Wednesday, February 28, 2007

NYSE continues to mop up from glitches

From BusinessWeek:

NYSE continues to mop up from glitches:
"The New York Stock Exchange on Wednesday continued its mop-up from the technical glitches that bottlenecked its trading system and triggered a temporary shutdown of electronic transactions during Tuesday's market plunge.

The Big Board requested that specialist firms -- which match buyers and sellers -- keep their stock posts open after the closing bell. With some 22,000 data requests pumping through the NYSE's servers per second, management at the exchange wanted to make sure all trades were settled properly.

Technicians at the world's biggest stock market worked overnight trying to determine why computer systems were log-jammed Tuesday. Investors encountered delays when they tried to bail out of stocks as a computer malfunction caused the Dow Jones industrial average to plummet 178 points in a minute."
Wow, 178 points in a minute. Makes the Day after Tomorrow look like gradual climate change.

BBC NEWS | Business | Is Sainsbury's set to be taken over?

I love grocery stores and we just covered leasing in my Problems in Finance Class, so I couldn't pass this one up:

BBC NEWS | Business | Is Sainsbury's set to be taken over?:
"While it has not revealed any details of its proposed plans, retail analysts agree that the consortium has its eyes on the property value of the Sainsbury's stores, which are often located in city centres where commercial property is expensive.

'They would sell off a huge chuck of the Sainsbury's stores, and then lease them back,' says David Stoddard of Teather and Greenwood.

'This could release a huge amount of cash.'"

Of course this assumes that the private equity group has better access to capital (someone has to provide the cash). This was touched on later in the article:
"However, the other major factor that most analysts say would enable the Sainsbury's board to successfully see off any bid, is the private equity group's expected plans for major store sales and lease backs.

"The Sainsbury's management are in a very strong position,"...."They can, for example, simply say to the shareholders that they will sell off the stores themselves, that they can do this on their own without a private equity group having to take its slice.""

mmm...wouldn't this make a nice essay? "Give economically justified reasons why a lease would/would not make sense in the Sainsbury case."

Dow Jones Indexes sees glitch-free Dow calculation | Reuters

Dow Jones Indexes sees glitch-free Dow calculation | Reuters:
"With an hour left to trade, the Dow Jones industrial average fell more than 500 points as it abruptly added about 200 points to its slide in late afternoon trade on Tuesday.

According to Dow Jones Indexes, 'unusually heavy volume' caused a 70-minute lag in correctly calculating the value of the Dow and the subsequent downward spike in the reported index value when the problem was corrected at 3 p.m. (2000 GMT)"

Monday, February 26, 2007

What happens when the private equity buyout boom ends - Feb. 26, 2007

CNN has an interesting look at private equity's role in recent buyout boom. (The video is good introduction)

What happens when the private equity buyout boom ends - Feb. 26, 2007:
"Utility firm TXU Corp. (Charts) said Monday it agreed to be bought by Kohlberg Kravis Roberts, Texas Pacific Group and the private equity arm of Goldman Sachs (Charts) for $32 billion, or nearly $45 billion including assumed debt, making it the biggest buyout ever.

The move comes just weeks after Blackstone Group put together what was then the biggest buyout deal when it finalized its $39 billion takeover of Equity Office earlier this month - $23 billion in cash and $16 billion in assumed debt."

Are things getting out of control?

"During the last buyout craze of the late 1980s, private equity firms were gushing with money and paying ever-higher prices for deals.

The biggest takeover of that era, KKR's $31 billion buyout of RJR Nabisco, which included debt - a deal chronicled in the well known book "Barbarians at the Gate" - became a nightmare and reportedly resulted in nearly $1 billion in losses for its investors"

Friday, February 23, 2007

Shareholders in Japanese Steel Maker Block a Merger Deal - New York Times

Score one for investors!

Shareholders in Japanese Steel Maker Block a Merger Deal - New York Times:
"Shareholders of the Tokyo Kohtetsu Company blocked a takeover on Thursday by a rival steel producer, the Osaka Steel Company, the first time in Japan that shareholders have vetoed a merger approved by the companies’ boards.

An investment fund, Ichigo Asset Management, started a rare proxy fight against what it saw as an unfair share-swap ratio for Tokyo Kohtetsu, a small but highly profitable maker"

A few interesting news stories

The Slow Pace of Justice on Options Backdating - New York Times:
"A sweeping investigation into the backdating of stock options at more than 100 companies has so far led to relatively few enforcement actions or resolutions.

Lawyers and executives at the companies under scrutiny have been waiting to see how investigations by the Securities and Exchange Commission, as well as those by United States attorneys, will play out.

In particular, they have been looking at one of the first cases, Brocade Communications"

A look at how exchanges are cooperating

Multibillion-dollar mergers are not the only way to bring stock exchanges together. Many exchanges around the globe are instead connecting through stake sales, partnerships and joint ventures with their overseas peers. The price tags, if there are any, are tiny, but the hope is that these alliances will set the stage for more substantive ventures in the future

Hedge Funds get a reprieve

"The Bush administration said Thursday that there was no need for greater government oversight of the rapidly growing hedge fund industry and other private investment groups to protect the nation’s financial system.

Instead, the administration, in an agreement it reached with the independent regulatory agencies, announced that investors, hedge fund companies and their lenders could adequately take care of themselves by adhering to a set of nonbinding principles."

Thursday, February 22, 2007

Father and CFO of His Country? - Finance - has a fun article on George Washington.

Father and CFO of His Country? - Finance -
"Washington 'took great pride in maintaining clear, concise, and accurate [financial] records,' notes the Library of Congress's guide to the material. Indeed, at the end of the war, Washington used those expense accounts to request reimbursement from Congress for his total expenses of $160,074. That request was audited by the Comptroller General of the United States Treasury, James Milligan, with a result that today's CFO can only dream of: Milligan concluded Washington was owed an additional eighty-nine ninetieths of one dollar."

Of course, the modern finance executive might not want to emulate everything about Washington, particularly when it came to executive compensation. Washington asked only for his expenses when Congress selected him as commander of the Continental Army; he refused a salary."

SSRN-Migration by Eugene Fama, Kenneth French

WOW. I will have to do a longer review of this when I get time, BUT WOW--explanations of both size effect and value anomaly?

SSRN-Migration by Eugene Fama, Kenneth French: "
"We study how migration of firms across size and value portfolios contributes to the size and value premiums in average stock returns. The size premium is almost entirely due to the small stocks that earn extreme positive returns and as a result become big stocks. The value premium has three sources: (i) value stocks that improve in type either because they are acquired by other firms or because they earn high returns and so migrate to a neutral or growth portfolio; (ii) growth stocks that earn low returns and as a result move to a neutral or value portfolio; and (iii) slightly higher returns on value stocks that remain in the same portfolio compared to growth stocks that do not migrate.""

Wednesday, February 21, 2007

Zvi Bodie on insurance, retirement, and saving too much!

Saving for a rainy day is one thing, but insurance may be a much more efficient way.

Listen to an interview with Zvi Bodie from PRI's Here and Now.

Here and Now : 2/20/2007:
"Professor Says Cut Back on Retirement Savings---Zvi Bodie, a professor of finance and economics at Boston University, says Americans are saving too much for retirement ."

Southern Finance Association

From Southern Finance Association:


Southern Finance Association
2007 Annual Meetings
November 14 - 17, 2007
Charleston Place Hotel
Charleston, SC

The SFA paper submission deadline is only about two weeks away! Please go to the website and submit your papers along with volunteering for the Program Committee. After sessions are formed, you may also volunteer to discuss papers or Chair a session. I appreciate your willingness to consider these important roles and I look forward to seeing you in lovely Charleston, SC in November.

SFA Home Page

SFA Annual Meetings

Tuesday, February 20, 2007 U.S. U.S.:
"Sirius Satellite Radio Inc.'s agreement to buy rival XM Satellite Radio Holdings Inc. for $4.57 billion in stock is a bet that U.S. regulators will alter rules that bar the only two pay-radio companies from combining.

Shares of XM may rise on the agreement, announced yesterday when U.S. markets were closed for a holiday. The terms value Washington-based XM at $17.02 a share, 22 percent more than its $13.98 close on Feb. 16. New York-based Sirius closed at $3.70.

U.S. Federal Communications Commission Chairman Kevin Martin said a merger combining the only two satellite radio services will face a thorough review"
It will be interesting to see the definition of market. Is it all satellite radio? or all radio? Or all entertainment options?

Jury duty

How can it be that in the course of two weeks I get a ticket for supposedly using a cell phone when driving (I WAS NOT!!! I have no idea what the officer was talking about and my phone log shows I was not--the officer said I might have two cell phones? please search my car--but she would not) AND have jury duty. I had to cancel day classes tomorrow. Stay tuned.

Sunday, February 18, 2007

Chávez Threatens to Jail Price Control Violators - New York Times

This guy needs an economist in the worst way!!

Chávez Threatens to Jail Price Control Violators - New York Times:
"Faced with an accelerating inflation rate and shortages of basic foods like beef, chicken and milk, President Hugo Chávez has threatened to jail grocery store owners and nationalize their businesses if they violate the country’s expanding price controls.

Food producers and economists say the measures announced late Thursday night, which include removing three zeroes from the denomination of Venezuela’s currency, are likely to backfire and generate even more acute shortages and higher prices for consumers. Inflation climbed to an annual rate of 18.4 percent a year in January, the highest in Latin America and far above the official target of 10 to 12 percent."
Can you imagine the predicament this puts retailers in? Wow.

A Good Word for Hedge Fund Activism - New York Times

A Good Word for Hedge Fund Activism - New York Times:
"...the evidence shows that for the most part, buy-and-hold investors ought to cheer when hedge funds jump aggressively into a stock, according to a new study. Titled “Hedge Fund Activism, Corporate Governance and Firm Performance,” it was written by Alon Brav, a finance professor at Duke; Wei Jiang, an associate professor of finance and economics at Columbia; Frank Partnoy, a law professor at the University of San Diego; and Randall S. Thomas, a professor of law and business at Vanderbilt."

Two other quotes:

* "In the year after that initial month of market-beating performance, the average target company’s stock kept pace with the overall market. And over the subsequent two years, the professors also found, the operating performance of the target companies improved markedly."

* "Hedge funds provide an example of effective shareholder activism,” Professor Brav says. He noted that “when other institutional investors engage in activism — such as pension funds or mutual funds — they typically have not been effective in improving firm performance.”"

I won't comment on the paper itself since it says not to cite it, but since it is in the NY Times I can at least point you to a preliminary version of the paper in question.

Saturday, February 17, 2007

SSRN-How Do Shareholders Respond to Downsizing? A Meta-Analysis by Gunther Capelle-Blancard, Nicolas Couderc

May try to comment on this one in a bit, but a friend sent it to me and it is an interesting look at whether downsizing is bad or not. The authors find there to be a negative reaction to the news. Why? Most likely because it signals that conditions within the firm are not very good.

SSRN-How Do Shareholders Respond to Downsizing? A Meta-Analysis by Gunther Capelle-Blancard, Nicolas Couderc:
" that layoffs announcements have an overall negative effect on stock market prices, and this remains true whatever the country, the period of time or the type of firm considered. However, some factors may ease as well as worsen the stock market's reaction to such announcements. The reason for the layoff decision is among the most decisive factors and the market sanction will be more severe in the case of defensive layoffs (taken by firms facing difficulties) than for offensive layoffs (when they are part of a more general reorganization strategy).


Friday, February 16, 2007

A look at decision markets

Recently we talked about decision markets in class. Here is a NY Times article on the same:

Odds Are, They’ll Know ’08 Winner - New York Times:
"Over the last few years, Intrade — with headquarters in Dublin, where the gambling laws are loose — has become the biggest success story among a new crop of prediction markets. Another company, Newsfutures, helps the world's largest steel maker, Arcelor Mittal, run an internal market on which executives predict the price of steel. At Best Buy, a company called Consensus Point has helped start a market for employees to guess which DVDs and video game consoles, among other products, will be popular. Google and Eli Lilly have similar markets. The idea is to let a company’s decision-makers benefit from the collective, if often hidden, knowledge of their employees."
Also my favorite:

If you are interested, I definitely recommend reading the Wisdom of Crowds.

Monday, February 12, 2007

Quick link round-up

Super fast look around at some blogs I have been following:

FreeMoneyFinance comments on an article by Ben Stein that looks at the relative returns of real estate to stocks. Short version: stocks have done better historically than real estate but it is really hard to live in a stock.
"There are long periods when the stock market doesn't make you much money.
The S&P is still lower than it was seven years ago. Stocks adjusted for
inflation lost about 80 percent of their value in the slump of the 1970s and
part of the 1980s. So nothing is a slam dunk.
Professor Robert Shiller of Yale has demonstrated, however, that over very long periods homes barely keep pace with inflation. Stocks, over very long periods, beat inflation by a large margin. (Please remember that "over very long periods" part."

Freakonomics comments on Cheating in NASCAR (which definitely has finance ties, but I would suggest it is too early to make much of a claim yet), Lenny Dykstra's new investment advice, and a look back to the VERY early days of Google.

The MarginalRevolution has a cool look at yesterday's NY Times piece on Niger. Short version? Increasing property rights has lessened the "problem of the commons" and tree owners are now protecting their trees, which in turn is helping the nation beat back the desert.

CyberLibris announced the starting of Vox Academia a new spot for academic conversations across a broad range of Business topics.

KimSnider has a podcast that covers a fact that many overlook: even if they want to work past 65 years old, they may not be able to do so. Financially, the solution is to save more now!

and finally (I am out of time), Cafe Hayek has a very cool definition of economics! (I love it!!! and agree):
"...economics is the study of how to get the most out of life....To get the most
out of life, to think like an economist, you have to be know what you're giving
up in order to get something else."

Great stuff all!

IPOs following going private transactions

First some background: As private equity has grown in importance, there have been many more deals where publicly traded firms are bought out and taken private (so their shares no longer trade publicly). Then after a while, the the firms are often resold to the public. The following NY Times article deals with whether or not investors should be buying when this "smart money" is selling.

Should You Buy When Private Equity Sells? - New York Times:
"Last year, almost half of the more than 150 initial public offerings in the
United States involved such sales by buyout firms, a higher share than ever
before, according to Jay Ritter, a finance professor at the University of
Florida who specializes in I.P.O. research.Generally, however, the returns were
nothing to brag about. On average, shares in such sales, known as buyout
I.P.O.’s, performed far worse last year than both the overall market and other
companies that made their public debuts, according to figures from Thomson
But before you give up on these IPOs, consider the following

:"...Jerry Cao, a doctoral candidate at Boston College, and Josh Lerner, a Harvard
Business School professor, found that buyout offerings from 1980 to 2002
returned 43 percent, on average, over the subsequent three years, versus just 26
percent for the Standard & Poor’s 500-stock index over the same span — a
difference of 17 percentage points. Similarly, Professor Ritter at the
University of Florida found that buyout offerings entering the market from 1980
to 2003 outperformed the S.& P. by 18 points in their next three years."

Definitely worth reading!!

Friday, February 09, 2007

Fortress' IPO

In a "must talk about case" for all of my classes, Fortress went public today.

Who is Fortress? From Marketwatch: "Fortress Investment Group -- not a hedge fund -- but a nine-year-old company that runs hedge funds."

First the facts:

From Business Week: Investors Storm Fortress IPO:
"In the most widely anticipated public offering of the young year, Fortress
Investment Group (FIG), the first U.S.-based hedge fund to go public, stormed
the ramparts. Shares in the alternative investment outfit were trading around
$32 in the early going Feb. 9 -- 73% above the offering price set the previous
day but down from the intra-day high of $37. The shares opened trading at $35."

The IPO:

From the NY Times:
"The first hedge fund and private equity company to go public in the United States will make its market debut today at $18.50 a share — at the high end of its expected price range."

and later:
"Fortress is trading some of that privacy and cachet for capital.
The company raised $634 million from the sale of 34.3 million shares yesterday.
Demand for the offering was strong, analysts said. People who attended a
presentation by Fortress on the offering on Wednesday said that it was standing
room only. Last week, Fortress said in a filing that it expected to sell the
shares in a range of $16.50 to $18.50 each."

Some interesting things to note:
  • The VAST majority of the price appreciation went to the first buyers (IPO was at 18.50, first trade in secondary market was $35).
  • Can a hedge fund company (most of whom love secrecy) maintain competitive advantages as a public firm? (In fact other hedge funds that have gone public have shied away from issuing in the US due to regulations that would lessen their secrecy.)
  • Does the IPO signal the cooling of the hedge fund industry? (from MarketWatch:"Under pressure, managers like those at Fortress may be looking to a reliable source to keep the new money rolling in, said Roy Smith, a former partner at Goldman, now a finance professor at New York University. Hedge funds remain a fashionable place to be for small-time investors who recognize it as a symbol of sophistication...."When the smart money is pulling out," Smith said. "It's time to start selling to the dumb money." ")
Yep, we'll be talking about this one in class!

Investment Ethics: Course explores dollars, decency

Marquette has started an Investment Ethics course. The Milwaukee Journal Sentinel covered reported on the class yesterday.

JS Online: Course explores dollars, decency:
"'Ethics in finance is a trifle specialized, especially at the undergraduate level,' says John Boatright, a professor of business ethics at Loyola University in Chicago and author of the text 'Ethics in Finance.' 'At the undergraduate level, students are much more likely to encounter ethics in finance as part of a broad course in business ethics.'

Such broad courses are common, he says, because students need to get a clear understanding of business practices to appreciate what makes some actions unethical.

'If someone gets mugged on the street, you know that's wrong,' he says, 'but if someone engages in insider trading, people may not be able to understand exactly what is wrong with that practice. . . . One's eye has to be trained to see where there are ethical problems.'"
The class is taught by Sarah Peck and uses many videos to bring ethical questions into the class.

Still more on pay gaps

More on the pay gap from NPR

Short version: while the pay gap gets much bad publicity, it is not entirely bad. The gap helps create incentives to work harder and get more education. Moreover, the gap is not some conspiracy, but rather brought about by some of the same forces (technology being paramount) that we see at work in large chain retail stores (the CEO of a large chain will get much more in real terms than the manager of a small chain would have in the pre-Wal Mart world), professional sports (superstars get paid much more than journey-man players), and many other facets of life.

Longer version:
This gap is not however all bad: analysis from Nobel Prize winner Gary Becker who brings some common sense to the discussion.
""I think inequality in earnings has been mainly the good kind," Becker says. "I strongly believe it's been mainly the good kind."

How...?According to Becker, good inequality gives more rewards to people with more education, more skills and a greater ability to create value in the world.

"If you're in an environment where knowledge counts for so much, then if you don't have much knowledge, you're going to be a loser," Becker says."

The problem of course is if there are too many losers, they become a drain and a hindrance on the economy and everyone else. (See Bernanke's comments from two days ago: "the public at large might become less willing to accept the dynamism that is so essential to economic progress."

One group that is unlikely to get much sympathy but who suffer a very large pay gap is the professional athlete in the minor leagues. For instance, NPR looks at the NBA developmental league and finds many of their players make a small fraction of what NBA superstars make.

NPR : Almost-NBA Players Take Home Paltry Salaries:
"With an average annual salary of more than $5 million, NBA players are the highest-paid athletes in professional sports. But for the many skilled professionals who haven't quite made it into the NBA, the financial gulf is huge.

Overall the pay gap is a tough problem to deal with: on one hand you need incentives, but on the other, those who do fall behind need a second chance to recover. This second chance can come through education that lifts them up and not regulations that hold the top achievers down.

(BTW lest you think that this is just some liberal academic speaking who just does not want there to be a pay gap, remember I am also GENERALLY in favor of rewriting underwater executive stock options. It is not about the winners and losers, but about improving incentives.)

Wednesday, February 07, 2007 - Graduate schools and programs guide

I knew the NYSE was closed in 1914 for WWI but never knew any of the story behind it. So on the chance that you did not know it either: - Graduate schools and programs guide: "
William L. Silber, Marcus Nadler Professor of Finance and Economics at NYU Stern, who earlier served as a senior economist with the President’s Council of Economic Advisors and as a member of the Economic Advisory Panel of the Federal Reserve Bank of New York, spoke about the United States’ monetary crisis at the outbreak of World War I that threatened the country with financial disaster. He introduced his new book, When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy, to an audience of Stern alumni and MBA students during the first of NYU Stern’s Spring Author Lecture Series."

Silber.... He described how in 1914, at the outbreak of World War I, the biggest gold outflow in a generation jeopardized America’s ability to repay its debts abroad and how fear that the US would abandon the gold standard caused a 50 percent decline of the US dollar overnight. He praised William McAdoo, who as Treasury Secretary responded by shutting down the New York Stock Exchange for more than four months – the longest the NYSE has ever been closed..."

The book is available from Amazon.

More on "pay Gaps"

Wow, pay gaps are a hot topic all of a sudden!

Today Fed Chairman Ben Bernanke gave a speech on the issue. The text of the speech is here.

Some Look-is:

* "Although we Americans strive to provide equality of economic opportunity, we do not guarantee equality of economic outcomes, nor should we. Indeed, without the possibility of unequal outcomes tied to differences in effort and skill, the economic incentive for productive behavior would be eliminated, and our market-based economy--which encourages productive activity primarily through the promise of financial reward--would function far less effectively."

* "....the average standard of living in this country has improved considerably over time. However, by many measures, inequality in economic outcomes has increased over time as well, albeit at varying rates."

*"In real terms, the earnings at the 50th percentile of the distribution (which I will refer to as the median wage) rose about 11-1/2 percent between 1979 and 2006. Over the same period, the wage at the 10th percentile, near the bottom of the wage distribution, rose just 4 percent, while the wage at the 90th percentile, close to the top of the distribution, rose 34 percent. In 1979, a full-time worker at the 90th percentile of the wage distribution earned about 3.7 times as much as a full-time worker at the 10th percentile. Reflecting the relatively faster growth of wages of higher-paid workers, that ratio is 4.7 today."

*"Indeed, substantial economic benefits may result from any form of training that helps individuals acquire economically and socially useful skills, including not only K-12 education, college, and graduate work but also on-the-job training, coursework at community colleges and vocational schools, extension courses, online education, and training in financial literacy. The market incentives for individuals to invest in their own skills are strong, and the expanding array of educational offerings available today allows such investment to be as occupationally focused as desired and to take place at any point in an individual's life."

From other sources: The Boston Globe:
"Bolstering education and training -- rather than erecting trade barriers -- would help narrow the economic gap between low- and high-income workers, Federal Reserve chairman Ben Bernanke said yesterday."
Bloomberg: Bernanke also stressed that protectionism is NOT the answer:
"`Policy approaches that would not be helpful, in my view, are those that would inhibit the dynamism and flexibility of our labor and capital markets or erect barriers to international trade,'' Bernanke said at an event sponsored by the Omaha Chamber of Commerce in Nebraska. Any hindrance of trade and technology would ``do far more harm than good.''"
And from CBS Marketwatch:
"If we do not place some limits on the downside risks to individuals affected by economic change, the public at large might become less willing to accept the dynamism that is so essential to economic progress," Bernanke said in a speech to the Chamber of Commerce in Omaha Nebraska."

Shriekers seek 'Idol' acclaim -

Ok, so the American Idol appears to have zero to do with finance (so much so I have NEVER watched a single episode, but I stumbled upon this in USATODAY and it does have a tie to behavioral finance--specifically some of the singers seem to have the same overconfidence that can negatively impact investors who trade frequently.

Shriekers seek 'Idol' acclaim -
"many singers don't know how awful they are. Reasons range from narcissism, with its ego-inflated self-absorption, to an obsession with fame.

'The very narcissistic honestly believe they are awesome even when there's no evidence' of it, says Dave Verhaagen, a Charlotte psychologist and author of Parenting the Millennial Generation. And he says that research suggests people who perform worst at a task often rate themselves best as a means of self-defense."

Tuesday, February 06, 2007

JOKE!!! THIS IS A JOKE! the spirit of the

The Tuck Profit:
"After 15 years of sharing the credit for groundbreaking research with Ken French, Eugene Fama is on a mission to expose his former colleague, and himself. The result is an alarming behind-the-scenes look at how academic careers are made and broken."

HT FinancialRounds for this one!

Home Depot Proxy Fight Is Settled - New York Times

Home Depot Proxy Fight Is Settled - New York Times:
"Home Depot...reached an agreement...with a large shareholder, Relational Investors, that will prevent a proxy fight over the company’s strategy.

In return, the shareholder, Relational, a San Diego investment fund, will receive a seat on the company’s board and four directors involved in hiring Robert L. Nardelli, the recently dismissed chief executive, will leave the board in 2008. Under the settlement announced last night, a founder of Relational, David H. Batchelder, will join the Home Depot board on Feb. 22, and the investment fund will drop its proxy challenge, the two companies said in a joint statement."
Good for a class discussion of shareholder monitoring, proxy challenges, and even role of institutional shareholders.

S.E.C. Is Looking at Stock Trading - New York Times

S.E.C. Is Looking at Stock Trading - New York Times:
"The Securities and Exchange Commission has begun a broad examination into whether Wall Street bank employees are leaking information about big trades to favored clients, like hedge funds, in an effort to curry favor with those clients, executives at Wall Street banks said.

The inquiry, these people said, seems aimed at determining how pervasive insider trading, or the illegal use of market-moving nonpublic information, may be on Wall Street."
Talk about timing! We are going to be talking some about insider trading this week in class!

Sunday, February 04, 2007

A look around at a few weekend news items

For those of you so caught up in the Super Bowl you missed reading the Business pages this weekend, here are a few highlights:

Earnings-based strategy has high risk factor | Chicago Tribune:
"A study by University of Illinois finance professor Allen Poteshman for the 10 years through May 2000 showed that there's a particular danger in holding growth stocks during the three-day period around an earnings report versus holding value stocks during the same time. Value stocks outperformed growth stocks by an average of 95 basis points per quarter."
Later in the same article was an interesting look at earnings' quality. Short version: playing games with accounting numbers may trick the market for a while, but in long run, higher quality earnings is key.

"there's more than one way for a company to beat earnings expectations. Sanjeev Bhojraj, a finance professor at Cornell University, looked at companies that beat expectations through low-quality earnings--maneuvers involving accrual accounting or short-term reductions in expenses like research or advertising.

These companies did well in the short run, handily outperforming companies that missed expectations with "high-quality" earnings. But long-term investors would have done well to put more emphasis on earnings quality than on headlines.
And then an interesting look at the Value-line anomaly from The NY Times. Short version? After beating market for quite a while, Value-Line has not done so well, BUT statistically it is still too early to say much.
"Value Line’s record in its earliest years was good enough to impress even Fischer Black...[who] would concede that Value Line’s record was an exception to his previously held belief [of market efficiency]. It is doubtful that Professor Black, who died in 1995, would have reached this conclusion had he been able to focus only on the performance of Value Line’s Group 1 stocks during this decade. In 2006, those top-ranked stocks lagged the Dow Jones Wilshire 5000 by nearly 13 percentage points...Professor Aronson found that their performance in recent years “is consistent with normal random variation in historical performance.” He concludes that there is no statistical basis for saying that “the Value Line ranking system has deteriorated."....One lesson is that in most cases, except when there is evidence of criminality or sheer incompetence, we shouldn’t switch advisers or strategies because of a few years of mediocrity.”

Sears announced they will appeal the court ruling that sided with bondholders over whether Sears had the right to redeem bonds prior to expiration. (who says Bondholders and Shareholders don't fight?) In the meantime, Sears took a charge to cover the loss.

And finally the Napa Valley Register has an interesting look at why people have an big incentive to take firms private and then later take the same firm back public:
"The first time Joseph Neubauer took Aramark Corp. private in 1984, the deal was worth $889 million.

When he and other managers led a leveraged buyout of the nation’s largest food services company a second time, the price tag zoomed to $6.24 billion.

And the biggest winner among shareholders at Aramark, which Friday completed its first week as a newly private company? Neubauer and his family, whose holdings soared in value to almost $1 billion."

Friday, February 02, 2007

Article on what not to do when investing

Sometimes knowing what NOT to do shows us what to do. That is the case of Dowling and Lucey's paper entitled The 7 Deadly Sins of Investors. (FTR the target audience is Irish Investors, but their stories and advice are largely universal.

A few quick look-ins:
"In March 1999, an internet company called AppNet Systems....stated that the company would soon float on the stock market. ...investors ... rushed to buy. Unfortunately, many day-traders tried to buy shares in the company before it actually floated on the market, and ended up mistakenly putting their money into a similar-sounding company....The reason – the stock tickers of both companies, the symbols that appear on the trading screens of both professionals and day traders, were rather similar being APNT and APT. The share price of Appian shot up by over 140,000 percent in the space of two days"
While I am not totally convinced of the names for the "7 deadly sins", there is much good advice. For instance from the so-called Sloth section:
"The single greatest sin is falling victim to what is called ‘churn and burn’ :trading too
much. Every time you buy or sell a stock it costs you money....Rather than constantly changing your portfolio, you can improve your returns simply by buying and holding an investment... A study by US academics, Brad Barber and Terrance Odean, illustrates this principle. They found that the 20 percent of US households that traded the most earned average annual returns of 11.4 percent. The 20 percent of households that traded the least earned average annual returns of 18.5 percent. So, by doing very little, the low-trading households outperformed the heavy-traders by over 7 percent. Sloth pays.

The biggest culprits in over-trading are (young) men. Young men tend to be naturally aggressive and overconfident in their abilities. This leads them to change their investment portfolio too often. Barber and Odean, in another study, found that women are better investors than men, as they tend to trade less frequently."

CITE: Dowling, Michael M. and Lucey, Brian M., "The 7 Deadly Sins of Investors" (October 2006). Institute for International Integration Studies (IIIS) Available at SSRN:

Kraft carveout and spin-off

This is a great one for class! Not only does the article discuss the carve-out and spin-off, but the SF Chronicle piece talks about valuation (including EBITDA multiples!), multiple classes of shares, and socially responsible investing.

  • carve-out: IPO of a part of company (In this case this happened in 2001, when Kraft began trading publicly. Altria (the parent who some still call Philip Morris) holds 89% of the shares.
  • spin-off: dividend distribution of a portion of company (if over 80% is given, it is considered tax-free)
From Altria itself:
"The Board of Directors of Altria Group, Inc. voted on January 31, 2007, to authorize the Spin-off of all shares of Kraft Foods Inc. owned by Altria to Altria's shareholders.

From RTT News:
"The New York-based company said the distribution of about 89% of Kraft's outstanding shares owned by Altria will be made on March 30 to Altria shareholders of record on March 16.

Under the spin-off plan, Altria shareholders will receive about 0.7 share of Kraft for each Altria share they own. Fractional amounts will be paid in cash. The exact distribution ratio will be determined on the record date.

from the San Francisco Chronicle
"Philip Morris will still own 84 percent of Kraft's stock and control more than 97 percent of its voting rights....Philip Morris is selling 280 million to 308 million Class A Kraft shares to the public. Class A shares have one vote each. After the offering, Philip Morris will still own 49.5 percent of Kraft's Class A shares and 100 percent of Kraft's Class B shares, which have 10 votes each."

from MSNBC:
"Its break-up comes as other diversified groups are pursuing similar strategies in response to investor disaffection with sprawling conglomerates.

In the next few months, Tyco will try to move beyond its scandal-ridden recent history by splitting into its three main divisions. Cedant, the real estate-to-travel agency group broke itself up last year.

Even General Electric, one of the most successful conglomerates, has embarked on a spree of acquisitions and divestitures to refocus on higher margin industries."

Definitely class worthy!!!! Exclusive Exclusive:
"[The hedge fund managers] hunt for market variables called risk factors that often lead to excess investment returns, or premiums, according to people familiar with the fund.

Some, such as a measure called the value premium -- the difference between the return of a group of stocks with high book values relative to their prices and that of a group with low book value-to-price ratios -- have been used by other money managers for years. Goldman Sachs has identified more than 20 new risk factors, which it doesn't disclose, even to its own investors.

Carhart never reveals the secrets. Old friends and people who've invested in the fund say they're not really sure how it works."

A few class-related things of note:

First notice how the risk factors work. We were just speaking of the value risk factor this past week. Also the secrecy that fund managers want/need. Interesting article. (THANKS GH!)