Strategies - Recent Errors Aside, Insiders Remain Reliable Indicators - NYTimes.com

Strategies - Recent Errors Aside, Insiders Remain Reliable Indicators - NYTimes.com:

"Professor Seyhun said that insiders were not infallible, and that their recent failures were hardly their first misreading of the market’s direction.

But since 1975, the earliest year he has studied, insiders have been correct far more often than they’ve been wrong....For the most recent 10-year period in his sample, through 2008, the comparable 50-day advantage for the insiders was 3.3 percentage points."

Some CEOs Are Selling Their Companies Short - BusinessWeek

Some CEOs Are Selling Their Companies Short - BusinessWeek:

"'There is no question these transactions should be a red flag for investors,' says Carr Bettis, the co-founder of forensic accounting firm Gradient Analytics and co-author of a recent study on hedging. 'The evidence is pretty compelling that hedges tend to be used before bad news hits the market.' Bettis' research found that in the year after executives and directors had engaged in hedging, their company's stock often dropped markedly. He also found evidence of an increase in financial restatements and shareholder lawsuits during the same period. Executives at MCI, Enron, ImClone (IMCL), Krispy Kreme—companies that suffered some of the great stock melt-downs of the last decade—hedged their shares."

How Hedges Work - BusinessWeek

How Hedges Work - BusinessWeek:

"Executives who own big chunks of their company's stock often hedge their holdings to diversify and limit risk if the stock tumbles. Critics worry such transactions weaken the incentives created by equity compensation. They also warn that executives may use privileged information to hedge their shares ahead of bad news"

U.S. airlines more cautious on '10 fuel hedges | Reuters

U.S. airlines more cautious on '10 fuel hedges | Reuters: "

Top U.S. airlines are taking a more cautious, though varied, approach to fuel hedging this year, after incurring blistering losses from hedges in 2008 when oil prices spiked then tumbled."

And then in what has been a test question, the article answers how can they hedge the downside, while benefiting if jet fuel prices fall:

" Buying some straight call options in our portfolio allows us to participate in the upside opportunity should prices fall," Mikells said."

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

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

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

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

Lawmakers Find S.E.C.’s Short-Sale Rule Lacking - DealBook Blog - NYTimes.com

Lawmakers Find S.E.C.’s Short-Sale Rule Lacking - DealBook Blog - NYTimes.com:

"The original “uptick rule” was put in place during the Depression in the 1930s to prevent stocks on a downswing from being hammered into the ground by short-sellers. It barred traders from selling short, or betting that a stock would fall, unless there was an uptick in the price. The rule was abolished in 2007 by the S.E.C. after it concluded that advances in trading strategies rendered the old uptick rule ineffective."

The article goes on to remind us that the SEC banned short selling on many stocks during the 2008 bear market, but forgot to mention that majority of studies showed that the ban was unsuccesful.

It goes on:

"The S.E.C. ruled Wednesday to reinstate the uptick rule, but only on individual stocks that experience a one-day 10 percent decline in value. It would stay in effect for the following day, but will be lifted the day after"

One interesting point (worthy of class discussion) dealt with the rule's failure to strengthen Naked short selling regulations:

"...has some support is on beefing up the rules to prevent so-called naked shorting. That is when a trader shorts a stock without actually borrowing the shares. While the practice was banned for the most part by the S.E.C. last year, enforcement of the ban remains subject to arbitrary “reasonable belief standards,” which critics say are difficult to prove."

Bloomberg on likelihood of sovereign debt defaults

Bloomberg.com:

"Ballooning public debt is likely to force several countries to default and the U.S. to slash spending, according to Harvard University Professor Kenneth Rogoff , who in 2008 predicted the failure of big U.S. banks. "

and later

"Greece’s debt totaled 298.5 billion euros ($407 billion) at the end of 2009, according to the Finance Ministry. That’s more than five times more than Russia owed when it defaulted in 1998 and Argentina when it missed payments in 2001.

The cost of protecting Greek sovereign debt from default surged in January, then declined this month as concern eased over the country’s creditworthiness. Credit-default swaps on Greek sovereign debt have fallen to 356 basis points from 428 last month, according to CMA DataVision. That’s up from 171 at the start of December."

Bloomberg on likelihood of sovereign debt defaults

Bloomberg.com:

"Ballooning public debt is likely to force several countries to default and the U.S. to slash spending, according to Harvard University Professor Kenneth Rogoff , who in 2008 predicted the failure of big U.S. banks. "

and later

"Greece’s debt totaled 298.5 billion euros ($407 billion) at the end of 2009, according to the Finance Ministry. That’s more than five times more than Russia owed when it defaulted in 1998 and Argentina when it missed payments in 2001.

The cost of protecting Greek sovereign debt from default surged in January, then declined this month as concern eased over the country’s creditworthiness. Credit-default swaps on Greek sovereign debt have fallen to 356 basis points from 428 last month, according to CMA DataVision. That’s up from 171 at the start of December."

MinnPost - Get me to the church (and the oxytocin experiment?) on time

MinnPost - Get me to the church (and the oxytocin experiment?) on time:

"Zak has also recently reported that oxytocin levels tend to rise in people while they’re watching sad video clips. Those who expressed the most intense emotional responses to the clips displayed the highest spikes in the hormone.

Other research has suggested that oxytocin may incite the darker emotions of envy and Schadenfreude (gloating). And animal studies have shown that the hormone is related to higher levels of aggression. It may be, researchers now speculate, that oxytocin makes people more sensitive to all social cues, good or bad."

Businesses, banks hoarding cash | Richmond Times-Dispatch

Businesses, banks hoarding cash | Richmond Times-Dispatch:

"'Cash accumulation by major U.S. corporations is at an all-time high since the 1960s,' said Kenneth N. Daniels, a finance professor at Virginia Commonwealth University. 'Firms are hoarding cash, banks are also not lending . . . and the economy will not rebound at the pace or the magnitude to significantly change the unemployment rate over the next 18 months.'

The recession, Daniels said, changed the way many corporate executives feel about managing their cash -- they want to hang on to it."

Getting a grip on emotions - The Globe and Mail

Getting a grip on emotions - The Globe and Mail:

"Here's a tip someone passed along during the financial crisis: If you find that emotions are taking over your investing decisions, deliberately enter the wrong password three times on your online brokerage account. That will block your access, and you'll only go to the trouble of unlocking your account if you're really, really sure you want to buy or sell something."

Sounds like a prescription right out of Nudge!

The stock market barometer: a study ... - Google Books

The stock market barometer: a study ... - Google Books from 1920 byWilliam Peter Hamilton, Charles Henry Dow


While it is from 90 years ago, we will be using it in class today!

Everywhere You Go, Walgreen! - Forbes.com

Everywhere You Go, Walgreen! - Forbes.com:

"Walgreen looks to expand its footprint in the New York City market.

The Deerfield, Ill.-based drugstore operator said it will acquire Duane Reade in a deal worth $1.1 billion that includes the assumption of $457 million in debt. Walgreen plans to pay cash for the acquisition, which will add to its portfolio of 7,100 locations across the country."

For class: note a horizontal merger. Firm paid cash. Walgreen was up on the news.

Bank Reform May Have $220 Bln Capital Hit - NYTimes.com

First the news:

Bank Reform May Have $220 Bln Capital Hit - NYTimes.com:

"Top banks will need an extra $221 billion (139.6 billion pounds) of capital and see annual profits slump by $110 billion if all proposed regulations to reform the industry are brought in, leading analysts said on Wednesday.

If all the initiatives from regulators are implemented it would cut the average return on equity to 5.4 percent from 13.3 percent next year, hurt economic growth and raise costs for bank services, JPMorgan analysts warned"

Now that said, I owuld have to imagine the bank analysts might be a tad biased in this one.

We are all biased and more from Michael Mauboussin

Great stuff on behavioral finance and need for contrarian investment from the PBS transcript of their Nightly Business interview with Mauboussin

"And there is one bias that all of us share, whether your smart or not as smart and that is a tendency to extrapolate. So what we -- if we've seen good results, we think they're going to go on forever. If we've seen something bad, we think it's going to go on forever. And that leads to what I think is the biggest mistake in investing, which is failure to distinguish between fundamentals and expectations. Fundamentals, basically how the company is going to perform in terms of sales and profits and expectations is what's embedded in the stock price."

Ht to Farnman Street.

YouTube - Hugh Hendry and Nassim Taleb February 2010

YouTube - Hugh Hendry and Nassim Taleb February 2010:

"Hugh Hendry' 'Nassim Taleb' Hendry Taleb inflation deflation hyperinflation euro USD dollar forex economy bubble"

Thanks to Michael S for the tip on this!

FT.com / UK - Deloitte chief reignites debate over accounting for banks' losses

An accounting article from the Financial Times that is really interesting (yeah I didn't know such animal existed either).

FT.com / UK - Deloitte chief reignites debate over accounting for banks' losses:

"Politicians and regulators have blamed the current system of 'incurred losses' - whereby companies may make provision for loan losses only as they occur - for exacerbating the crisis, by encouraging a cyclical approach to risk management.

But that view is questioned by many accountants and bankers who say that 'incurred losses' give investors clarity. Accountants and bankers are also are sceptical about the 'expected loss' model, as they fear it raises the risk of 'cookie jar' accounting, whereby executives put funds aside during good years only to release them later to cover up bad performance.

Mr Quigley said he believed that 'one way we can bridge some of the current conflicts in financial reporting is with transparency'. 'The two-line idea accomplishes that transparency objective,' he told the FT. However, PwC, has said it is opposed to putting two lines in the income statement."

SSRN-The Behavior of Hedge Funds During Liquidity Crises by Itzhak Ben-David, Francesco Franzoni, Rabih Moussawi

SSRN-The Behavior of Hedge Funds During Liquidity Crises by Itzhak Ben-David, Francesco Franzoni, Rabih Moussawi:

From teh Abstract:

"On average at the time of a crisis, hedge funds reduce their equity holdings by 9% to 11% per quarter (around 0.3% of total market capitalization). This effect results from large selling by up to a quarter of hedge funds and is not offset by other hedge funds expanding their positions. Dramatic sell-offs took place in the 2008 crisis: hedge funds sold about 30% of their stock holdings and almost every fourth hedge fund sold more than 40% of its equity portfolio. We identify two main drivers of this behavior. First, we impute about half of the variation in equity sell-offs to a response to lender and investor funding withdrawals. Second, it appears that hedge funds mobilize capital to other (potentially less liquid) markets in the pursuit of more profitable investment opportunities."

SSRN-Limits to Arbitrage During the Crisis: Funding Liquidity Constraints and Covered Interest Parity by Tommaso Mancini-Griffoli, Angelo Ranaldo

SSRN-Limits to Arbitrage During the Crisis: Funding Liquidity Constraints and Covered Interest Parity by Tommaso Mancini-Griffoli, Angelo Ranaldo:

"...this paper finds that following the Lehman bankruptcy, these were large, persisted for months and involved strategies short in dollars. But few were the traders able to reap these profits. The constraint did not arise from elevated risks, but from insufficient funding liquidity in dollars."

Geithner: U.S. Bond Rating Is Safe - WSJ.com

Geithner: U.S. Bond Rating Is Safe - WSJ.com:

"Treasury Secretary Timothy Geithner said Sunday that the U.S. wasn't in danger of losing its triple-A bond rating, in the wake of a warning from Moody's Investors Services about the U.S.'s treasury-bond rating.

'Absolutely not,' Mr. Geithner said in an interview with ABC News's 'This Week' when asked about the prospect of the U.S. losing its top rating. 'That will never happen to this country.'"

Never say Never.

Does an MBA Make You a Better CEO? - The Conversation - Harvard Business Review

Does an MBA Make You a Better CEO? - The Conversation - Harvard Business Review:

"...we tried to analyze whether having an MBA influences overall CEO performance. In a large-scale study of CEO performance since they took office, we found that other things equal, MBA CEOs had a slight performance edge over their non-MBA peers. In our analysis and ranking of the performance of 2,000 CEOs around the globe, CEOs who had an MBA on average ranked 40 places higher than CEOs who didn't have an MBA (a statistically significant effect)."

Interestingly they also found some evidence that suggests a slight decline in the value of a MBA:

"One hypothesis is that having an MBA might have given an edge to CEOs getting them when it was less of a commodity, and when business education was more of a generalist, "art rather than science" course of study."

I would have to say at SBU, we still have more of a generalist program. Indeed, it was made even more so this year.

25 Years of Finance - CFO Magazine - January/February 2010 Issue - CFO.com

25 Years of Finance - CFO Magazine - January/February 2010 Issue - CFO.com:

"...the CFO role has broadened dramatically, in many companies expanding to that of a de facto chief operating officer. As the role has expanded, so too has the CFO's sphere of influence. As for the concern that finance chiefs too often play the fall guy…well, some changes take longer than others.

The CFO position, in fact, entails even more risk today, thanks to the Sarbanes-Oxley Act. Complying with that sweeping regulatory change represents just one of many seismic shifts that CFOs have had to adjust to over the past quarter century. A CFO who had a Rip Van Winkle moment in 1985 and fell asleep for 25 years would awaken today to a vastly different world, both within his own department and throughout the entire realm of business."