Wednesday, September 30, 2009

The Exiled Victims of Bernie Madoff - Money 2009 -- New York Magazine

The Exiled Victims of Bernie Madoff - Money 2009 -- New York Magazine:
"For most of us, the Madoff matter is over. The man is in jail for the rest of his life, his associates have lawyered up, his wife is a pariah. But for those victimized by Madoff, the story is just beginning. There are several kinds of Madoff victims, of course. Some are wealthy beyond imagination and hardly affected at all. Others are clear hardship cases, people living in squalor after losing everything, and the government has reached out to many of them. But then there is a middle population—Ebel and thousands like her—who led quiet lives building savings only to watch it vanish. For these people, the Madoff fraud sent them into a spiral of downward mobility. They lost virtually all of their money, had to recalibrate their dreams, and suffered the public embarrassment of having fallen for one of history’s biggest frauds. Now this group is experiencing a second phase of victimhood, a wave of financial, legal, and emotional aftershocks. Perhaps most of all, they feel abandoned by the public and the officials who they believe should be helping them." / In depth - How to tame the animal spirits / In depth - How to tame the animal spirits:
"...policymakers have recognised that the financial system cannot continue to operate as an off-balance-sheet liability of the public sector, leaving the taxpayer to bear the cost of the clean-up after any catastrophe.....President Barack Obama declared in June that its “proposals would compel these firms to internalise the costs they could impose on society in the event of failure”.

A consensus is also growing on how to address the inherent pro-cyclicality of the system. A recurring characteristic of financial cycles is that good news fuels credit demand and supply. Asset prices rise in response, creating yet more collateral for more lending. The bursting of the resulting bubble then kills speculation and shrinks debt incurred in the boom.

During the latest bubble, pro-cyclicality was increased by flawed risk management and by securitisation, they shunted assets off the balance sheet. Leverage was also implicit in the structure of derivative instruments such as the swaps and options extensively used in banks’ own-account trading."

Does the Incentive Effect of the Charitable Deduction Vary Across Charities? by Robert Yetman, Michelle Yetman

SSRN-Does the Incentive Effect of the Charitable Deduction Vary Across Charities? by Robert Yetman, Michelle Yetman:
"We find significant differences in the response of donations to taxes across different types of charities. Donations to charities that provide basic goods and services to humans in need appear to be unresponsive to tax incentives, while donations to charities that appeal to higher human needs, animals, and the environment are very sensitive to tax incentives. These results suggest that changes to tax laws that affect the price of giving would likely lead to a reallocation of relative donations across different types of charities."

Not sure where BonaResponds falls. I guess we would get more relative to others BUT we do help accross the board.

DNA-Based Investing Strategies -

DNA-Based Investing Strategies - "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."

Men, Women and Money | Psychology Today

Men, Women and Money | Psychology Today:
"For most people, money is never just money, a tool to accomplish some of life's goals. It is love, power, happiness, security, control, dependency, independence, freedom and more. Money is so loaded a symbol that to unload it--and I believe it must be unloaded to live in a fully rational and balanced relationship to money--reaches deep into the human psyche. Usually, when the button of money is pressed, deeper issues emerge that have long been neglected."

Another "must read" behavioral finance piece.

Tuesday, September 29, 2009

Been gone for a while

As many of you know, I have been gone for a week, so I will post a few things today that are rather old but have been wanting to comment on.

First is this piece by George Will. Free trade is good and that things such as tariffs hurt the majority of people involved.

George F. Will - Obama's Tire Tariff May Protect Unions but Harms the Nation -
"The 215 percent increase in tire imports from China is largely the fault, so to speak, of lower-income Americans, many of whom will respond to the presidential increase in the cost of low-end tires by driving longer on their worn tires. How many injuries and deaths will this cause? How many jobs will it cost in tire replacement businesses or among longshoremen who handle imports? We will find out. The costs of the president's sacrifice of the national interest to the economic illiteracy of a single labor union may also include injuries China might inflict by imposing retaliatory protectionism or reducing its purchases of U.S. government debt, purchases that enable Americans to consume more government services than they are willing to pay for."

Tuesday, September 22, 2009

Cramer Freaks Out On The SEC Over Flash Trading (VIDEO)

Cramer Freaks Out On The SEC Over Flash Trading (VIDEO): "This time he comes down on the Securities and Exchange Commission's (SEC) flash trading crackdown, and makes a lot of sense.

Why the sudden interest in flash trading when the SEC continues to overlook so many much larger problems?

The powerful and mysterious brain circuitry that makes us love Google, Twitter, and texting. - By Emily Yoffe - Slate Magazine

The powerful and mysterious brain circuitry that makes us love Google, Twitter, and texting. - By Emily Yoffe - Slate Magazine:
"It is an emotional state Panksepp tried many names for: curiosity, interest, foraging, anticipation, craving, expectancy. He finally settled on seeking. Panksepp has spent decades mapping the emotional systems of the brain he believes are shared by all mammals, and he says, 'Seeking is the granddaddy of the systems.' It is the mammalian motivational engine that each day gets us out of the bed, or den, or hole to venture forth into the world. It's why, as animal scientist Temple Grandin writes in Animals Make Us Human, experiments show that animals in captivity would prefer to have to search for their food than to have it delivered to them.

For humans, this desire to search is not just about fulfilling our physical needs....we get thrilled about the world of ideas, about making intellectual connections, about divining meaning....

The juice that fuels the seeking system is the neurotransmitter dopamine. The dopamine circuits 'promote states of eagerness and directed purpose,' Panksepp writes. It's a state humans love to be in. So good does it feel that we seek out activities, or substances, that keep this system aroused—cocaine and amphetamines, drugs of stimulation, are particularly effective at stirring it."
Mmm, can you say Twitter? Or blogging?

This reminds me much of this article from several years ago (yeah I did notice the irony).

Behavioral finance implications? How about excessive trading? We keep searching for a stock or portfolio mix that rewards our cravings.

And much like passive indexing might be the "fix" for the "wanting a fix", there are ways to keep our minds on task. Unfortunately, as the The NY Times points out this methods are only marginally successful. The article discusses various software tools designed to prevent our minds from wandering (like a horse's blinders) but eventually concludes

"I wish I could say that using these digital nannies has revolutionized the way I work. They didn’t, really. Though blocking time-sucking Web sites did keep me from goofing off on my computer, I found that my brain quickly compensated by wasting time in other ways: As I’m writing this paragraph, for example, I’m also eating a peach. But not just eating it without thinking — I’ve been using a paring knife to try to cut perfectly cubical pieces to pop into my mouth."

Drilling Down - Perceiving the Risk of Stock Picking -

Drilling Down - Perceiving the Risk of Stock Picking -
"Consider a stock that picks up 10 cents on even days of the month and loses that much on odd days. Now imagine, instead, a stock that picks up value until the midpoint of the month, and then sinks until the endpoint. Both stocks offer the same monthly and yearly return. But investors will tend to regard the first stock as safer than the second, according to a paper soon to be published in The Journal of Consumer Research. The researchers found an essentially irrational buyer response to “run length,” meaning the height and depth of a stock’s spikes, unrelated to the frequency with which the stock varies, the period of time over which the investment is contemplated, the stock’s returns over a given period or its average value."

Kodak and KKR: Distressed Debt Investing 101 - Deal Journal - WSJ

Kodak and KKR: Distressed Debt Investing 101 - Deal Journal - WSJ:
"KKR will buy up senior secured notes carrying interest rates as high has 10.5%, which is twice the blended interest rate that Kodak is paying on its current debtload. The firm will also receive warrants to convert the debt into 53 million Kodak shares.....KKR is essentially acting as a lender of last resort, while gaining the potential upside of owning a piece of the company’s equity in the future. It can be a safer bet than the gigantic buy outs that made KKR famous."

This is the case we discussed in class on Monday.

Insider trading? Possibly

While the deal had been rumored, trading like this is at least suggestive of insider trading.

Deal Journal - WSJ:
" looks like somebody couldn’t keep quiet about the Perot deal, though it had been rumored to be in the works for many months. Dow Jones Newswires reports that starting Sept. 9 and continuing through Monday, traders bought and sold far more options in Perot Systems than they historically have.

Surprise, surprise. The bulk of the activity appeared to be bullish, with traders preparing for Perot’s stock to move higher. On Sept. 9, for example, traders picked up 2,000 calls that allow them to buy the company’s stock and just 11 puts that allow them to sell it, according to Trade Alert. Under normal circumstances, traders would buy and sell only a few hundred contracts in the Texas company."

Monday, September 21, 2009

Problems managing money may foreshadow Alzheimer's - Yahoo! News

Uh, so wait. While I doubt VERY strongly there is any causation here, I would suggest that you want to do your finance readings since you never know.

Problems managing money may foreshadow Alzheimer's - Yahoo! News:
"Problems with basic money management may serve as a sign that an older adult with mild memory impairment will soon progress to Alzheimer's disease, researchers reported Monday."

Using options as tools for hedging, 4 techniques available to anybody

Basic, but good intro!

using options as tools for hedging, 4 techniques available to anybody:

"Another reason to desire a hedge on a long position would be that you believe the market is going to correct, and stocks you own are going to go lower with it, but you still believe that in time the names you hold can move higher. A hedge can temper the short-term pain or even provide profts you can re-invest after such a correction takes place, if it does take place.

There are several paths we could take to hedge our bets with options and these are the focus of this blog.

First, some background: there are two kinds of options. A call, and a put.

A call is a contract between you and someone else where one party agrees to give the other the right to buy a share from them by a certain time for a certain price in exchange for a premium.."

Required for SIMM.

Unpaid bills mount for top Chrysler executive - Yahoo! News

Unpaid bills mount for top Chrysler executive - Yahoo! News:
"One of the best-known auto industry executives in the world has fallen on hard times.

Jim Press, who briefly ran Toyota Motor Corp.'s U.S. operations and spent 37 years with the Japanese automaker before joining Chrysler as one of its three top executives in 2007, is facing claims of more than $1.35 million for unpaid federal taxes and a personal loan.

The 62-year-old auto executive, who told the New York Times last year he wore a single string on one wrist as a reminder that material wealth is not the most important thing, may be one of the highest profile victims of Detroit's collapse."

Fed Rejects Geithner Request for Study of Governance, Structure -

Well, then, this is heating up. Stay tuned, I doubt we have seen the end of this one.

Fed Rejects Geithner Request for Study of Governance, Structure -
"The Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.

The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”

Some top central bank officials, after agreeing to the review, saw a potential threat to Fed independence"

Sunday, September 20, 2009

The Financial Crisis and America’s Casino Culture -

The Financial Crisis and America’s Casino Culture -
"“It goes all the way back to George Washington,” said Robert Shiller, the Yale economist who warned of the Internet and real estate bubbles, and whose book, “Irrational Exuberance,” remains a seminal text on Americans’ tendency to believe in good times. “Washington said regulation should be done with a light hand. The word capitalism hadn’t been invented yet, but freedom had. Washington said businesses should be free. There’s this hatred of kings that we really have in our blood.”

In a country inclined to celebrate its frontier roots and rugged individualism, how much shock is required before Americans opt to increase the powers of the sheriff? Fear does have a way of inducing change."

Case study on paying off loans

Hat's off to the Hildebrandts. A good case study for personal finance!

Yahoo! Finance - Business Finance, Stock Market, Quotes, News: "Five years ago, the Hildebrandt family of New Richmond, Wis., was juggling more than $100,000 in credit card and personal debt. Through frugality, determination and hard work, they are now -- other than a mortgage -- debt-free."

The secret? Hard work, will power, and living a bit below previous lifestyle. Well done.

Did Wells Fargo's Auditors Miss Repurchase Risk? (WFC)

This is a good example of what you can sometimes unearth if you dive a little deeper than normal.

Did Wells Fargo's Auditors Miss Repurchase Risk? (WFC):
"On Friday, Clusterstock worried that Wells Fargo may be making the same fatal mistake AIG did – underestimating, or worse, naively ignoring Collateral Call Risk."

SEC’s Schapiro Sees More Public Disclosure for Hedge Funds -

This has been a major issue since I began teaching. Will be interesting to see if it happens whether hedge funds flee the country as some have threatened in the past.

SEC’s Schapiro Sees More Public Disclosure for Hedge Funds -
"The U.S. Securities and Exchange Commission will urge more public disclosure from hedge funds if Congress follows through with plans to make the investment pools register with the agency, Chairman Mary Schapiro said.

The SEC will likely require “some level of public reporting,” as it currently does for mutual funds, Schapiro said today during a conference at Georgetown University in Washington. The agency is “very aware of the tension” involved in requiring more disclosure because hedge funds don’t want competitors to “front-run” their strategies, she said."

Saturday, September 19, 2009

The secret of self-control : The New Yorker

Patience is a virtue:

Behavioral finance time anyone?

The secret of self-control : The New Yorker:
"Once Mischel began analyzing the results, he noticed that low delayers, the children who rang the bell quickly, seemed more likely to have behavioral problems, both in school and at home. They got lower S.A.T. scores. They struggled in stressful situations, often had trouble paying attention, and found it difficult to maintain friendships. The child who could wait fifteen minutes had an S.A.T. score that was, on average, two hundred and ten points higher than that of the kid who could wait only thirty seconds."

S&P 500 Winners & Losers Since Lehman's Fall - CNBC By The Numbers -

S&P 500 Winners & Losers Since Lehman's Fall - CNBC By The Numbers -
"According to data compiled by CNBC, 412 companies in the U.S. equity index are trading in negative territory, with an average loss of 22%, since the date that Lehman's demise took effect. As no surprise, many financial companies are among the worst performers from a year ago"

10 Ways Sports Stars Destroy Their Finances

Clusterstocks' Business Insider's 10 Ways Sports Stars Destroy Their Finances:

"A Sports Illustrated article this year showed how shockingly common financial ruin is:

* By the time they have been retired for two years, 78% of former NFL players have gone bankrupt or are under financial stress......
* Within five years of retirement, an estimated 60% of former NBA players are broke.
* Numerous retired MLB players have been similarly ruined"

WOW. Sad. Talk about a version of the Free Cash Flow problem.

How economists are tackling sports injuries / Reportage - How economists are tackling sports injuries:
"Brady’s story shows vividly how injury can affect a team, and in particular injury to a star player, whose performance is doubly critical. And since sport is increasingly obsessed by Freakonomics-style analysis, where economists and statisticians (and mere stats nuts) hunt for inefficiencies in the system, his case raises questions, too....

Sport is not a conventional business (Barnwell says that getting to the playoffs can cost a team more than they earn from it) but an NFL team’s raison d’être is to win, and one of the biggest constraints they face is the salary cap. In this context, the $14m spent on Brady represents a massive opportunity cost – a cost made painfully clear by his season on the sidelines as he convalesced. With so much at stake in the big money world of professional sport, the questions become more urgent. Do teams and their owners understand the economics of injury?"

Friday, September 18, 2009

Psychology of poverty and temptation – Chris Blattman

Psychology of poverty and temptation – Chris Blattman:
"Some people are not only impulsive and impatient, but inconsistently so. they care a lot about a dollar today versus tomorrow, but could care less between getting a dollar either 10 or 11 days from now. Economists call this ‘hyperbolic discounting’.

Both behaviors–impatience and time inconsistency–could be a source of persistent poverty.

Or not. Abhijit Banerjee [and] Sendhil Mullainathan....look at a number of seemingly unusual behaviors by the very poor–from exorbitant rates of short-term borrowing to the low take-up of small, high-return investments. Impatience cannot explain the patterns, they say....

Another view: we’re all impulsive and impatient in the same way, but over a narrow range of goods that are quickly and cheaply satisfied. If you’re poor, these temptations are a big fraction of your income....Temptations are declining in income."

Here is the actual paper.

New Required reading for my Behavioral Finance class!

H/T to SimoleonSense which is definitely one of my favorite blogs out there. Be sure to check it out!

SSRN-The Liquidity of Liquid Markets During the Financial Crisis by Craig Furfine

SSRN-The Liquidity of Liquid Markets During the Financial Crisis by Craig Furfine:
"We measure changes to trading volumes, spreads, the level and shape of order books, and the price impact of a trade and document that these traditional measures imply a noticeable withdrawal of liquidity from Eurodollar futures markets, which previously could have been argued to be one of the most liquid financial markets in the world. By contrast, liquidity in another liquid market, S&P 500 index futures, was far less affected. Trading volume of S&P futures actually rose substantially, spreads and order books changed by only a fraction of what was witnessed in Eurodollars, and price impacts were largely unaffected."
Interesting! Have to think through the "why".

Is this common?

Was reading over the announcement and must confess I do not know if this is common or not: Anyone help me here?

From Kodak's 8k announcing a new convertible sale:
"Information Rights: For so long as KKR and certain related parties hold at least 10% of the common stock issued or issuable upon exercise of the Warrants it originally purchased pursuant to the Purchase Agreement, KKR shall have the right to receive certain information regarding the Company, subject to confidentiality restrictions."

To Reduce Hedge Fund Risk, Let Everyone In - News Analysis -

Steven M. Davidoff - To Reduce Hedge Fund Risk, Let Everyone In - News Analysis -
"It is time to get serious about hedge fund risk. This, however, is not the usual argument for more regulation of hedge funds. Here is a contrarian view: the best course for our capital markets may actually be in the other direction. Perhaps hedge funds need to be deregulated, breaking down the wall that restricts hedge fund investing only to the wealthy.

All investors — not just rich ones — should have access to the superior investing and diversification potential of hedge funds. Deregulating these opaque entities will also bring these funds out into the open, helping regulators monitor systemic risk, where the real focus of hedge fund supervision should be"

For more on this, see this post from back in February.

Thursday, September 17, 2009

SU - Former Cub Shawon Dunston Demands Team Pay Him Promised College Money - The Two-Way - Breaking News, Analysis Blog : NPR

SU - Former Cub Shawon Dunston Demands Team Pay Him Promised College Money - The Two-Way - Breaking News, Analysis Blog : NPR:
"Shawon Dunston, the former Chicago Cubs all-star shortstop, has offered an interesting reason why the Tribune Co. now in bankruptcy court, shouldn't be allowed by the judge to sell his old team: it still owes him scholarship money he was promised so that he could obtain a college degree."

SSRN-Understanding the Growth of African Financial Markets by Mihasonirina Andrianaivo, Charles Amo Yartey

SSRN-Understanding the Growth of African Financial Markets by Mihasonirina Andrianaivo, Charles Amo Yartey:
"This paper examines empirically the determinants of financial market development in Africa with an emphasis on banking systems and stock markets. The results show that income level, creditor rights protection, financial repression, and political risk are the main determinants of banking sector development in Africa, and that stock market liquidity, domestic savings, banking sector development, and political risk are the main determinants of stock market development. We also find that liberalizing the capital account promotes financial market development only in countries with high incomes, well- developed institutions, or both. The powerful impacts of political risk on both banking sector and stock market development suggest that resolution of political risk may be important to the development of African financial markets"

In response to the last sentence: "Gee, do you think?"

SSRN-From Behavioural to Emotional Corporate Finance: A New Research Direction by Richard Fairchild

Interesting: breaking behavioral finance down into finer groupings.

SSRN-From Behavioural to Emotional Corporate Finance: A New Research Direction by Richard Fairchild:
"Behavioural finance and behavioural corporate finance analyses the effects of psychological biases, heuristics, and emotions on investors’ and managers’ decision-making and performance. Taffler and Tuckett (2005) have introduced a major paradigm shift by introducing a new field of research, namely Emotional Finance. This ground-breaking approach employs Freud’s theory of phantastic objects to analyse the effect of unconscious, infantile, emotions on investors’ decisions. In this paper, we extend their work by proposing a new development, namely, emotional corporate finance. We argue that, just as investors may view investments as phantastic objects, managers may view their projects similarly."

SSRN-The Efficacy of Short Selling Restrictions: Evidences from Italy in Post-Lehman Turmoil by Gianluca Mattarocci, Gabriele Sampagnaro

More evidence, this time from Italy, that last year's short selling bans did not achieve their desired reductions in volatility.

SSRN-The Efficacy of Short Selling Restrictions: Evidences from Italy in Post-Lehman Turmoil by Gianluca Mattarocci, Gabriele Sampagnaro:
"By analyzing the effect on daily price returns and volatility following the addition of short selling constrains, and using some control procedure able to isolate them from possible crisis induced movements, our results do not indicate a common impact of the restrictions. While the results on the performance change show some difference in the trend of mean performance before and after the short selling constraint that is particularly relevant for those stock without traded options, the results concerning the volatility impact show a general increase of the post-restriction variance the most part of which can be attributable to the short selling bans. This finding appear contrary to the basic belief of market regulators to consider short selling ban as an useful tool able to mitigate volatility and speculative behaviors; new restrictions on short sellers are likely to reduce the amount of information incorporated into stock prices."

Survivor Bias on the Gridiron - Freakonomics Blog -

Dubner brilliantly writes on the Survivorship Bias using sports as the example. It is good and thus I will include even though he has to bring up the Bills losing AGAIN.

Survivor Bias on the Gridiron - Freakonomics Blog -
"Over time, therefore, the DJIA reflects a different reality than many people presume. It is biased toward survivors — or, if you want to think of the concept more broadly, toward winners.

This winner’s bias, if you will, shows up in pretty much every realm imaginable: academics, medicine, politics, etc. I don’t mean to sprinkle skepticism all over your inherently positive thoughts about the world, but I do think it’s worth keeping winner’s bias in mind whenever you read (or write) something about the performance of a given group or institution or coalition."

"Winner’s bias is perhaps especially pronounced in sport. The behaviors of winners are remembered and dissected far more thoroughly than those of losers, and given greater weight, even if the outcome was decided by a tiny margin."

Two fast examples/quotes I will add:

1. "History is written by the victors" (probably Winston Churchill but many attributed)
2. "No one remembers who came in second" (no idea)

We must not only look at the winners. There is much to be learned by looking at the losers as well.

Class: be able to explain how the survivorship bias influences allocation decisions as well as academic studies.

Economist Zvi Bodie debunks standard investment advice - Sep. 16, 2009

Bodie has long advocated holding treasuries (technically TIPS) and if you really want to take risk using long term options).

Economist Zvi Bodie debunks standard investment advice - Sep. 16, 2009:
"Were retirement investors taking on too much risk before the crash?

Yes. The standard models that are used to give investment advice to millions of Americans are fundamentally wrong. We're told that over time, stocks get less risky, but that's bull. Stocks are always risky -- whether in the short or long run. Prices dropped by 37% last year. While improbable, there's nothing to say they couldn't drop by that much again next year or the year before you retire. And diversification doesn't take away that risk. That's why retirement money belongs in truly safe assets whose value won't go down -- not in stocks."
And later the gives us this sage advice:
"You should only invest in equities what you can afford to lose."
I am always amazed this idea has not caught on more for retirement planning. It is clearly safer and makes infinite sense. Why hasn't it caught on? Probably since the expected return is lower (especially for the TIPS only portfolio), so it puts the onus on the investor to save more (the article suggests upwards of 30% which many consumption addicts struggle with) or not retiring until later (which those who do not like their jobs really struggle with).

Wednesday, September 16, 2009

Stress Taints Decision Logic | Psych Central News

Stress Taints Decision Logic | Psych Central News:
"Typically, we reflect on our past history to weigh the pros and cons of a choice, and then decide on the most logical option.

A new study suggests this approach may need revision if we are under cognitive stress — the stress can serve as a distracting force and cause us to make poor decisions.


The authors note that when we are stressed and need to make a decision, we are “more likely to bear in mind things that have been rewarding and to overlook information predicting negative outcomes.”

In other words, these findings indicate that irrational biases, which favor previous rewards, may guide our behavior during times of stress.

Source: Association for Psychological Science "

Are hockey fans, scalpers ready for 'dynamic' ticket prices? - Puck Daddy - NHL - Yahoo! Sports

I always like it when economics wins out! This is a perfect example of something many have been advocating for years:

Are hockey fans, scalpers ready for 'dynamic' ticket prices? - Puck Daddy - NHL - Yahoo! Sports:
"This season, the Dallas Stars are the first NHL team to implement a system called 'dynamic pricing,' which is like variable pricing only it's determined with artificial intelligence and in a constant state of flux.

Market conditions, consumer demand, the latest hockey news ... it all factors into what upper-level tickets for Stars games will cost leading up to faceoff. In some cases, that means prices with climb; in other cases, it means fans will buy ticket well below last year's face-values for less popular games."

Guest Lecture by David Swensen Yale's Chief Investment Officer

In the week that Yale reported a 30% loss of their endowment, I thought it would be interesting to look at this guest lecture from David Swensen. It is unfortunate in a way that they lost so much, since his presentation and long run record had been very good. Indeed, Swensen has done very well over longer term windows:

"The Yale endowment is led by David F. Swensen, who has advocated aggressive use of alterative investments like private equity and hedge funds. At the end of fiscal 2008, Yale continued to turn in the best 10-year performance with an average annualized gain of 16.3 percent, which was followed by Harvard with 13.8 percent."
This video was from last year.
YouTube - 9. Guest Lecture by David Swensen:
"David Swensen, Yale's Chief Investment Officer and manager of the University's endowment, discusses the tactics and tools that Yale and other endowments use to create long-term, positive investment returns. He emphasizes the importance of asset allocation and diversification and the limited effects of market timing and security selection. Also, the extraordinary returns of hedge funds, one of the more recent phenomena of portfolio management, should be looked at closely, with an eye for survivorship and back-fill biases."

Tuesday, September 15, 2009

YouTube - Authors@Google: Jeffrey Kluger

YouTube - Authors@Google: Jeffrey Kluger
I am almost done with his book Simplexity.

His discussions of traffic or escaping a disasters are fascinating and his whole work is a good reminder that few things are strictly linear.

The Greatest Sucker's Rally In History, Play By Play

How closely does history repeat itself?

From the Business Insider at ClusterStock: The Greatest Sucker's
Rally In History, Play By Play: "The early 1930 rally came after the market had fallen nearly 50% in the fall of 1929. That rally took the market up nearly 50% again, to a level that was only about 20% below the previous peak.

That rally, of course, was also the biggest sucker's rally in history. After the market peaked in April 1930, it crashed again, eventually ending up down 89% from the 1929 high and more than 80% from the 1930 high. The market did not reach the 1930 high again for another quarter of a century."

Just in case you weren't worrying.

Which CEOs Took a Base Pay Cut? :: The Daily Stat :: September 15, 2009 ::

Which CEOs Took a Base Pay Cut? :: The Daily Stat :: September 15, 2009 ::
"373 U.S. public companies reduced their chief executives' base salaries between June 1, 2008 and June 18, 2009. 68 companies in the Fortune 1000 index have reduced executive officers' base salaries in the past year."

I am sort of disappointed but not sure why. I would have figured almost all did.

Wall Street’s Math Wizards Forgot a Few Variables - DealBook Blog -

A look back by the NY Times at what went wrong:

Wall Street’s Math Wizards Forgot a Few Variables - DealBook Blog -
"What wasn’t recognized was the importance of a different species of risk — liquidity risk,” Stephen Figlewski, a professor of finance at the Leonard N. Stern School of Business at New York University, told The Times. “When trust in counterparties is lost, and markets freeze up so there are no prices,” he said, it “really showed how different the real world was from our models.”

In the future, experts say, models need to be opened up to accommodate more variables and more dimensions of uncertainty.

The drive to measure, model and perhaps even predict waves of group behavior is an emerging field of research that can be applied in fields well beyond finance."

Simon Johnson and James Kwak - Lehman Brothers and the Persistence of Moral Hazard -

Simon Johnson and James Kwak - Lehman Brothers and the Persistence of Moral Hazard -
"Moral hazard already existed in the system on at least three levels.

First, bank employees and managers had asymmetric compensation structures.....

Second, shareholders had the same payoff structure. Banks are highly leveraged institutions; every dollar contributed by shareholders is magnified by 10 to 30 dollars from creditors. This meant that in good years, shareholders benefited from profits that were juiced by leverage, but should things go wrong, they could shift their potential losses to creditors.

Third, creditors had only limited incentives to watch over major banks. Ordinarily, creditors should demand high interest rates on loans to highly leveraged institutions. However, the expectation that large banks would not be allowed to fail made creditors more willing to lend to them. This is why the failure of Lehman was such a damaging blow: It shattered market expectations that the government would not let a major bank fail."

A must read for corporate or banking/institution classes.

Monday, September 14, 2009

5 lessons on how to strengthen finances and limit damage in next crisis | Ecommerce Journal-more about virtual economy|e-commerce and money news|articles|forex and stocks news|banks|investment|gambling

5 lessons on how to strengthen finances and limit damage in next crisis | Ecommerce Journal-more about virtual economy|e-commerce and money news|articles|forex and stocks news|banks|investment|gambling:
"The real problem with asset allocation isn't that it no longer works, but that people expect that it will always work. And that's just not true. The 2000-02 bear showed that even sophisticated asset allocations can't guarantee you won't lose money in a lousy market. 'That doesn't mean asset allocation is a bad idea,' says Harvard economics professor John Campbell. 'If vaccines don't work for swine flu, it doesn't mean you shouldn't vaccinate for other types of flu.'

And if you look at the numbers, you'll see that proper diversification did you considerable good in this meltdown....If you held a mix of 35% U.S. stocks, 25% foreign stocks, 10% cash, and 30% fixed income (including government and high-quality corporate bonds), you would have lost just 28% between Sept. 1, 2008, and the market's bottom of March 9. By comparison, the S&P 500 was down nearly 50%."
The other 4 lessons were good too.

Very good article. Definitely recommend for investments (including SIMM--REQUIRED)

HT: Wayne Marr

FinanceProfessor and SBU in the September rally like white shoes after Labour Day September rally like white shoes after Labour Day:
"Like everyone else, investors 'give in to mood swings that lead to impulsive decisions,' says Jim Mahar, an associate finance professor at St. Bonaventure University in upstate New York. And it's why, despite our better judgment, we are still tempted to try to time the market and latch on to hot stocks, funds and trends.

'The excitement of beating the market - and getting to brag about it - leads investors to make decisions that they never would in a more sterile environment.'"

Thursday, September 10, 2009

Motives and Consequences Of Financial Regulation

The short version is that regulation often helps the Regulated and harms the poor.

The Harvard Law School Forum on Corporate Governance and Financial Regulation » Motives and Consequences Of Financial Regulation:

Fascinating piece that provides evidence of what we probably already knew: regulations can often hurt those they are designed to help. How? By preventing them access to markets and by limiting competition thereby helping the regulated.

FYI this post is based on a paper that is forthcoming in the Journal of Finance by Effi Benmelech and Tobias Moskowitz entitled: The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century. However, I will also refer to the coverage of this paper by Benmelech on the Harvard Law Governance Blog

A few "look-ins" from each source:

From the paper itself
"We study the political economy of financial regulation and its consequences through the lens of usury laws in 19th century America. Usury laws are arguably the oldest form of financial regulation. Mentioned in the Bible and the Koran and dating back to ancient Rome, usury laws have long been the subject of religious and political debate
from the blog article:
"...the evidence we uncover appears most consistent with financial regulation being used by incumbents with political power for their own private interests—controlling entry and competition while lowering their own cost of capital."
from the conclusion to the paper (page 30)
"Our evidence suggests incumbents with political power prefer stringent usury laws because they impede competition from potential new entrants who are credit rationed. However, during financial crises when incumbents become credit rationed themselves, usury laws are relaxed. We also find that financial regulation is correlated with other restrictive political and economic policies adopted by the state designed to exclude other groups and protect incumbent interests."
Interestingly the authors find that how religious an area is matters when it comes to usury (from the paper itself p 28):
"....we regress the maximum legal rate on the number of church accommodations (seating capacity summed across all churches, temples, synagogues, and other religious dwellings)....More religious states adopt more strict usury laws."
and finally from the blog commenting on the importance of the laws (this is actually early in the article but I chose to conclude with it:

"... changes[ie making them more stringent] in these laws are associated with future economic growth and, importantly, that the impact on growth is concentrated exclusively among the smallest borrowers in the economy.""

Might the rating agencies be in more trouble than originally thought?

The other day I mentioned this interview with Terry McGraw of McGraw-Hill who basically said that Moody's merely had it wrong and there was no fraud.

In this response, David Eihorn suggests that this "we messed up" defense may not be enough. Now that said, he is short the stocks of rating agencies so it is ironic that he is speaking on conflicts of interest, but it does bring up some serious questions for the jury and judge to sort out.

Kahneman speaking at Georgetown graduation

Daniel Kahneman is one of the main founders of the Behavioral Economics/Finance School. This is a short (19 min if you watch it all) graduation address that we used in class (Behavioral Finance).

I recommend skipping the first section and get right to his talk on economic rationality.

In defense of markets---Thomas E. Woods, Jr. - Mises Institute

I have not mentioned the Mises Institute in a while. But this response is so thorough and so well thought out that I had to. It is a response piece to a person who does not favor free market responses. Thus, Mises plays the role of free market defender. It is a role that is played very well!

Anatomy of an Economic Ignoramus - Thomas E. Woods, Jr. - Mises Institute:
" free-market economist thinks the market 'always knows exactly what to do and when to do it.' If that were the case, how could free-market economists account for firms that go out of business?

The argument that free-market economists actually make is that on the free market, decisions regarding what to produce, in what quantities, using what methods, and in what locations, are made in light of satisfying the most urgent demands of consumers. Business firms find out very quickly what consumers want and what they do not want, and they adjust their production decisions accordingly."

and later in defense of profits:

"...profit is simply society's way of ratifying a firm's past production decisions. It indicates what consumers want, and (by the process of imputation) the best process for producing it. Profits attract further investment in a given line of production, until the increased supply of goods in that industry brings the rate of return there back down to the level that exists elsewhere in the economy. This is how we ensure that our limited resources are not wasted, and that the most urgently desired goods are produced."
If only more people understood this.

Wednesday, September 09, 2009

Paul B. Farrell: Lazy Portfolios take on the best and win, again - MarketWatch

Have you heard of the Lazy Portfolios? They run a series of tests of what are essentially passive investment strategies vs active management.

Well given behavioral finance is so hot, they decided to take on that. The result? Lazy wins again!

Paul B. Farrell: Lazy Portfolios take on the best and win, again - MarketWatch:
"Does the 'Behavioral Edge ... earn superior returns?' No!
Representing behavioral finance:
"There are two mutual funds actually managed by the Fuller & Thaler team: The JPMorgan Undiscovered Managers Behavioral Growth Fund and the Undiscovered Managers Behavioral Value Fund.

Fuller & Thaler manage roughly $1 billion, mostly institutional money."

The article then presents (on page 2) a table showing results of the Lazy Porfolios vs The Behaviorally based Fuller-Thaler funds.

The results might just nudge some back to indexing:

"Every one of the eight Lazy Portfolios beat the Fuller-Thaler Growth Fund for all three time periods, some by as much as 11 percentage points. Moreover, not only are all of our Lazy Portfolios in positive territory on a 5-year basis (while the Growth Fund's in negative territory) we're beating Growth by as much as six percentage points long-term. Same applies when we pit Lazy Portfolios against the Fuller-Thaler Value Fund on the 3-year and 5-year results. "
Now looking at two funds is not exactly scientific and if this were an academic journal it would most likely be laughed at and the paper returned without even being reviewed, but it is not so we can look at the results, but be sure to take them with some salt.

The results do remind me of the old WSJ series (many years ago now) that interviewed Thaler and Eugene Fama. In the end, both admitted their investment strategy was essentially to index. For Thaler it was because such a strategy protects us from ourselves (especially with reweighting) and for Fama it was his believe (which is backed my much data) that active management not only does not beat passive investing, but generally loses to it (especially after costs are included).

Investment Mistakes: The View From Behavioral Finance -

Investment Mistakes: The View From Behavioral Finance -
"Why did we think and feel and behave as we did? Why did we act in a way that today, in hindsight, seems so obviously stupid? Only by understanding the answer to these questions can we begin to improve our financial future.

This is where behavioral finance comes in. Most investors are intelligent people, neither irrational nor insane. But behavioral finance tells us we are also normal, with brains that are often full and emotions that are often overflowing. And that means we are normal smart at times, and normal stupid at others."

Yep, another one required for class. Read the whole thing! :)

Tuesday, September 08, 2009

McGraw Hill CEO: We Just Got It Wrong

From CNBC and Clusterstock: This was one of the more interesting CNBC interviews I have seen in a long time.

The interview is with McGraw-Hill CEO Terry McGraw. In the interview Mr McGraw starts off talking about new tools for college classrooms but then it gets more exciting and he discusses the recent case in which a judge allowed rating agencies to be sued. McGraw stresses that there was no fraud, but that they did not expect real estate declines to be as sharp as they were. (it is interesting to note, they did allow for 15% declines which if you remember back last year people were saying that rating agencies never considered ANY decline. So that was clearly wrong.

He then tackles the basic structure of the rating agencies where firms pay to be rated and disagrees that it is flawed.

From Clusterstock: McGraw Hill CEO: We Just Got It Wrong:
"..he addresses the pay-to-play model, and he argues that it's the only one that makes sense. When issuer-pays, the ratings are freely disseminable to everyone. When a buyer pays, the information stays with the buyer. And what's more, there's not much of a business selling this kind of research to each customers"

Monday, September 07, 2009

SSRN-Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008 by Daniel Kaufmann, Aart Kraay, Massimo Mastruzzi

Yes this will be used in class :)

SSRN-Governance Matters VIII: Aggregate and Individual Governance Indicators, 1996-2008 by Daniel Kaufmann, Aart Kraay, Massimo Mastruzzi:

This paper reports on the 2009 update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2008: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. These aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 33 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. We also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. We find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time."

SSRN-Short Sales, Limits to Arbitrage and Fundamental Value by Dirk Brounen, Melissa Porras Prado, Marno Verbeek

Score another for short sales!

SSRN-Short Sales, Limits to Arbitrage and Fundamental Value by Dirk Brounen, Melissa Porras Prado, Marno Verbeek:
"The presence of short sale constraints ensures that pessimistic investors' negative information is not reflected in the stock price as they are not able to sell short, short sales hamper the tendency of the optimist to bid up prices."

Friday, September 04, 2009

Rating agencies lose free-speech claim | Reuters

Rating agencies lose free-speech claim | Reuters:
"'You can't yell fire in a crowded theater, but here it seems the agencies were doing the opposite,' said Jonathan Macey, a professor at Yale Law School. 'There was a fire, but they were saying there was nothing to worry about and taking money for saying that.'"

Football, Statistics, and Agency Problems « The Baseline Scenario

Agency costs occur when the agent looks out for his or her own interests and not those of whom hired him/her. The typical example of this is when manager looks out for his/her personal pay and not the returns of the shareholders.

That said the world is full of examples of such conflicts. The Baseline Scenario provides a wonderful example using football. Specifically, the fact that football teams punt much more than they should. Probably the best explanation of this is that the coaches do not want to be criticized for "going for it" even if "going for it" is better for the team.

Football, Statistics, and Agency Problems « The Baseline Scenario:
"The conclusion (PDF p. 14) is that over most of the field you should go for it if you have four or fewer yards to go; there is a big spike around the opponent’s 33-yard line where you should go for it even on fourth and nine, because the net field position benefit of punting is low and the expected point value of attempting a field goal is low.

The implication, of course, is that football teams don’t maximize. Romer concedes that making the right decision on fourth down would lead to about one more win every three years, and this is probably outweighed by the asymmetric returns: you are more likely to be penalized (as a coach) if you go against convention and are wrong than if you follow convention, since the fans (and the owners) are more likely to notice departures from convention. So the incentives of football coaches are not simply to maximize points, but also to maintain their reputations."

Forbes: Bills lead league in value increase : Sports : The Buffalo News

Forbes: Bills lead league in value increase : Sports : The Buffalo News:
"Forbes magazine has released its annual rankings of NFL franchises and their worth. The Bills are valued at $909 million, 26th in the league overall. They were 27th last season.

Buffalo is one of four teams, with New England, Tampa Bay, San Diego, whose value is up 3 percent from 2008....

The Dallas Cowboys are worth $1.65 billion, the most of any U.S.-based sports franchise, according to Forbes. Only Manchester United of the English Premier League is worth more worldwide, $1.87 billion."

Thursday, September 03, 2009

SSRN-Capital Structure Decisions Around the World: Which Factors are Reliably Important? by Özde Öztekin

SSRN-Capital Structure Decisions Around the World: Which Factors are Reliably Important? by Özde Öztekin:
"The most reliable determinants are past leverage, tangibility, firm size, research and development, depreciation expenses, industry median leverage, and liquidity. The signs of the reliable determinants give consistent support to the dynamic trade off theory."

This one will definitely be required reading for my Advanced Corporate class when we get to the Capital Structure part of the course!

SSRN-CFOs and CEOs: Who Have the Most Influence on Earnings Management? by John (Xuefeng) Jiang, Kathy Petroni, Isabel Wang

SSRN-CFOs and CEOs: Who Have the Most Influence on Earnings Management? by John (Xuefeng) Jiang, Kathy Petroni, Isabel Wang:
"Because CFOs’ primary responsibility is financial reporting, CFO incentives should play a stronger role than those of the CEO. We find that the magnitude of accruals and the likelihood of beating analyst forecasts are more sensitive to CFO equity incentives than to those of the CEO. Our evidence supports the SEC’s new disclosure requirement on CFO compensation."

Given our text begins with a description of the roles of each of the executives at the firm, this is PERFECTLY timed.

HT to WayneMarr.

Tweets of the week

Have not done this in a while, but since class just started I figured I would point out some really cool tweets of note. Not very diversified today, but ran out of time and the transaction costs of diversification were too high.

From Wayne Marr
  1. [Harvard HBS, BA680] How Marvel Went from Bankruptcy to $4B Buyout
  2. [SSRN] CFOs and CEOs: Who have the most Influence on earnings management?
  3. [SSRN] Which leverage factors are consistently important for capital structure decisions of firms around the world
  4. Urban Institute suggest the stock market collapse will have small effects on most Americans' retirement incomes
  5. RT @setandgoprods: STATS: Young People Are Flocking to Twitter GOOD!
  6. [bePress] Bob Schiller -People just don't seem to understand how little housing should and will appreciate long term
  7. [Harvard, HBS] The key to effectiveness? FOCUS
  8. [CIRANO] Study finds that option-implied volatility and skewness are also good predictors of future realized beta
  9. [St. Louis FED] Can the term spread predict changes in economic activity?
  10. [Simon Johnson, MIT] The nature of modern finance [Simon teaches finance courses at MIT!]
  11. [Harvard, SSRN] Competition between FASB and the IASB is better than a converging of FASB & IASB.
  12. [NBER, SSRN] Paper's two-factor model is as successful empirically as the three-factor Fama-French model.
  13. [SSRN] Analysts do not efficiently incorporate information into their forecasts and stock valuations
  14. [SSRN] Credible hedging commitments reduce the agency costs of debt
  15. [Greg Mankiw, Harvard] Harvard freshman seminar this semester reading list
  16. [WSJ] Big firms quick to collect, slow to pay [Basic Finance if you can do it!]
  17. [Felix Salmon] The efficient markets hypothesis in fund fees - [easy read]
  18. [The Economist, BA325] EXCELLENT & USEFUL Big Mac index, guide to valuing currencies
  19. [SSRN] Compensation paid to audit committees is positively correlated with audit fees and SOX
  20. [Jeffrey Sachs, Columbia] The financial crisis one year after
  21. [Fama/French - Chicago] How Unusual Was the Stock Market of 2008? [EXCELLENT PAPER, EXCELLENT GRAPHS]
  22. [SSRN] Can auditors can effectively use non-financial measures to help detect financial statement fraud

  1. Is the S.E.C. More or Less Scary Today?: Let's say you are currently running your own shady investment scheme. P..
  2. Biblical Property Rights: Deuteronomy 23:25-26 reflects the limits on altruism: When thou comest into thy ne..
  3. The Strangely Powerful Placebo: It's got the pharmaceutical industry worried enough to fund a major study to ide..

Simoleon Sense
  1. Media Multitaskers Pay Mental Price: Tagline: Attention, multitaskers (if you can pay attention, that is): Your ..
  2. Individual rationality can mean collective irrationality & An Institutional Theory of Momentum and Reversal: I l..
  3. Countries and Culture in Behavioral Finance: How cultural differences influence investor behavior. Click Here To..
  4. Are You Smarter than a CFA’er?: Is this a light way of saying CFA’s match markets better than MBAs (insert..
  5. BBC Documentary: The History Of Gold: The perfect documentary for a relaxing weekend. Enjoy! (Big Hat Tip to Edw..
  1. New on Harvard’s Corporate Governance Forum: Shareholder Activism, Say on Pay and Executive Compensation,
  2. New on Harvard’s Corporate Governance Forum: Treasury Inc.: How the Bailout Reshapes Corporate Theory & Practice,

well time is up...sorry...

Wednesday, September 02, 2009

We're All Predictably Irrational - Dan Ariely

YouTube - We're All Predictably Irrational - Dan Ariely:
"Dan Ariely, a professor of behavioral economics at Duke University, presents examples of cognitive illusions that help illustrate why humans make predictably irrational decisions."

Just used this in class. It is excellent!

Tuesday, September 01, 2009

How to Lose $3 Million in Six Years - Yahoo! Buzz

The Buzz Log - How to Lose $3 Million in Six Years - Yahoo! Buzz:
"Callie Rogers was just 16 when she won a whopping $3 million in the lottery. Six years later, she reports that she blew untold sums on drugs, partying, exotic cars, and breast implants. A staggering $730,000 went to designer clothes alone, Ms. Rogers explains in an article from AOL. Says Rogers: 'I honestly wish I'd never won the lottery money — and knowing what I know now I should have just given it all back to them.' She's currently left with around $32,000.

In these trying economic times, Ms. Rogers will likely find little sympathy. Still, it's worth noting that she's hardly the first big winner who wished she'd never bought a ticket."

Not exactly what Jensen was talking about when he coined free cash flow problem, but an extreme case of it.

Greg Mankiw's Blog: An Impossible Task

I am embarrassed that I have read so few of them! I guess I know what I better do this year!

Greg Mankiw's Blog: An Impossible Task:
"For those blog readers who might be interested in what the seminar will be reading, here is the list of books:

* The Worldly Philosophers, by Robert Heilbroner
* Spin-Free Economics, by Nariman Behravesh
* Capitalism and Freedom, by Milton Friedman
* Equality and Efficiency: The Big Tradeoff, by Arthur Okun
* Nudge, by Richard Thaler and Cass Sunstein
* The Return of Depression Economics, by Paul Krugman
* Animal Spirits, by George Akerlof and Robert Shiller
* The Myth of the Rational Voter, by Bryan Caplan
* Economic Gangsters, by Raymond Fisman and Edward Miguel
* The Price of Everything, by Russell Roberts"

Greg Mankiw's Blog: An Impossible Task

I am embarrassed that I have read so few of them! I guess I know what I better do this year!

Greg Mankiw's Blog: An Impossible Task:
"For those blog readers who might be interested in what the seminar will be reading, here is the list of books:

* The Worldly Philosophers, by Robert Heilbroner
* Spin-Free Economics, by Nariman Behravesh
* Capitalism and Freedom, by Milton Friedman
* Equality and Efficiency: The Big Tradeoff, by Arthur Okun
* Nudge, by Richard Thaler and Cass Sunstein
* The Return of Depression Economics, by Paul Krugman
* Animal Spirits, by George Akerlof and Robert Shiller
* The Myth of the Rational Voter, by Bryan Caplan
* Economic Gangsters, by Raymond Fisman and Edward Miguel
* The Price of Everything, by Russell Roberts"