say, 'Yes.' The vote should accompany some kind of underlying interest."

What is curious however is that the article also states that Perry hopes
"to profit from the spread between the price Mylan offered for King shares, $16.49, and King's actual share price, which closed yesterday at $12.42. If the deal is completed, Perry stands to make over $28 million, based on figures in a filing with the Securities and Exchange Commission on Tuesday."
Unfortunately the article does not say how this profit would be accomplished and (as stated above) the rest of the article says that Perry's has no economic interest in the deal. (mmm, well $28 million seems to be interesting to me. ;) )

So how did they accomplish getting voting rights and gaining if the stock price appreciates? Two strategies come to mind. Note: the article and the illustration do NOT suggest that this is possible, so this is pure speculation.
  • The short sale could be done via a limit order arrangement whereby the shares will only be sold in the event that the stock price goes below some price limit. This would prevent losses while allowing Perry to profit if the deal is done.
  • With derivatives. Perry may have puts on the shares at the current price. The put would be allowed to expire if the price appreciates.

Unfortunately, as the article says, the details are still fairly "opaque" so we may have to wait and see.

Wednesday, December 01, 2004

Personal Finance and variable annuities

One thing I wish we had at St. Bonaventure was a personal finance class. Maybe even not for credit, but I do think it would help many people after graduation. However, often there seems to be little demand for such a class and to offer it for credit is almost too much like training and not enough like "education".

My biggest advice with respect to personal can be summarized into a series of rules

FinanceProfessor's Top Ten Personal Finance Rules

  1. Invest as much as you can-Do it now!
  2. Invest on a regular basis! Set up automatic investments in your funds.
  3. Realize there are no "free lunches"
  4. Diversify! The basket is generally more important than the eggs!
  5. Think long-term and do not try to time the market
  6. Consider tax consequences and take advantage of tax-advantaged accounts
  7. Look for low transaction costs
  8. Save more than you think you need (a penny saved is a penny earned!)
  9. Compounding matters! Save early, save hard!
  10. Live within your means. Do not run up large credit card bills.

But this is far from a "do this, don't do this" prescription. I really do not (and probably will never) want to give that specific of advice. However, that often does not stop people from asking however. But I always do my best to refrain from answering. LOL.

That said, a good friend recently asked about variable annuities for his mother and for him I broke my silence and agreed that it made no sense (especially since it was already in a retirement account!)

Fortunately, she did not do it. Many people do not know much about variable annuities and hence fall prey to salespeople who have a vested interes in selling the high cost products. So I was really excited when I saw/heard this week's Kim Snider radio show. It had a very good discussion on variable annuities and the problems they can cause. You can listen to it here. Short version: you probably do not want a variable annuity!

As I said before when I mentioned her blog/show: "good stuff." :)

Reuter and Zutzewitz on the Bias in the financial press

SSRN-Do Ads Influence Editors? Advertising and Bias in the Financial Media by Jonathan Reuter, Eric W. Zitzewitz'

Super Short Review:

In a paper that will be presented in the American Finance Association's Annual Conference (AFA) this coming January, Reuter and Zitzewitz (R&Z) examine mutual fund recommendations from "major personal finance magazines (Money, Kiplinger's Personal Finance, and SmartMoney)."

The authors report that the magazines appear biased. (SHOCK!) In R&Z's words:

"...recommendations appear to be tied to mutual fund families that "have the past."

Fortunately, there is still some semblance of journalistic independence as The Wall Street Journal and New York Times appear to be free of this co-called "content bias".

BUT then the question---does the bias matter from an investment perspective? And the answer is no, or at least not much:

"so bias towards advertisers can be accommodated without significantly reducing readers' future returns. Interestingly, the recommendations of Consumer Reports, which does not accept advertising, have future returns comparable to or below those of the publications which accept do advertising."

As an aside, while the bias may not matter much from an investment recommendation perspective, the article should stir debate into the conflicts of interest that exist within the journalistic community. (Similar to that within audit firms and brokerage firms) It is not far fetched to imagine negative news stories being ignored or pulled if they involve an advertiser.

Suggested Citation:
Reuter, Jonathan and Zitzewitz, Eric W., "Do Ads Influence Editors? Advertising and Bias in the Financial Media" (October 31, 2004).

Mark Cuban's New Hedge Fund - Blog Maverick -

New Hedge Fund - Blog Maverick -

Mark Cuban is starting a Hedge fund that will gamble. Literally! Forget stocks, forget bonds, the money will be used to make bets.

(In case you do not know, Mark Cuban is the Billionaire owner of the Dallas Mavericks and former owner of

The article is great. It has so many interesting and thought provoking lines I really have to stress that you should read it. Some of the highlights:

On market efficiency:

"It's an idea whose time has come. I have bet on stocks long and short for about 15 years now. I've done very well. There has already been one hedge fund started based on my trading results. In those 15 years, I have learned that despite all the claims and books written about efficient markets, the trading of individual stocks are not efficient. There are always people trading on better or worse information. There are always people trading on emotion rather than logic. There are always people t rading on hopes of the big hit. What Peter Lynch would call the '10 Bagger'. They were gambling. Nothing more. Nothing less"
On SEC Enforcement:

"Unlike the stockmarket, you know the rules exactly. You know without question, the house is going to play by the rules. The gaming commission appears to actually enforce rules of play, unlike the SEC.""

On information

"When you think about betting on sports, there really is far better information about your local sports team than there is about any local business in your market. The local papers cover the team every day. The local TV station gives a report about every game. There are radio stations who cover them for hours at a time. That's far more information than you get about Tyco or Computer Associates or NFI."

On accounting games

"Public companies play so many games with their numbers it's ridiculous. Should they expense options or not? Per forma vs GAAP? One time write-offs? Buying company after company? Writing down inventories then reselling them?"

Some news coverage of this story includes:


I agree with the news articles that suggest this is a long shot at best of getting off the ground, but I personally hope it does. While he goes too far in my opinion with the inefficiency story, I do agree that gambling markets are very efficient and regulators appear to have an easier enforcement task.

One question I have is whether the NBA would allow him to do this? My bet is no. (Pun intended) But I sure would love to see the fight that he would put up if the NBA does tell him he can't do it! :)