Wednesday, February 29, 2012

Wall Street Bonus Drop Means Trading Aspen for Discount Cereal - Bloomberg

Wall Street Bonus Drop Means Trading Aspen for Discount Cereal - Bloomberg

Everything is relative. Pay cuts at $35,000 or $350,000 a year hurt:

Bloomberg has a personal interest story on how Wall Street bonus cuts have hurt those who had expected to get more money.

"The smaller bonus checks that hit accounts across the financial-services industry this month are making it difficult to maintain the lifestyles that Wall Street workers expect, according to interviews with bankers and their accountants, therapists, advisers and headhunters.
“People who don’t have money don’t understand the stress,”"
There are several examples. I will pick this one:
"Richard Scheiner, 58, a real-estate investor and hedge-fund manager, said most people on Wall Street don’t save.
“When their means are cut, they’re stuck,” said Scheiner, whose New York-based hedge fund, Lane Gate Partners LLC, was down about 15 percent last year. “Not so much an issue for me and my wife because we’ve always saved.”
Scheiner said he spends about $500 a month to park one of his two Audis in a garage and at least $7,500 a year each for memberships at the Trump National Golf Club in Westchester and a gun club in upstate New York. A labradoodle named Zelda and a rescued bichon frise, Duke, cost $17,000 a year, including food, health care, boarding and a daily dog-walker who charges $17 each per outing, he said.
Still, he sold two motorcycles he didn’t use and called his Porsche 911 Carrera 4S Cabriolet “the Volkswagen of supercars.” He and his wife have given more than $100,000 to a nonprofit she founded that promotes employment for people with Asperger syndrome, he said."
The solution? The article mentions many who are looking for bargains, shopping on price, and in general cutting back even though they still make much more than most of us.

It should be noted, that this view is only slightly different than that espoused in a recent paper by Kamukura and Du that suggests the cuts in spending by the "rich" are a function of not needing to spend as much to impress since the "less rich" can not afford to spend when the economy is slower.
BTW my biggest piece of advice would be to spend less and remember this simple formula:

               Wealth= (What you have) / (What you want)

5 Simple Hedge Strategies for Volatile Times - Forbes

5 Simple Hedge Strategies for Volatile Times - Forbes

I am not convinced these are really "strategies", but more ideas of things you should give some attention. For example market volatility, credit risks, risk of low returns, inflation. Not so much a "how to" article, but more of a useful reminder of the various risks investors face. :

A rather long "look-in":
"Dawal encourages a portfolio that is well-diversified, well-managed and built to weather such volatility. They key is to have assets that are not correlated over an extended period of time.

He sees a diversified portfolio as one that includes cash, bonds and “equities of all ilk.....”

“We would also recommend real assets, commodities, real estate, infrastructure, perhaps timber, managed futures, private equity and traditional alternatives,” he adds....

In the not-so-distant past, these strategies were out of reach for all but the most high-net-worth investors and institutions. Now many of those hedge fund-worthy strategies have been replicated for a more mainstream audience through mutual funds and ETFs."

Could Twitter predict the stock market? | Reuters

Could Twitter predict the stock market? | Reuters

Nice article for class from Reuters:
"A basic premise of behavioral economics is that the markets aren't perfectly rational machines, but are expressions of human emotions like greed and fear. If you agree with that premise, and are looking for an immediate gauge of those human sentiments, then Twitter is one of the greatest tools ever invented....The trick is how to crunch that data effectively and make some sense of the 250 million tweets generated every day. Peterson, for example, filters the data using 1,500 different factors, culling keywords to track global moods. His is essentially a contrarian take on the markets: If the public is overly bullish, it's time to be cautious. If it is extremely gloomy, on the other hand, it might be time to snap up a bargain."

Monday, February 27, 2012

Why Do Individuals Exhibit Investment Biases? by Henrik Cronqvist, Stephan Siegel :: SSRN

Why Do Individuals Exhibit Investment Biases? by Henrik Cronqvist, Stephan Siegel :: SSRN

"We find that a long list of investment biases, e.g., the reluctance to realize losses, performance chasing, and the home bias, are "human," in the sense that we are born with them. Genetic factors explain up to 50% of the variation in these biases across individuals. We find no evidence that education is a significant moderator of genetic investment behavior. Genetic effects on investment behavior are correlated with genetic effects on behaviors in other domains (e.g., those with a genetic preference for familiar stocks also exhibit a preference for familiarity in other domains), suggesting that investment biases is only one facet of much broader genetic behaviors. Our evidence provides a biological basis for non-standard preferences that have been used in asset pricing models, and has implications for the design of public policy in the domain of investments."


Oh the essays questions I could/will write! 


Cronqvist, Henrik and Siegel, Stephan, Why Do Individuals Exhibit Investment Biases? (February 19, 2012). Available at SSRN:

Too Much Cash in the Corner Office - Businessweek

Too Much Cash in the Corner Office - Businessweek

A definite must-read for my classes!

"In 2008, the CEOs who run companies in the Standard & Poor’s 500-stock index earned, in total, less than 1 percent of what everyone who’s a 1 percenter earned. So it’s unfair to blame CEOs alone for fostering inequality. Defenders of the system cite such data to advance a larger claim. Pay for public company CEOs has risen, they say, for the same reasons it has for movie stars, real estate moguls, and private entrepreneurs: Globalization and technology has created a wider market. Even President Obama, no friend of the very rich, acknowledged in December that “over the last few decades, huge advances in technology have allowed businesses to do more with less, and made it easier for them to set up shop and hire workers anywhere in the world.” Read thoughtfully, that implies that 1 percenters are taking home more because, in an economic sense, they’re earning it."

That said, $189,000 an hour? Really? mmm...Maybe a tad extreme?

UBS hires former Bear Stearns CFO Molinaro | Reuters

UBS hires former Bear Stearns CFO Molinaro | Reuters

"UBS has hired former Bear Stearns financial chief Sam Molinaro as operating head of its investment bank effective March 1, according to a memorandum seen on Friday by Reuters."

Congratulations to St. Bonaventure Graduate Sam Molinaro:

The Dog that Did Not Bark: Insider Trading and Crashes by Jose Marin, Jacques Olivier :: SSRN

The Dog that Did Not Bark: Insider Trading and Crashes by Jose Marin, Jacques Olivier :: SSRN

Interesting. And sort of unexpected.

Marin and Olivier document

"that at the individual stock level, insiders’ sales peak many months before a large drop in the stock price, while insiders’ purchases peak only the month before a large jump.We provide a theoretical explanation for this phenomenon based on trading constraints and asymmetric information. A key feature of our theory is that rational uninformed investors may react more strongly to the absence of insider sales than to their presence (the “dog that did not bark” effect).We test our hypothesis against competing stories, such as insiders timing their trades to evade prosecution."

Saturday, February 25, 2012

Hedging Demand Halts Issuance of Credit Suisse VIX Note: Options - Bloomberg

Hedging Demand Halts Issuance of Credit Suisse VIX Note: Options - Bloomberg:

"Credit Suisse suspended the creation of new stock in the VelocityShares Daily 2x VIX Short-Term ETN on Feb. 21 after its market value more than quadrupled in 2012 to a record $694.4 million, data compiled by Bloomberg show. Shares outstanding have surged 699 percent since Dec. 30 as the S&P 500 climbed 8 percent and posted its best January gain since 1997.

Demand for products that let investors hedge has surged during a four-month rally in global stocks. The Credit Suisse note tracks a gauge linked to the Chicago Board Options Exchange Volatility Index, or VIX, which moves in the opposite direction of the S&P 500 about 80 percent of the time. The structure of the ETN known as the TVIX (TVIX) makes it harder for Credit Suisse to offset risk. "

Friday, February 10, 2012

Asset Price Bubbles: A Survey by Anna Scherbina, Bernd Schlusche :: SSRN

A bubble.Image via Wikipedia
Asset Price Bubbles: A Survey by Anna Scherbina, Bernd Schlusche :: SSRN

In class next week we will be talking about bubbles. No not this one, nor even this one, but financial bubbles. Financial bubbles have a long history going back decades. A few examples: the famous Dutch Tulip Bubble, the South Sea Bubble (1720)--BTW WATCH THIS short video on it, VERY GOOD!),the late 1920s US stock market , the Japanese bubble of late 1980s, the Internet Bubble of 1998-2000 (here is a video from that time by CNN that is very telling), and of course the most recent real estate bubble.

One of the papers we will be examining is this by Scherbina and Schlusche:

"The persistent failure of present-value models to explain asset price levels led academic research to introduce the concept of bubbles as a tool to model price deviations from present-value relations. The early literature was dominated by models in which all agents were assumed to be rational and yet a bubble could exist. In many of the more recent papers, the perfect rationality assumption was relaxed, allowing the models to shift the focus to explaining how a bubble may be initiated, under which conditions it would burst, and why arbitrage forces may fail to ensure that prices reflect fundamentals at all times. In light of the recent U.S. real estate bubble, the question of why bubbles are so prevalent is once again a matter of concern of academics and policy makers. This paper surveys the recent literature on asset price bubbles, with significant attention given to behavioral models as well as rational models with incentive problems, market frictions, and non-traditional preferences"

I should add, that these are not all agreed upon as bubbles. Some explain the high volatility merely using high levels of volatility and a real option analysis. This definitely is a source of some price run-ups, but I have a hard time convincing myself that it explains a large portion of the price changes.
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Study: Consumers Keep Up -- or Down -- with the Joneses During Recession - Duke's Fuqua School of Business

Recession            (Photo credit: Anders V)Study: Consumers Keep Up -- or Down -- with the Joneses During Recession - Duke's Fuqua School of Business:

It has long been a question as to why spending is reduced in a recession for many whose income seemingly has not fallen (or at least not enough to warrant income based cutbacks). Now we may have the answer thanks to Wagner Kamakura and Rex Du whose paper suggests that this reduction of spending is a result of those who are spending as a means of flaunting their wealth (i.e "Keeping up with the Joneses") don't need to spend as much to do so when the Joneses have been forced to cut their spending.

"Non-essential goods like jewelry, clothing and travel maintain their attractiveness regardless of the state of the economy," said Wagner Kamakura, marketing professor at Duke's Fuqua School of Business and lead author of the study. "But the positional value of non-essentials is reduced during recession.

"When households affected by recession spend less on positional goods, households not directly affected by recession -- even though their overall consumption budgets may remain constant -- can follow suit and still maintain their social status. Those households whose budgets are not significantly impacted by recession may choose to divert more money into savings.

a look-in to the paper itself which is forthcoming in the Journal of Consumer Behavior:

"' Our basic research question is: For any given level of consumption budget, how would a household’s expenditure pattern (i.e., category budget shares) differ, depending on whether the economy is in recession or not? Standard economic models would suggest that for the same amount of total expenditures, category budget shares would remain unchanged. A key assumption of these standard models is that the utilities a household derives from various commodities at different levels of expenditure are independent of economic conditions. For example, consumers should enjoy jewelry in a recession as much as they do in normal economic this study, we depart from the standard economic assumption, arguing that the utilities a household derives from various commodities could vary systematically, depending on whether the economy is in recession or not. We postulate that people care about their relative position in a society when it comes to expenditures in certain categories. In a recession, their desire to spend in these “positional” categories will decrease, because there is no longer a need to spend as much to maintain the same social standing when others have reduced their expenditures."

Wow, I wish I had thought of that!

That said, I would also suggest that at least some of the reduced spending may be explained, not so much by a drop in income, but by an increase in the variance of the income ("I have a job not, but my future now looks more uncertain so I better not spend so much.")
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Thursday, February 09, 2012

Jurf--Journal of Undergraduate Research in Finance

The deadline for submissions is May 31, 2012.
The Mark J. Bertus Prize, sponsored by CFA Institute, will be awarded for the best paper in the JURF. Authors of the top three articles will be invited to present their research at the Financial Management Association meeting in Atlanta in October 2012. A panel of judges will select the winner who will also receive $1,000. Each runner-up will receive $250.

All articles are subject to blind review by faculty. Recognizing that the typical ”revise and resubmit” model of most academic journals is not optimal given the time constraints of undergraduates the JURF will follow a no revisions policy. Authors will receive a yes or no along with a full referee report that may recommend extensions or suggestions for future research. Simple cosmetic changes may be required prior to publication.

To maintain a focus on contributions made by undergraduates, faculty involvement is limited to the guidance typically given during the writing of a senior thesis. Initial submissions must be made while the author is an undergraduate student. Authors may be full-time or part- time. No co-authored papers will be accepted.

Diamond Foods Debacle May Crack Open a MAC -

Blue Diamond Almonds (Garden Herb)       (Photo credit: iateapie)Ok, I learned something. A MAC is more than just a computer...a Material Adverse Change.

Diamond Foods Debacle May Crack Open a MAC -

"A rare event occurred late on Wednesday in the deal world.

Diamond Foods, the seller of Emerald snack nuts, announced it would restate its financial results for two years. It also placed its chief executive, Michael J. Mendes, and its chief financial officer, Steven M. Neil, on administrative leave.

Throwing out executives is anything but rare these days, to be sure. But Diamond had previously agreed to acquire the Pringles brand from Proctor & Gamble. So its restatement and executive changes likely constitute a real-life material adverse change, or MAC, giving P.&G. the right to terminate the acquisition, something P.&G. is now likely to do."

BTW this would make a great case for a class discussion. Just saying ;)

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Wednesday, February 08, 2012

Simple options thrive in risky world - SuperDerivatives | Reuters

Simple options thrive in risky world - SuperDerivatives | Reuters:

"What we see is that people are pricing fairly simple structured products, fairly commoditised products. It's not what we saw five or six years ago when every month banks were inventing a new product."

The pace of growth in the equity derivatives market has slumped from the 33 percent seen in 2007 - before the 2008 collapse of Lehman - to 9 percent in 2011, according to data from the World Federation of Exchanges. Within that, stock index options are the most popular category and are enjoying the strongest growth.

Jobless Decline Masks Drop in U.S. Labor Force - Bloomberg

Jobless Decline Masks Drop in U.S. Labor Force - Bloomberg:

"The jump in the count of those not in the labor force caused the participation rate to drop to 63.7 percent last month, the lowest since May 1983. About 88 million Americans aged 16 years or older didn’t have a job and weren’t trying to find one, the new data showed.

The unemployment rate, which only counts people who say they are actively looking for work, would be higher if some of those sought employment."

Tuesday, February 07, 2012

Funny stuff--academic "weasel words"

If you have ever been to a finance conference or read many academic finance articles, you will get a laugh out of this picture from Barry Ritholz........H/t to MoneyScience.

Professor Is Wary of 'Exciting' Investments and Suggests Mutual Funds to Buy -

Professor Is Wary of 'Exciting' Investments and Suggests Mutual Funds to Buy -

A very good article and interview with FinanceProfessor David Snowball who runs MutualFundObserver.

Two look-ins:
"There's a concept called the loser's game, and in the loser's game the winner is the person who makes the fewest mistakes.

If you ever go and play tennis with one of your neighbors, in all likelihood you are both pretty bad. The person who wins these matches isn't the person with the greater skills but the person who does the smaller number of stupid things.

The same is true when you are your own small investor: You are your biggest enemy. You are going to have the opportunity to hurt yourself badly. You need to minimize the size and impact of the mistakes that you will inevitably make."

"WSJ: How should ordinary investors pick funds?

Mr. Snowball: Investors like stories. But for most people, the best thing they can do is to find a boring investment. Find something that does not excite them at all. A balanced fund or a life-cycle fund that is offered with reasonable expenses and a good management team. They are so dull they are not even fun to write about, but year after year they produce what they promise."
So go bore yourself! Your portfolio will most likely be glad you did!

BTW if you are interested in Mutual Funds, I recommend reading this by John Bogle.

Monday, February 06, 2012

Just How Efficient Is The Market? - Seeking Alpha

Just How Efficient Is The Market? - Seeking Alpha:

The debate on whether Markets are efficient or not is seemingly never ending and in the end a debate no longer of absolutes ("it is" or "it is not") but one of degree ("not perfect but good" vs "not even close").

Seeking Alpha's Stockopedia lays out the case for the latter (Markets are not even close to efficient) but first attacking the assumptions (low hanging fruit?) and then showing some studies that show the view that market perfection is not the norm and that due to structural and behavioral factors the small investor may be better able to beat the market than the large institutional investor.

a couple of "look-ins"

Firstly, EMH is based on a set of absurd assumptions about the behaviour of market participants that goes something like this:
  1. Investors can trade stocks freely in any size, with no transaction costs;
  2. Everyone has access to the same information;
  3. Investors always behave rationally;
  4. All investors share the same goals and the same understanding of intrinsic value.
All of these assumptions are clearly nonsensical the more you think about them but, in particular, studies in behavioural finance initiated by Kahneman, Tversky and Thaler has shown that the premise of shared investor rationality is a seriously flawed and misleading one."
and :

"The reason that EMH theory has caught on despite its clearly absurd underlying assumptions is that it explains away something rather awkward - the persistent failure for the average fund manager to beat the market. But there is also another explanation for this woeful track record by fund managers, namely incompetence, coupled with the institutional imperative aka. herd behaviour. The vast size of many funds, the uncertainty of the timing of investment inflows and outflows, the fees/commission they charge and other factors discussed here also mean that institutional managers can be at a huge disadvantage to a motivated share-owner with less capital."

H/T Jordan a former student

Friday, February 03, 2012

Senate OK’s bill barring Congress from insider trading - Nation - The Boston Globe

Senate OK’s bill barring Congress from insider trading - Nation - The Boston Globe:

Remember the 60 Minute Piece that exposed insider trading? It seems it is having a desired effect.
"The Senate overwhelmingly passed legislation yesterday to explicitly prohibit members of Congress and their staffs from financially profiting from insider information, a rare bipartisan effort that is expected to be addressed in the House next week.

“The truth is, members of Congress have access to all kinds of sensitive information, and it has to be clear that the information is being used to serve our country - not to make a personal profit,’’ said Senator Scott Brown, a Massachusetts Republican who co-wrote an earlier version of the bill and has been aggressively pushing for its passage."

Wednesday, February 01, 2012

Financial Reporting Quality in U.S. Private Firms by Ole-Kristian Hope, Wayne Thomas, Dushyantkumar Vyas :: SSRN

Financial Reporting Quality in U.S. Private Firms by Ole-Kristian Hope, Wayne Thomas, Dushyantkumar Vyas :: SSRN:

"We provide a large-scale investigation of financial reporting quality (FRQ) among U.S. private firms. Private firms are vital to the economy but have received limited attention from researchers due to a lack of available data. Using a new database that contains accounting data for a large sample of U.S. private firms, we provide interesting new evidence on their FRQ. Relative to publicly traded companies, we find that private firms have lower FRQ as proxied for by several commonly used FRQ measures and are less conservative. Further, we provide the first exploration of cross-sectional variations in the FRQ of private firms. Specifically, we show that private firms with greater external financing needs and a greater presence of long-term debt have higher FRQ and greater conservatism. Private firms with greater owner-manager separation (i.e., C corporations) tend to exhibit lower FRQ but more conservatism."

Interesting and will make it to class, but I am not sure how surprising. Firstly the need for quality information may be lower in private firms so a lower level of financial reporting quality may be optimal (managers know what is going on already even given the c-corp control). And secondly, bonuses are more common (make up a larger percentage of pay since no stock options) in private firms and as these are often tied to income, one would expect less conservatism.