Wednesday, August 24, 2011

TMQ says money motivates losing on the cheap instead of paying up for wins - ESPN

TMQ says money motivates losing on the cheap instead of paying up for wins - ESPN:

Similar to the Pirates etc in baseball. Incentives matter and both the Bills and Pirates have lost for a very long time and claimed it was for "small-market" reasons. Some of it may be, but it can also be because it is more profitable (at least from a risk and return perspective. (Winning big costs money and comes with a greater risk.)


From Gregg Easterbrook (Tuesday Morning Quarterback is BY far my favorite football read)

"Each NFL team gets exactly the same national TV payment whether it's winning big on "Monday Night Football" or losing badly and never aired nationally. Ticket sales can vary and generally are where the profit resides. But the revenue swing between packing the house and having a poor gate just isn't that great.

Most teams go into the season knowing they will sell about 90 percent of their seats no matter how they perform; a few know every seat will sell regardless of performance. In 2010, even given a slack economy, the league average was 94 percent of seats sold, and every team except Oakland and City of Tampa sold at least 80 percent of its home seats. Winning can help sell tickets, but even a clunker season will fill most of the house."


Thursday, August 18, 2011

Nouriel 'Dr. Doom' Roubini: ‘Karl Marx Was Right’ - International Business Times

Interesting even if you do not agree with the view.

Nouriel 'Dr. Doom' Roubini: ‘Karl Marx Was Right’ - International Business Times:

"Karl Marx had it right," Roubini said in an interview with wsj.com. "At some point capitalism can self-destroy itself. That's because you can not keep on shifting income from labor to capital without not having an excess capacity and a lack of aggregate demand. We thought that markets work. They are not working. What's individually rational...is a self-destructive process.

Roubini added absent organic, strong GDP growth -- which can increase wages and consumer spending -- what's needed is large fiscal stimulus, agreeing with another high-profile economist, Nobel Prize-winner Paul Krugman, that, in the case of the United States, the $786 billion fiscal stimulus approved by Congress in 2009 was too small to create the aggregate demand necessary to advance the U.S. economic recovery to a self-sustaining expansion."



I have to imagine virtually every macro class in the world will have some variant of this on their tests this year.

Wednesday, August 17, 2011

How Does Financial News Impact Your Brain? : NPR

How Does Financial News Impact Your Brain? : NPR:

NPR talks with Northwestern FinanceProfessor Camelia Kuhnen:

"GLINTON: OK. You're going to have tell me what neurofinance or neuroeconomics is.

KUHNEN: What we're trying to do in this area is to use knowledge from neuroscience and psychology to understand how people think about financial risk and reward, how they think about forming their portfolios and how they make economic choices in general.

GLINTON: Kuhnen says when we hear bad financial news, we become more risk averse. For instance, if the stock market is tanking, we're more likely to buy bonds than stocks, even if that's the wrong thing to do. The way we hear the news affects us also."


You can listen to it here.

Friday, August 05, 2011

First downgrade of U.S. credit rating - The Washington Post

UPDATE:  Shortly after the original post, the downgrade did in fact happen...

From The Guardian:

"S&P had held back cutting the rating earlier in the day, after the US government reportedly questioned its maths. But the agency insisted it was cutting America's top AAA rating by one notch to AA-plus, saying the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilise its debt situation. 
This is the first time that S&P has issued a "negative" outlook on the US government since it began rating the credit-worthiness of railroad bonds in 1860. 
The dramatic reversal of fortune for the world's largest economy means that US treasuries, once seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany or France."
Editorial:

Upon some reflection, I do believe (or at least hope) that this is a good thing in the long run.  In class we harp that the market is a harsh disciplinarian and it will force managers to think long term even when they themselves have a short term horizon.  We teach that bondholders may help to monitor firms with free cash flow problems.

This is not that different.  Politicians have a short term horizon. And in the absence of shareholders, bondholder really are in the best position to monitor politicians.  (Some may argue that the regular elections serve as the most effective monitoring tools, I disagree.  Incentive problems and conflicts of interest are too strong here:  how often will people vote against money/goods/services going to themselves?)

So it is my hope, that a century from now, history books will look to this day and say, that was the start of the US getting its fiscal house in order.  The choices over the next decades will not be easy, but without some market discipline, I fear the necessary decisions would never be made.


Original post:

S&P considering first downgrade of U.S. credit rating - The Washington Post:
".....S&P officials advised the Treasury that it had decided to lower the AAA credit rating, which the U.S. government has held for 70 years.

.....
Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.

Some analysts are worried about the impact of a downgrade on markets where Treasurys are held as collateral and the AAA rating is required."


Sort of surprised it came now, but not at all surprised it happened. Most speculation was that it would happen this fall.

Kraft Foods, in Split, Is Keeping Oreos but Not Velveeta - NYTimes.com

Kraft Foods, in Split, Is Keeping Oreos but Not Velveeta - NYTimes.com:
"The food giant said on Thursday that it planned to split into two businesses. Kraft will spin off its North American grocery business — home to familiar brands like Velveeta, Kraft macaroni & cheese and Oscar Mayer meats — to its shareholders. It will hold onto its global snacks business, with brands like Oreos, Cadbury and Trident.

By cleaving itself in two, the company is essentially letting shareholders choose between the fast-growing snacks business or the grocery business, which generates a lot of cash and enjoys strong profit margins despite its lower growth."


Well we now have the best example of a spin-off I have seen in several years and even the "why". Will definitely be discussed in the coming Corporate Finance classes.

Thursday, August 04, 2011

Money Therapy # 4: The Science of Money Behaviors with Dr. Victor Ricciardi | pwrnradio.com

Money Therapy # 4: The Science of Money Behaviors with Dr. Victor Ricciardi | pwrnradio.com:

When it comes to behavioral finance, few are better than Victor Ricciardi, indeed I wish the interviewer would just let him talk more.

"Deborah Price interviews Dr. Victor Riccardi, Behavioral Finance Expert from Goucher College in Baltimore, Maryland."


Hint to Students: Good primer for my behavioral class...

Wednesday, August 03, 2011

Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms by Makoto Nakano, Pascal Nguyen :: SSRN

Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms by Makoto Nakano, Pascal Nguyen :: SSRN:

Are older board members good or bad? The answer seems to be "Yes".


Whether it is good OR bad ...it depends on what you want the board to do. If you want conservatism, then older board members appear to be better. However, if you want to risk taking leadership, you probably want a younger board.

From the abstract:
"After controlling for endogeneity using firm size as instrument, the effect of board age is found to be more significant....we show that the performance of younger and high-growth firms is more sensitive to board age, which points to a risk-based explanation. Indeed, it appears that older boards are more reluctant to take risks and particularly to undertake acquisitions. Overall, the results underline the disadvantage of (re)appointing older managers since the latter tend to be more conservative, perhaps because of their shorter decision horizons or greater vested interests."

and from the paper:

"... we further show that the impact of board age does not depend on the firm’s size or affiliation to a business group, but is stronger among younger and high-growth firms, and among firms using more intangible assets. These results point out that some firms may require different types of managers because of their different characteristics. More precisely, it appears that the greater determination and ability to take risk typical of younger managers make them more fit to operate in high-growth or rapidly-changing environments (Child, 1974; Wiersema and Bantel, 1992). 
.....Our cross-sectional regressions show that firms with older boards exhibit a significantly lower variability in their operating profits, market values and stock returns. They are also less likely to undertake acquisitions, which are considered to be risky investments. This result is consistent with May (1995) who notes that managers with more capital vested are more likely to diversify in order to reduce their firm’s idiosyncratic risk. In the case of Japan, age can be a good proxy for a manager’s vested capital due to the enduring practice of lifetime employment and deferred compensation (Ono, 2010). This negative influence on risk-taking may explain why older boards are associated with lower profitability and firm value." 

 I guess not unsurprising, but interesting none-the-less.


Cite:
  Nakano, Makoto and Nguyen, Pascal, Do Older Boards Affect Firm Performance? An Empirical Analysis Based on Japanese Firms (July 5, 2011). Available at SSRN: http://ssrn.com/abstract=1879250


Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry by Wei Du, Maya Waisman, Haizhi Wang, Mingming Zhou :: SSRN

Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry by Wei Du, Maya Waisman, Haizhi Wang, Mingming Zhou :: SSRN:

Du, Waisman, Wang, and Zhou provide an interesting look at a topic that frankly I never considered: whether post employment non compete contracts in financial service firms are priced by market participants and whether the enforcement of these contracts is good for bondholders.



From the abstract:

"...this study examines whether and to what extent the capital markets recognize the risk associated with the mobility of human capital. We evaluate the state-by-state variations in the enforceability of noncompetition agreements in the United States to test the market-discipline hypothesis and find a significant negative relation between the degree of enforcement of noncompetition agreements and the yield spreads for bonds issued by financial institutions. We also find that the negative relation is more prominent for investment-grade bonds and bonds with long-term maturities. In addition, we find that investors care more about managerial stability when bond issuers have weak protection of shareholder rights."

From the paper:

"Noncompetition agreements can function as strong binding mechanisms that significantly increase managerial stability and reduce the mobility of human capital (Garmaise 2010). The legal enforcement of covenants not to compete varies widely across jurisdictions in the United States. For example, a majority of states allow and enforce noncompetition agreements as long as they are ―reasonable and necessary,‖ though California virtually forbids such covenants. This variation in legal enforcement provides a natural setting to apply the insights of the law and finance literature (La Porta et al. 1997, 1998). 
This paper examines whether bondholders demand different yield spreads if the legal enforcement of noncompetition agreements affects the mobility of human capital. Following existing research (Morgan and Stiroh 2001), we collect data on new bond issues from financial institutions and document that the statewide enforcement level is negatively correlated with bond spreads, which means that investors do recognize the risk associated with the mobility of human capitals and price the risk accordingly. We also find that bonds investors care more about the managerial stability of financial institutions having weak protection of shareholder rights. "


Interesting.

Cite:

Du, Wei, Waisman, Maya, Wang, Haizhi and Zhou, Mingming, Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry (June 18, 2011). Available at SSRN: http://ssrn.com/abstract=1885752

Tuesday, August 02, 2011

How to use the Fama French Model | Empirical Finance Blog

WOW. Simply the best CAPM and Fama French discussion I may have ever seen. Will DEFINITELY be used in several of my classes this coming year....


How to use the Fama French Model | Empirical Finance Blog:

Super short version:

Even though CAMP does not work, many (most still use it) with some bad results. Why? One reason may be that few people understand other models. Thus Wes Gray (the mastermind behind the Empirical Finance Blog) goes on to explain the Fama French model, link to Sharpe's page for data, and then gives spreadsheet examples of how to use it. Simply great job!

A few look in's:

"The CAPM is prolific, but doesn’t appear to work"

and then after showing it does not work

"Given such a poor track record, is anyone still using the CAPM?

Lot’s of people, apparently…

Welch (2008) finds that ~75% of professors recommend the use of the model when estimating the cost of capital, and Graham and Harvey (2001) find that ~74% of CFOs use the CAPM in their work."


and finally:

"The key lesson is that one shouldn’t be asking whether or not their active manager can outperform the market, rather, they should be asking, given my active manager’s exposures to the market, size, and value, can he beat alternative products in the marketplace that charge ‘index’ fees and not ‘active’ fees."

GREAT job Wes!


HT to MoneyScience

SEC builds new tips machine to catch the next Madoff | Reuters

Exclusive: SEC builds new tips machine to catch the next Madoff | Reuters: "The TCR Database is the SEC's most significant response to its well-documented fumbling of early tips about Madoff's $65 billion fraud. The SEC's new Office of Market Intelligence, which last summer also forged a first-of-its kind partnership with the Federal Bureau of Investigation, is using the database as a key tool.

The changes are part of an effort by SEC Chairman Mary Schapiro to overcome the agency's reputation for being a step or two behind the bad guys. It is far too soon for the SEC to declare victory. But some of the agency's harshest critics notice a change.

Among them is Harry Markopolos"







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Monday, August 01, 2011

A lottery game with a windfall for a knowing few - The Boston Globe

A lottery game with a windfall for a knowing few - The Boston Globe:


WOW....and the state leaves is open?

"Massachusetts State Lottery: For a few days about every three months, Cash WinFall may be the most reliably lucrative lottery game in the country. Because of a quirk in the rules, when the jackpot reaches roughly $2 million and no one wins, payoffs for smaller prizes swell dramatically, which statisticians say practically assures a profit to anyone who buys at least $100,000 worth of tickets."

Selbee bought $307,000 worth of $2 tickets for a relatively obscure game called Cash WinFall.....the Selbees, who run a gambling company called GS Investment Strategies, know a secret about the Massachusetts State Lottery: For a few days about every three months, Cash WinFall may be the most reliably lucrative lottery game in the country. Because of a quirk in the rules, when the jackpot reaches roughly $2 million and no one wins, payoffs for smaller prizes swell dramatically, which statisticians say practically assures a profit to anyone who buys at least $100,000 worth of tickets.
During these brief periods - “rolldown weeks’’ in gambling parlance - a tiny group of savvy bettors, among them highly trained computer scientists from MIT and Northeastern University, virtually take over the game. Just three groups, including the Selbees, claimed 1,105 of the 1,605 winning Cash WinFall tickets statewide after the rolldown week in May, according to lottery records. They also appear to have purchased about half the tickets, based on reports from the stores that the top gamblers frequent most."

UPDATE 8/3/2011: the state of Massachusetts partially shut down the "loophole"by limiting the number of tickets played at any one time:
From NPR.