Jim Cramer: Mad No More?

Jim Cramer: Mad No More?:

"How about this for a new surprise? Jim Cramer, sober-minded personal finance guru.

It creates some contradictions. The hyperactive stockpicker on CNBC's Mad Money has a new book out advising most readers not to buy individual stocks at all"

Wow. A Christmas miracle? Or more likely he has known it all along and realized that picking stocks makes for better TV.

Freakonomics Being Documentary-ized « FirstShowing.net

Indie Spotlight: Freakonomics Being Documentary-ized « FirstShowing.net:

"...an upcoming adaptation of the New York Times Bestseller by Steven Levitt and Stephen J. Dubner - Freakonomics. The catch is that a group of documentary directors are teaming up to make a documentary based on Freakonomics, with each making a 15 minute segment based off of a couple of chapters."

I cannot remember the last movie I went to, but this might have to be the next one I go to.

Thanks to Mike for sending this to me.

The Anatomy of Financial Crises: Understanding Their Causes and Consequences - Knowledge@Wharton

Gee, I may have to ask Santa for this one. It looks VERY good!

The Anatomy of Financial Crises: Understanding Their Causes and Consequences - Knowledge@Wharton:

"Crises have been a feature of the financial landscape for hundreds of years. They often appear with little warning, as the sub-prime mortgage crisis of 2007 and the Asian crisis of 1997-1998 illustrate. It's not always clear what causes crises, whether they can be avoided and how their impact can be reduced. A recent book, titled Understanding Financial Crises (Oxford University Press), by Wharton finance professor Franklin Allen and Douglas Gale, a professor of economics at New York University, tackles this subject from a number of different angles"

Stocks rise when sun shines | Dallas Morning News | News for Dallas, Texas | Business

We've talked about this several times in class so when I stumbled upon this in the Dallas Morning News (it is orignally from the Washington Post) I figured I better share it!

Stocks rise when sun shines | Dallas Morning News | News for Dallas, Texas | Business:

"In a study of 26 stock markets around the world between 1982 and 1997, researchers David Hirshleifer and Tyler Shumway showed that the annualized average return on perfectly sunny days was 25 percent, while the annualized average return on overcast days was only 9 percent."

" Mark J. Kamstra, a finance professor at York University in Toronto, argued that seasonal variations in the markets might be related to seasonal affective disorder."

and finally:

"Given the transaction costs of buying and selling stocks, Dr. Hirshleifer said, it's impractical to use sunshine as a stable investment strategy.

But an investor who's planning to sell some stocks anyway might want to time the sale to a sunny day of the week instead of a cloudy day.

"The main lesson for investors is something broader," Dr. Hirshleifer said. "It is important to discount for your moods in making investment decisions.""

Well this is one way to make sure people pay their loans!

Yeah...well I guess...hope this one is not true, but given the high default rates we are seeing, maybe...lol...

Loan thugs strike again, bash up 58-year-old professor- Hindustan Times:

"THE POLICE are investigating charges leveled by a professor of a reputed engineering college against a multinational bank, which allegedly sent a pack of intimidating loan recovery agents to hound him. Prof J.S. Kalra of the Delhi College of Engineering said in his complaint to police that the agents abused and beat him up outside the Indraprashta University campus in north Delhi for delaying monthly installments of a loan."

I will not say the name of the bank, but it is in the article for those interested.

Yet more reasons on why there are more Buys than Sells

Bloomberg.com: Exclusive:

"Shrinking fees from brokerage commissions mean fewer dollars for research and more pressure on analysts to hang on to paying customers such as hedge funds. While clients care little for ratings, they covet meetings with company executives -- audiences that favored analysts can deliver. As a result, ``sell'' ratings on Wall Street are even scarcer than four years ago, when 10 securities firms paid $1.4 billion to settle allegations by then-New York Attorney General Eliot Spitzer that they used research to improperly promote stocks."

And lest we forget, remember the reported death threats.

NYSE fights to maintain once crowded trading floor

AFP: NYSE fights to maintain once crowded trading floor:

"The computer age has wiped out the need for human traders in many stock markets around the world, but the New York Stock Exchange is fighting to ensure the survival of its historic trading floor. At 11 Wall Street behind the NYSE's imposing white marble facade, about 1,500 dealers continue to buy and sell shares on the exchange's trading floor. 'That's good for the visibility. It's a symbol,' said Patrick Healy....

"The floor as we knew it is dead," said James Angel, a finance professor at Georgetown University."

Blaine Lourd Profile - Executive Articles - Portfolio.com

What a great article! Inherently readable, a great story, and even ends up with a happy ending. I usually hate to give away the story, but in this case I will. It is the story of a stereotypical stock broker who sees the light and realizes that indexing is generally a better idea.

Blaine Lourd Profile - Executive Articles - Portfolio.com:

"As a group, professional money managers control more than 90 percent of the U.S. stock market. By definition, the money they invest yields returns equal to those of the market as a whole, minus whatever fees investors pay them for their services. This simple math, you might think, would lead investors to pay professional money managers less and less. Instead, they pay them more and more...Nobody knows which stock is going to go up. Nobody knows what the market as a whole is going to do, not even Warren Buffett. A handful of people with amazing track records isn’t evidence that people can game the market. Nobody knows which company will prove a good long-term investment. Even Buffett’s genius lies more in running businesses than in picking stocks. But in the investing world, that is ignored. Wall Street, with its army of brokers, analysts, and advisers funneling trillions of dollars into mutual funds, hedge funds, and private equity funds, is an elaborate fraud."

And later on some so-called experts:

" There's a shelf of financial bestsellers whose titles now sound absurd: Ravi Batra's The Great Depression of 1990; James Glassman's Dow 36,000; Harry Figgie's Bankruptcy 1995: The Coming Collapse of America and How to Stop It. There’s BusinessWeek’s 1979 description of "the death of equities as a near permanent condition,"

and after he finds DFA (yeah Eugene Fama's firm) and comes to realize that indexing is probably the way to go.

"I think more and more brokers will move to an efficient-markets strategy, because all of their products go bad. They just do...

GREAT STUFF!!!!

BTW, IF I haven't convinced you to read it, consider this: it was written my Michael Lewis (Of MoneyBall fame) which should be reason enough to read it even if it were on checkers.

Thanks to Greg for pointing this out to me! (two Portfolio.com articles in one day, definitely not random ;) )

An Airline Shrugs at Oil Prices - New York Times

An Airline Shrugs at Oil Prices - New York Times:

"Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion. Those gains will mostly be realized over the next two years. Other major airlines passed on buying all but the shortest-term insurance against high fuel prices..."

That other airlines were not hedging (or at least not hedging long-term) has been one of my pet peeves going back as far as the newsletter days. Sure it costs money to hedge, and sure is not without some risks (see for instance this story on what happened when oil prices fell), but hedging makes too much sense not to do.

How does hedging work? Why? The best explanation I have ever seen comes from an old Corporate text book I once used by Rao (do not think it is still in print and I can not find my copy). In it he described how hedging allows management to worry about what they do well and can control (service, pricing, safety etc) and not what they can not control (oil prices in this case).

An other view (the two views are definitely NOT mutually exclusive) is that hedgers have both better access to capital markets and less need to go when the asset (oil) moves in teh 'wrong' direction. My favorite paper in this area has long been Carter, Rogers, and Simkins.

Of course that said, all of the good I can say about hedging goes out the window if firms use the same derivatives to speculate.



Thanks to Felix over at Conde Nast's Porfolio.com for the heads-up on this one.

Do International Financial Reporting Standards Live Up to Their Promise? - Knowledge@Wharton

Do International Financial Reporting Standards Live Up to Their Promise? - Knowledge@Wharton:

"Under the lead of the International Accounting Standards Board (IASB), already more than 100 countries, most notably the European Union and many Asian economies, have either implemented International Financial Reporting Standards (IFRS) or plan to do so. So far, the United States has been a holdout. But the winds are changing. On November 15, 2007, the U.S. Securities and Exchange Commission (SEC) -- which up to then was requiring foreign companies to either report using Generally Accepted Accounting Principles (GAAP) or to reconcile to them -- announced that it would promote international compatibility by allowing foreign companies to access U.S. capital markets while reporting under IFRS. At the same time, the SEC is contemplating changes that would grant domestic firms the choice between reporting under GAAP or IFRS."

This change would lower reporting costs by making reporting more consistent.

Is this positive or negative? Probably positive if we can extend the evidence from a new paper by Daske, Hail, L, and Verdi. The authors

"analyze the effects on market liquidity, cost of equity capital and Tobin's q in 26 countries using a large sample that includes over 3,800 first-time adopters [and] find that market liquidity increases around the time of the mandatory introduction of IFRS. The results for firms' cost of capital are mixed but there is evidence indicating an increase in equity valuations. Partitioning our sample, we find that the capital-market benefits exist only in countries with strict enforcement regimes and institutional environments that provide strong reporting incentives."

While it will be interesting to see if the same impact is felt in the US (my guess is we won't as we already have a strong accounting system--but maybe some through reduced accounting costs?), but we will see soon enough). See, accounting and finance do go together very nicely.

The Subprime Drama Continues, but for How Long? - Knowledge@Wharton

Wharton's Knowledge@wharton has a good discussion with Richard Herring on the continuing developments in the real estate and sub-prime lending markets.

The Subprime Drama Continues, but for How Long? - Knowledge@Wharton:

"Has the crisis run its course? Knowledge@Wharton asked that question and several more to Richard Herring, a professor of finance at Wharton and co-director of the Wharton Financial Institutions Center. Herring spoke recently at a meeting in Rome about 'the darker side of securitization.'"

Thanks DH!

Private placements

Another financial instiitution that had had major writedowns gets a cash infusion.

Bloomberg.com: Worldwide: "-- E*Trade Financial Corp., the U.S. discount broker grappling with mortgage losses, will get a $2.55 billion cash infusion from a group led by hedge-fund manager Citadel Investment Group LLC."

This is on the heels of Citi getting $7.5 Billion from Abu Dhabi.

"Investors seem delighted that Abu Dhabi is injecting $7.5 billion into Citigroup, bidding up stocks in general on new confidence that the mortgage solvency crisis might ease. "

Several items of note (BTW these are great for class! Hint hint ;) ).

1. Originally (with the writedowns) leverage ratios had gone up dramatically. Assets had been slashed while debt was largely the same. As this happened, financial distress costs rose.

I have talked to a few investors who had taken that portion of their portfolio above the SIPC's insured $500,000 out of E-trade.
E-trade CEO even acknowledged this in his released statement:

" `This capital infusion will restore investor and customer confidence in the company...' ''

Note to my classes, why? What could this have done to E-Trade? Since it is almost December I will give you a bonus hint: think It's a Wonderful Life!

2. The stock market reaction to these private placements is generally positive at least in the short run. . That much is well known. What is less understood is the "Why". Some of it of course is the reduction of these agency costs, but not all private placements take place in this crisis environment and they are still met with positive (albeit less positive) reactions.

My favorite explanation is that when people who have better information do something, I would be smart to follow their lead. This information hypothesis story goes back at least as far as Wruck's 1989 paper (he also mentions monitoring) and has received quite a bit of support--e.g. this 1999 paper by Goh, Gombolo, Lee, and Liu).

There is another version however. For at least some private placements, the new investors are more apt to be active in monitoring management. This version is consistent with much of what we see in private equity firms as well.

It is undoubtedly true that in some cases monitoring improves, but it often is troubling since a private placement is usually done by management (and not always in a time of need). Why would management actively seek out investors to make their lives miserable.

A recent paper by the late Michael Barclay with Cliff Holderness and Dennis Sheehan (three professors who I owe a great deal of my financial learning both at Penn State and Rochester) further questions this monitoring hypothesis and shows that it can be overstated since often the new investors are passive.

Further antecodal support for the information explanation is that (at least in the resolution of these major financial events) there appears to be a fairly strong industry effect at times when things look bad. The intuition is that these private investors are not just buying the firm, they are also buying into the industry.
(a fascinating version of this is by Besley, Kohers, and Steigner) who actually find a negative reaction in good times (the monitoring may make firm X a stronger competitor) but a positive reaction when in a bear market.

4. Firms do try to get back to their target debt levels. Publicly issuing equity can take months and is generally associated with a stock price decline, so privately placing equity is often a faster (and more positive!) event.

5. And finally, Ben Franklin had it right when he said "Necessity never made a good bargain." The new investors (especially at Citi) seemingly got a pretty good deal. From the Fool.com:

"In general, Wall Street was relieved to hear about the Abu Dhabi Investment Company's infusion, which will boost Citi's ratio of cash to debt and, in turn, make Citi stronger financially. Once the equity units Abu Dhabi bought are converted into stock in 2010 and 2011, Abu Dhabi will hold a 4.9 percent stake in Citi. Until those units get converted, Citi will pay Abu Dhabi a yield, or essentially an interest rate, of 11 percent."

From the NY Times's Dealbook on the ETrade deal:

"Citadel is getting E*Trade’s portfolio for a cut-rate price: It is paying $800 million for assets that had a book value of $3 billion. E*Trade said Thursday it is taking a $2.2 billion haircut on the transaction."

SSRN-Do Buyouts (Still) Create Value? by Shourun Guo, Edith Hotchkiss, Weihong Song

I do not have time to really comment on this one, but I did find it very interesting. I'll try to add some to this later, but at least I can point it out and quote the abstract.

SSRN-Do Buyouts (Still) Create Value? by Shourun Guo, Edith Hotchkiss, Weihong Song:

"For a sample of 176 buyouts completed between 1990 and 2006, we show that these deals are somewhat more conservatively priced and lower levered than their predecessors from the 1980s, but that the deals still impose substantial default risk on the firms. For 89 of these LBOs with post-buyout data available, we find that gains in operating performance are either comparable to or exceed those observed for benchmark firms matched on industry and pre-buyout characteristics....Returns to either pre- or post-buyout capital invested are significantly positive for the sample overall, and are positive for all outcome groups except those ending in a distressed restructuring. Returns to post-buyout capital are greater when the deal is financed with a greater proportion of bank financing, or when there is more than one private equity sponsor involved in the deal, consistent with increased monitoring by these providers of capital."

Fed to Inject $8 Billion to Lubricate Economy - New York Times

Fed to Inject $8 Billion to Lubricate Economy - New York Times:

"Seeking to reassure banks amid the continuing credit crisis, the Federal Reserve said yesterday that it would provide $8 billion in funds to ease concerns about lending during the holiday season.

The $8 billion — essentially a low-interest loan to the nation’s banks — will be issued Wednesday and repaid Jan. 10. The 43-day loan period is the longest in three years for this type of year-end injection. While it is not an unusual step for the Fed, the injection usually takes place later in the fourth quarter and involves a smaller amount. In 2005, the last time the Fed issued year-end funds, it issued 28-day repurchase agreements for $5 billion, starting Dec. 8."

I may NEVER say this again (it really was not my favorite class--sorry Rich ;) ), but I wish I were teaching Money and Banking right now.

BonaResponds "commercial"

My day job is a financeprofessor, but what most on campus know me for is my role in BonaResponds. In that light, you can call this an agency cost problem if you must, but here is an unpaid for advertisement...

Help BonaResponds While Shopping!

Ok, this is easy. All you have to do is click through this link and then shop at any of 100s of stores (Barnes and Noble, Best Buy, Buy.com, Ebay, even Wal Mart, Hotels.com, Travelocity, Verizon, etc etc. (scores and scores of retailers in all categories!)

Just type in BonaResponds as your charity (in their terms who do you Goodsearch for) and then shop like you would anyways. The retailer will donate a portion of the sale (generally about 3%, but in some cases 5%, 9%, or even 25%) to BonaResponds!!

Support BonaResponds here


And if you are curious about what BonaResponds does, checkout BonaResponds.org. Or better come volunteer with us. You will love it, and if you want we can even talk finance (I actually have two students who are are going in January who have asked me to cover material in the van! So we will be doing international finance and derivatives on the drive down and back in my van.)

I think someone has been spying on our Faculty meetings!

Somehow the Unknown professor has been spying on our faculty meetings. He has to have been. There is no way he could have had so many items EXACTLY correct! LOL... Hi is starting a faculty meeting Bingo--the games won't last long!

Seems like Bonuses won't suffer as much as most expected

Bloomberg.com: U.S.:

"Securities firms typically use slightly less than 50 percent of their revenue to pay salaries, benefits and bonuses....Year-end bonuses usually account for about 60 percent of compensation. In the first nine months of 2007, Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns told their shareholders that they set aside $52.4 billion for compensation, up 9 percent from a year earlier. For the whole year, the figure rises to $62.5 billion...The total increases when bonuses for employees at hedge funds, leveraged buyout firms and banks such as New York-based JPMorgan Chase & Co. and Frankfurt-based Deutsche Bank AG are included. The industry's bonuses are larger than the gross domestic products of Sri Lanka, Lebanon or Bulgaria. The average $201,500 bonus is more than four times the $48,201 median household income in the U.S. last year, according to U.S. Census Bureau statistics."

Congratulations to Robert Strong!

The University of Maine - News - November 16, 2007 - Carnegie Foundation Names UMaine's Strong 2007 Maine Professor of the Year:

"Robert A. Strong, a University of Maine professor of finance, has been selected as the 2007 Maine Professor of the Year by the Carnegie Foundation for the Advancement of Teaching and the Council for the Advancement and Support of Education (CASE.)"

A very good choice. Congratulations! (and note, he is a Penn State Alum :) )

The Sums of All Parts: Redesigning Financials - Accounting - CFO.com

Look for changes in financial statements soon:

The Sums of All Parts: Redesigning Financials - Accounting - CFO.com:

" ...another large step towards the most dramatic overhaul of financial
statements in decades, the Financial Accounting Standards Board Wednesday laid
out a series of subtotal figures that companies would be required to include on
their balance sheets, income statements and cash flow statements. The new look
for financials will break all three statements into five general categories:
business, discontinued operations, financing, income taxes, and equity (if
needed). "

Fannie Mae's credit losses still in doubt - Nov. 16, 2007

Well that didn't take long. The day after I speculated with zero evidence of the nightmare that would exist if one of the big agencies got into trouble, Fortune had the same idea but they backed it up with the troubling accounting game that Fannie Mae apparently was playing:

As usual when you try to hide something on investors, they tend to get annoyed and more distrustful. The result? A falling stock price.

Fannie Mae's credit losses still in doubt - Nov. 16, 2007:

"In announcing quarterly results Nov. 9, Fannie Mae (Charts) used a different methodology for calculating its credit-loss ratio -- one that had the effect of making the ratio appear more reassuring to investors than it is. In response to investor concerns about the change, first reported this week on Fortune.com, Fannie Mae executives held a conference call with analysts Friday morning that did little to placate investors. Fannie Mae shares fell $2.32, or 5.39%, Friday. The company's stock price has plunged 17% since Fortune revealed the change in disclosure in a story posted online Wednesday"

Steven Levitt Lecture

at the Steven Levitt lecture,
originally uploaded by FinanceProfessor.

I took a small group to the Steven Levitt(of Freakonomics' fame )Lecture at UB this week. I will give you some highlights soon.

Weird going to an academic lecture (more or less ;) ) in a basketball arena and having the crowd feel like a basketball game.


A few thoughts: overall VERY interesting.

Random comments and notes from the Levitt Lecture in Buffalo.

Before: Seems weird going to an academic lecture in a basketball arena with a few thousand others. Interestestingly a large portion of the audience were high school students which proves something for about economics but I am not sure what. Some possibilities:

1. they have a lower opportunity cost of time than others
2. demand curves slope down and they were offered free tickets.
3. They were told to go by their teachers and thus had more of an incentive

The first speaker was a high-up at UB (I think VP of academic affairs at UB—I THINK) who was good. His best line was: “only by asking the right questions can world make sense.” (or something like that).

The second speaker was Issac Ehrhlich. He spent most of the time introducing Levitt. His best line: “He [Levitt] proved that economics is not the abysmal science it had been known as.”

Levitt then came on. Some of his comments:

• “Incentives are at the heart of what economists do.”
• He then told the story of John S___ an IRS employee who caused 7 million children to disappear. No, he was not a mass murderer but it was his idea to mandate Social Security numbers for children on parents’ tax returns to qualify for deduction. Many had been lying to get the deduction. With this rule change they could not do it anymore. Makes the IRS about $2B per year! One great idea. Unfortunately for him, he worked in government and was not well paid for the idea: he had to fight (and get congressional help) to get a bonus of $25,000.
• His mom was a psychic. His dad was a doctor specializing in “internal gas”. He then told the story of how he chose to get a PHD in Econ and his math difficulties (indeed his story of his first PHD math class was not unlike mine. Only difference is that he overcame his problems ;) )
• His dad told him if he could not compete against smarter competition “in real economics”, choose a niche that others do not want and excel there.
• His favorite story in Freakonomics is that of the drug dealers (See video below).
• Altruism may or may not increase utility, but the research into altruism definitely showed that people care of how they appear to others.
• My favorite story was about his new work on prostitutes. He said that the world’s oldest profession may also be the world’s worst. Big risks, little money etc. He had a prostitute speak to his class. Had to pay her out of own pocket as paying for a prostitute is frowned upon. Among findings: probably more likely to have sex with a police officer than be arrested by one. The type of “service” has changed over time as premarital sex has become more common. Now take the “weird stuff” to prostitutes (Gary Becker thought that up—I might add internet as well—or so I hear!).

Q&A (others Questions were left out)

• Q. On Trickle down economics. (person clearly wanted to hear it did not work)

A. Tough question. Tradeoff between a bigger pie and more equality. Lower taxes do increase economy but also inequality. In the end “we really do not know”.

• Q. How do you come up with some of your metaphors?

A. Having a mom as a psychic who channels dead people and a father who studies intestinal gas really created an atmosphere where anything was ok. This cuts down on his self-censorship.

• Q. On Health Care:

A. Health care is tough. For some reason people expect it for free. Health care not really different. If you want it, you pay for it. Healthcare is a hige share of GNP, but we do get a lot for it….somehow need to encourage innovation. For instance years ago people expected polio to take up large percentage (30%) if healthcare costs. Then vaccine. Polio costs fell. But now it is difficult to keep patents etc, so vaccines are less profitable, so less of an incentive to develop new ones.

Here is an example of what it was like. This was from a few years ago, but VERY VERY similar to what he did. Some of it even in the same words.

Interesting history lessons

Yeah this is probably sort of trivial, but I love history and finance so the combination of the two is too good to pass up. This is on the 1920s. It shows the how the stock market worked with specialists at posts and how the ticker tape was created--the video of order confirmations is fascinating and reminscient from my mental picture of Orwell's 1984), the risks of buying on margin, and the crash of 1929.

Transactions costs, renting, and leasing

While leasing is a topic we won't cover in class to any detail until later in the semester, a friend called all excited about ZipCars today. ZipCars allows you to rent for periods as short as as an hour.

In their words:

"Zipcar is the closest thing to owning a car without the cost and headaches. It's also more convenient, cost-effective and more fun than renting."

The call got me thinking: As technology drives down transaction costs, what other types of transactions will become economically justified. Any thoughts on what other markets might develop as transactions costs fall still further?

Make a difference

I know there are literally thousands of great causes out there. Take, BonaResponds for instance, which is always looking for donations (we are adopting a family in Mississippi and helping to rebuild their home which will cost about $20,000) so I am definitely not saying do one to the exclusion of others, but this one seems like quite a "win-win". I am giving it a try.

Give one, get one:

"Between November 12 and November 26, OLPC is offering a Give One Get One program in the United States and Canada. This is the first time the revolutionary XO laptop has been made available to the general public. For a donation of $399, one XO laptop will be sent to empower a child in a developing nation and one will be sent to the child in your life in recognition of your contribution. $200 of your donation is tax-deductible (your $399 donation minus the fair market value of the XO laptop you will be receiving)."

For more on this program (which like all has limitations--some may be on Ebay etc, but on net is a wonderful attempt to help those in need and raise them from poverty see this NY Times piece/video.

Illustrated Cash Flow For Dummies

Illustrated Cash Flow For Dummies: "Illustrated Cash Flow For Dummies"

Pretty funny. A good visual lesson on your personal finance!

Google Options Make Masseuse a Multimillionaire - New York Times

Google Options Make Masseuse a Multimillionaire - New York Times:

Co-founders Larry Page and Sergey Brin are each worth about $20 B each and the weatlth has not stopped there. A few look-ins:

" Although no one keeps an official count of Google millionaires, it is estimated that 1,000 people each have more than $5 million worth of Google shares from stock grants and stock options."

"“It isn’t considered ‘Googley’ to check the stock price,”said an engineer...[but]...Others admit that, when gathered around the espresso machine it is hard to avoid the topic of their sudden windfalls.“It’s very clear that people are taking nicer vacations,"

Not surprisingly this wealth has made some nice stories, for instance:

""Bonnie Brown...in 1999...On a lark, she answered an ad for an in-house masseuse at Google, then a Silicon Valley start-up with 40 employees. She was offered the part-time job, which started out at $450 a week but included a pile of Google stock options that she figured might never be worth a pennyAfter five years of kneading engineers’ backs, Ms. Brown retired, cashing in most of her stock options, which were worth millions of dollars...."

Of course all too often what goes up also goes down. And if Google were to fall, it would have a long ways to go:

"Jim Cramer, the high-decibel CNBC talk-show host, told his audience...“never to take financial advice from anyone who doesn’t recommend Google.”

Google['s]...market capitalization...nearly equals the total value of the three largest traditional media companies: Time Warner, Walt Disney and the News Corporation. Even at Google’s current stock price, 34 of the 38 analysts following the company have buy recommendations...Fred Hickey, editor of The High-Tech Strategist newsletter...is one of the few willing to call Google’s stock surge “insanity.” But even he isn’t predicting when it might end. He has placed a tiny bet against Google, but no more. “You cannot short a mania,” "

Thanks GS for sending this to my attention.

Mortgage Crisis Extends Its Reach - WSJ.com

Sometimes things change really quickly for instance, there are now calls to expand Government's role in the housing market. Huh? Only months ago the exact opposite was being considered!

From the Wall Street Journal--Mortgage Crisis Extends Its Reach - WSJ.com: "

The expanding government role isn't the result of initiatives from Washington. As investors have fled from housing exposure, lenders wanting to sell loans they make have had no choice but to rely more on existing agencies that will still buy mortgages, like government-sponsored Fannie Mae and Freddie Mac. To raise funds to lend in the first place, lenders are leaning more heavily on the 12 regional Federal Home Loan Banks, which are cooperatives chartered by Congress but owned by commercial banks and other financial institutions....The political sentiment to expand the companies' powers -- while growing out of the plight of borrowers facing foreclosure -- plays into the hands of the two shareholder-owned companies. Until a few months ago, the debate in Washington centered on whether regulators should be able to force the two, which were both recently involved in accounting scandals, to reduce their holdings of mortgages."

Want a nightmare scenario? While an unlikely event, we would really have troubles is one of them (or worse both) got into financial trouble. (Although we would be able to answer the questionof whether the US government would bail out an agency. Given their accounting problems, it is worth considering.

Do you have a student managed investment fund?

From Edward Lawrence:

"The University of Missouri - St. Louis is in the process of collecting data on all Student Managed Investment Funds in the world."

If you have not filled out his survey and do have a fund, email him or Kerry Sallee.


Edward C. Lawrence, Ph.D.
Professor of Finance & Area Coordinator
College of Business
One University Boulevard
University of Missouri - St Louis

Real Estate, CDOs, Banks, and the Economy

The story began in June when trouble in the real estate market (which played out first as sub-prime borrowers could not make payments) began spilling over to the banking industry (Bear was the to acknowledge the damage as it took writedowns (and then made loans to) two of its hedge funds as their holdings of CDOs (a type of mortgage backed security) fell sharply.

In recent weeks the problems have continued to mushroom as financial firms big and small have written down billions of dollars of assets. (See CIBC, Wachovia, Merrill, JP Morgan, Bank America, Citi, E-trade, and maybe Barclays, et al). While not enormous as a percentage of value (Citi estimates the losses at about $64B) it is not surprising that bank stocks have suffered.

What is the biggest concern is that this spreads to the overall economy. The line of reasoning is: banks get in trouble, they lend less, and soon the economy suffers. This is one of the things that is worrying Fed Chairman Ben Bernanke. As a result the Fed has lowered the Fed Funds target and reiterated that the discount window is open to any bank that needs it. (which is what they should have done).

No one can say for sure how this will play out, but it seems like everyone has an opinion. For instance:

UPDATE 3-Wachovia, Capital One say credit conditions worsen Bonds News Reuters.com:

"This is now worse than Long-Term Capital (Management),' said Jack Malvey, chief
global fixed-income strategist at Lehman Brothers Inc., referring to the hedge
fund whose 1998 collapse threatened to unhinge global financial markets. 'This
is a painful lesson in financial engineering.'"

Josef Ackermann CEO of Deutsche Bank in Reuters:

"If you go back to the Asian crisis, the Latin American crisis, the Russian
crisis, these were pretty regional," said Ackermann, who also heads global
banking organization the Institute of International Finance.
"(This) is psychologically the worst crisis that I have seen in my 30 years,"

The Economist:

"One worrying lesson for bankers and regulators everywhere to bear in mind is
post-bubble Japan. In the 1990s its leading bankers not only hung onto their
jobs; they also refused to recognise and shed bad debts, in effect keeping
“zombie” loans on their books. That is one reason why the country's economy
stagnated for so long. The quicker bankers are to recognise their losses, to
sell assets that they are hoarding in the vain hope that prices will recover,
and to make markets in such assets for their clients, the quicker the banking
system will get back on its feet."

and finally Business Week:

"Studies have shown that tighter loan standards tend to precede economic
slowdowns. Between July and October, banks tightened their lending criteria
significantly for a variety of business and consumer loans, according to the
Fed's latest survey of senior loan officers. Bankers cited a less favorable,
more uncertain economic outlook, and many pointed to less liquid secondary
markets and greater risk aversion.Sharply tighter standards...will put an added drag on the housing market and consumer spending. And more stringent rules for commercial real estate loans will dampen business outlays for new construction, which has been a key driver of capital spending this year."

So what's next? Who knows? Stay tuned, it will be interesting!

BTW one of the important stories that are coming out is the fact that this is affecting all tranches of the debt as even AAA rated debt is being marked down (which is why the rating agencies are concerned). The San Antonio Express News reminds us that conflicts of interest exist here too.

Corporate goverance making inroads in Nigeria!

In a story that shows the importance of capital markets and governance, the Central Bank of Nigeria is pushing for better corporate governance of banks. Remember that Nigeria wants to grow into one of the top 20 economies by 2020, this is a good start.

allAfrica.com: Nigeria: No Bank Survives Without Good Corporate Governance -CBN (Page 1 of 1):

"The Central Bank of Nigeria (CBN) has restated that no bank would survive, even with large capital base, without good corporate governance practices. ....He further explained that good corporate governance means good management, accountability, adding that good management principles...."

Later:

"...the CBN has rules and regulation which stipulate the roles of the chief executive, independent directors, directors, audit committee and the roles of management to ensure good corporate governance....the CBN tried to build these rules, adding that one of such was limitation of state government ownership of banks, as part of measures to avoid huge withdrawal from the bank on the ground that they are owners. He stated that government withdrawal in the past has contributed to the failure of the nation's banks."

and then also:

"...also stated that media on the other hand has the role to play to encourage corporate governance and report those that do not comply"

Science Journal - WSJ.com

Science Journal - WSJ.com: A look at the Puri and Robinson JFE article on optimism.

"Optimists, the Duke finance scholars discovered, worked longer hours every
week, expected to retire later in life, were less likely to smoke and, when they
divorced, were more likely to remarry. They also saved more, had more of their
wealth in liquid assets, invested more in individual stocks and paid credit-card
bills more promptly. Yet those who saw the future too brightly .... behaved in
just the opposite way, the researchers discovered....Optimism is a little like
red wine," said Duke finance professor and study co-author Manju Puri. "In
moderation, it is good for you; but no one would suggest you drink two bottles a
day.""

Great coverage by the WSJ of a fascintating JFE article.

Index of Orlando FMA Papers

Index of Orlando Papers: A reader commented today that the FMA had taken down the program from last month's Meetings in Orlando. Fortunately they did leave the directory of papers online. Enjoy!

Fall 2007 FMA Online--

Fall 2007 FMA Online: "

"Jay's Ritter's Keynote Address tackles the question of if there is a corporate governance premium for listing in the United States, with an insightful look at international competition for new listings of IPOs."

At the FMA's in Orlando I was talking to a friend and our comments about Jay Ritter were almost identical: "He is a genius." Well here is your chance to watch his presentation from the European Financial Management's annual meeting. It is just under 30 minutes long but very good!

A conversation with with the CEO of General Electric Jeffrey Immelt - Charlie Rose

A conversation with with the CEO of General Electric Jeffrey Immelt - Charlie Rose: "A conversation with with the CEO of General Electric Jeffrey Immelt"

Immelt talks on risk and return, globalization, global warming, foreign exchange risks, the US dollar and trade deficit, the role of government, and much more. It is really good. We can debate if he is an expert on some of the things (say education or healthcare), but I think we can all agree he is a smart person and it is an interesting conversation. (Indeed Warren Buffett calls him best manager in US!)

Yes, I am a big fan of Charlie Rose, but this conversation is even better than most. The next time I have to miss a class, this might be required watching. But in the interim, I definitely recommend it.

No More Bench Strength - New York Times

The NY Times missed a great opportunity here. The article is good, but it could have been great. First the facts from the article.

No More Bench Strength - New York Times: "

Thirty years ago, companies rarely looked beyond their own executives to find new chiefs, said Kevin J. Murphy, a professor of finance at the Marshall School of Business at the University of Southern California. In the 1970s, only 10 percent of new chiefs at Standard & Poor’s 500 companies came from the outside, he said. Now that figure is closer to a third."

Which in and of itself is a nice bit of trivia. Unfortunately, the article did not mention a great academic article by Hermalin that gives much insight into this phenomenon and hypothesizes that real option analysis and closer board governance can help explain why outsiders are now more apt to replace the CEO than in the past.

Close circuit to those of you at USC: if you get a chance, take a class from Kevin Murphy. He ranks VERY high in my all time favorites!


Here is a follow up via NPR.

Study: Free beats fee for Radiohead's 'In Rainbows' | Tech news blog - CNET News.com

I have to admit this is probably not strictly speaking finance, but it is REALLY interesting, so....

First the background: Radiohead released their newest album free online. They merely asked people to donate.

Well, the album was released and the tallies are coming in. And not overly surprisingly, people did not give all that much. Some highlights:

Study: Free beats fee for Radiohead's 'In Rainbows' | Tech news blog - CNET News.com: "Those who predicted that Radiohead would see mass financial support after allowing fans to pay whatever they wanted for the band's latest album appear to have been a tad optimistic, according to a study released Monday."

The breakdown:

"... Of those who downloaded Radiohead's digital album, In Rainbows last month, about 62 percent walked away with the music without paying a cent....About 17 percent plunked down between a penny and $4, far below the $12 and $15 retail price of a CD. The next largest group (12 percent) was willing to pay between $8 and $12--the cost of most albums at Apple's iTunes is $9.99. They were followed by the 6 percent who paid between $4.01 and $8 and 4 percent coughed up between $12 and $20."

The economist in me is totally not surprised (see most open source products), but I do have to confess I was hoping that people would pay. Oh well.


And now I think I will take their advice and go to sleep.

A few other blogs that you might be interested in

Without boring the entire finance world, there are two other finance blogs that I help with. One is for just my finance classes, the other is for a our student-run investment portfolio class (called Students in Money Management or SIMM). Feel free to read either or both, they do have quite a few interesting posts.

Does short-term debt lead to more "earnings management"?

In another paper from the FMAs, Gupta and Fields look at whether more short term debt leads to more "earnings management."

Does short-term debt lead to more "earnings management"?

Short answer: YES.

Longer answer:

Intuitively the idea behind the paper is that if a firm has to go back to the capital markets, they do not want to do so when times are bad. Of course, sometimes times are bad. In those times, management may be tempted to "manage" earnings so that things do not appear as bad as they may be.

The findings? Sure enough, managers seemingly manage their firm's earnings more when the firm has more short term debt.

A few look-ins:

From the Abstract (this is the best summary of the entire paper):

"...results indicate that (i) firms with more current debt are more susceptible to managing earnings, (ii) this relation is stronger for firms facing debt market constraints (those without investment grade debt) and (iii) auditor characteristics such as auditor quality and tenure help diminish this relation...."

Which fits intuition. Why?
* The more the constraints, the more incentive the management has to manage earnings since if they do not, they may not be able to refinance.
* Auditors would frown upon this behavior and the stronger the auditor, the less likely it is that the manager would manage earnings.

How does this "earnings management" manifest itself? The most common way (although not the only way) that managers manipulate earnings is through the use of accruals . Thus, the authors examine this and find:

"A one standard-deviation increase in short-term debt (total current liabilities) increases discretionary accruals by 1.69% and increase total accruals by 2.28%. Our evidence supports the idea that debt maturity significantly impacts the tendency of firms to manage earnings."

Which is a really interesting finding!

CIBC analyst got death threats on Citigroup: report - Yahoo! News

It is well known that there have traditionally been many more buy recommendations than sell. This has been largely explained incentives both of the analyst (who does not want to lose the information that comes from better access to management) and from the brokerage firm (who does not want to lose potential investment banking business). Recent research (Kadan, Madureira, Wang, and Zach) suggests that these problems have been at least somewhat mitigated by regulations, but not completely.

Why? Well in what sounds like a plot from a novel or movie, we may have to add another explanation: Death threats!!!

CIBC analyst got death threats on Citigroup: report - Yahoo! News:

"The analyst whose downgrade of Citigroup Inc sparked a broad stock market sell-off on Thursday said she has received several death threats stemming from her research, the Times of London said. Meredith Whitney of CIBC World Markets Inc late Wednesday downgraded Citigroup to 'sector underperformer,' saying the largest U.S. bank by assets might need to raise more than $30 billion of capital and cut its dividend. Her downgrade triggered a 6.9 percent drop in Citigroup's shares.... 'People are scared to be negative, especially when a company has such a wide holding,' Whitney told the Times of London in an article published Saturday. 'Clients are not pleased with my call and I have had several death threats,' she continued. 'But it was the most straightforward call I've made in my career and I am surprised my peer analysts have been resistant. It's so straightforward, it's indisputable."

Wow! Can that be true?

Google Reader -Jim's shared items

Google Reader -Jim's shared items: Google's Sharing feature is really cool. For what is worth here are articles that I liked and thought you might. It is updated regularly.

Britney Spends Big, Court Papers Reveal - washingtonpost.com

Britney Spends Big, Court Papers Reveal - washingtonpost.com:

"Court papers released Thursday in Britney Spears' custody dispute with Kevin Federline show she spends lavishly on clothes and entertainment, and doesn't save or invest any of her roughly $737,000 monthly income....she spends zero on education, savings and investments and gives $500 a month in charitable contributions...."

I have nothing to add to that...

Obesity Epidemic Among CEO Pay - Business on The Huffington Post

Eve Tahmincioglu: Obesity Epidemic Among CEO Pay - Business on The Huffington Post:

"Stanley O'Neal who is leaving Merrill Lynch after giving it a big fat gift of a $8 billion dollar write-off thanks to risky investments. The board just can't help but feed this obesity epidemic. They're giving him $160 million plus in severance for his troubles as he heads for the door. At some point, the nation's corporations, or most pointedly, their corporate boards, will realize throwing money at their CEOs is probably not the best idea"

CEO pay is perennially a hot topic. Since we will be doing in class soon, figured this would be a good time to start thinking about it.

What is I^3?

I^3 papers are those papers that I feel are extra special. The I^3 moniker stands for Interesting, Informative, and Important. You could do much worse than reading them. They really are good. Here are some past winners.

IPO Underpricing, Earnings Quality, and more

Another FMA paper. This one looks at IPO underpricing and Earnings Quality and is by Thomas J. Boulton, Scott B. Smart, Chad J. Zutter.

The shortest version is that using international evidence the authors find underpricing is greater where earnings quality (transparency) and liquidity are lower.

The abstract says it best:

"Examining 7,306 IPOs from 34 countries, we find less underpricing in countries with higher earnings quality. This finding persists after controlling for other deal- and country-specific factors, and it is not driven by large, relatively transparent markets such as the U.S. and U.K. Firms in countries with lower earnings quality can reduce underpricing by choosing higher quality underwriters. We also observe lower underpricing in countries that allow banks to hold equity in nonfinancial firms and in countries with more liquid markets. Finally, we provide results that suggest investors assign lower valuations to IPOs in countries with lower earnings quality."

As the title suggests, the authors first look at earnings quality and sure enough find the greater the transparency, the lower the underpricing. In their words:

"...sample’s mean first-day return is 27.5 percent, and a one standard deviation improvement in earnings quality reduces underpricing by about 4 percentage points."

Next on the agenda is whether bank ownership may affect underpricing. How? Read on:

"Through their lending relationships with firms, commercial banks gain access to private information. When they choose to invest in the equity of IPO firms, banks send a valuable signal to other market participants and, thereby, reduce information asymmetries....In countries with fewer restrictions on bank equity holdings, we observe less underpricing."

WOW. Great stuff. A definite I^3!!!! (Interesting, Informative, and Important)


Cite: Earnings Quality and International IPO Underpricing Thomas J. Boulton, Scott B. Smart, Chad J. Zutter. Working Paper: presented at FMA conference Orlando Florida.

The News-Gazette.com:Top salaries continue to rise as UI competes for talent

Well this was sent to me, it is not to as a means of saying so and so gets too much, merely to report that it really is a different world. This is from the University of Illinois.

The News-Gazette.com:Top salaries continue to rise as UI competes for talent :

"As of fall 2006, the average salary for a full-time professor at the UI was $95,700, up $13,400 or 16 percent since 2002. When comparing that average salary to those at the 21 institutions, the UI ranks third from the bottom, behind Michigan, Texas and North Carolina but ahead of Washington and Wisconsin....In recent years, as turnovers have occurred in high-level positions at the university, salaries for new employees have often risen well above the predecessor's pay. Four years ago, the UI's vice president for technology and economic development, David Chicoine, earned $262,500. UI College of Business Dean Avijit Ghosh will assume that post in January and earn $339,000....Of the more than 100 people who earn $200,000 or more at the UI, many are in the business and law schools. And many hold endowed chairs, meaning some of the salary is funded by a donor.Such top faculty earners include finance Professor Jeff Brown, who has the title of William Karnes Professor of Mergers and Acquisitions, and a salary of $245,000;"

This does show how much salaries can vary. At small schools (such as SBU) it may take the sum of four years to make that much. :( Oh well...having traveled to mid Ohio, Orlando, and NYC in the last three weeks, I can definitely say I would not want to trade places.

Financial Rounds

I know I mention him all the time, but I actually saw him at FMAs (did not get to speak as he was presenting and I had to leave early for an interview, but the Unknown Professor over at the FinancialRounds has put up some thoughts on the FMA interviews he did as well as his FAQ which even mentions this blog :)

Do Mutual Funds vote responsibly? Evidence from Proxy voting

Another paper from the FMAs:

Do Mutual Funds vote Responsibly? Evidence from Proxy Voting by Ng, Wang, and Zaiats

Multiple Choice answer: Sometimes

Short Answer Answer: Mutual funds frequently vote in a manner that does not appear to be in shareholders' best interest.

Essay Answer: How mutual fund managers vote the shares of their fund is a hot topic both because of the growing emphasis on corporate governance and the tremendous growth mutual funds have experienced. This mix, coupled with a few years of voting since the SEC mandated voting disclosure in 2003, is a perfect environment to study whether agency costs problems or higher stock valuation of the fund's holdings dominate when it comes to proxy voting.

It is well known that agency costs may lead fund managers to vote shares in ways that may not be value enhancing to the fund's investors. For example, suppose the parent company of the mutual fund has an investment banking arm. Voting the fund's shares against management could lead to a loss of lucrative investment banking business. So the fund's management is tempted to vote with management even if the fund's investors may not want that.

In Do Mutual Funds vote Responsibly? Evidence from Proxy Voting, Ng, Wang, and Zaiats examine the question and report that often Mutual Funds vote in a way that appears to conflict with their investors' best interests. Specifically, the authors find that funds support a majority of management sponsored proposals for anti-takeover amendments, board related votes, and award proposals. But before any indictment, there must be more convincing evidence, so the authors find that many regular shareholders also appear to vote for these proposals.

To investigate this further, proposals are broken into groups based on the ISS recommendation. (negative recommendations are counted as bad for shareholders). Again the authors find that mutual funds regularly vote for so-called negative proposals. But not at a level that is significantly different than shareholders in general.

As an aside, if I were a reviewer, I might suggest breaking the votes into groups based on how the shares did on the announcement of the vote.

Overall funds appear to disregard past performance in most of their votes but there are two noteworthy exceptions--executive pay and board related proposals are at least tied to how well the firm has done.

Conclusion:

Ng, Wang, and Zaiats do present evidence suggesting agency cost problems affects the voting behavior of mutual funds but the evidence is not the final word and also brings into question the voting behavior of other shareholder groups.

Stay tuned, we've not heard the last word on this topic!


BTW I did see this presented at the FMAs. It was good.

Do Finance Profs practice what they preach?

Sometimes the most important finding of an article is not played up while lesser items (especially those that appear to more exciting or controversial) are given more play. For instance from SmartMoney:

Finance Profs Reveal How They Invest Own Money (The Pro Shop) | SmartMoney.com:

"Colby Wright, assistant professor of finance at Central Michigan University and James Doran, finance professor at Florida State University, [survey] ... finance professors. After all, they're arguably the most educated and well-informed people when it comes to understanding the mysteries behind stock price movements. [I think the article somehow left out 'best looking", funniest, and "nicest" as well.] So Wright and Doran set out to survey all the professors of finance in the U.S. and ask what's most important to them when investing their own money. The survey resulted in 642 usable responses. They published their results earlier this year in a paper titled 'What Really Matters When Buying and Selling Stocks?"

The findings were not exactly what we would think. For instance the survey suggests that PE ratios, market multiples, and momentum investing are among the keys and not CAPM, efficient markets and the market risk factors.

"Out of 43 variables given, the most important were a company's price/earnings ratio and how close a stock is to its 52-week high to low. Considering the material most finance professors teach their students as a way of explaining stock price movements — like the capital asset pricing model and discounted cash flows — Wright calls the findings surprising"

Which is true to a degree, but virtually all finance classes also cover market multiples, such as PE ratios, in some format. For instance in my classes I harp on the fact that both Discounted CAsh Flow analysis and multiples are really doing something very similar just in a different way and there is a place for both. In fact, we generally say that the time to perform a DCF projection is often not worth it for small investments.

Had that been the entire story it MIGHT have been blog worthy. However, after reading the actual article it screamed "Blog me!"

It could be argued that the main finding of the paper was not the reported use of mutliples and momentum investing, but that "...over two-thirds of the sample are passive investors, and not because they don’t have the time to invest."

Thus, the headline grabbing headlines were not from the entire sample but only a small subsample of active investors.

Which to my biased reading suggests that the majority of finance professors do appear to practice what they preach!

Whew ;)

Interesting article.

Cite:
Doran, James S. and Wright, Colbrin, "What Really Matters When Buying and Selling Stocks?" (4/13/2007). Available at SSRN: http://ssrn.com/abstract=980364

The Science Education Myth - Yahoo! News

For those who have read the World is Flat I thought you might be interested in this one even if the jury is still out.

The Science Education Myth - Yahoo! News:

"The authors of the report, the Urban Institute's Hal Salzman and Georgetown
University professor Lindsay Lowell, show that math, science, and reading test
scores at the primary and secondary level have increased over the past two
decades, and U.S. students are now close to the top of international rankings.
Perhaps just as surprising, the report finds that our education system actually
produces more science and engineering graduates than the market demands."

FTC Appeals to Court to Undo Whole Foods-Wild Oats Merger - WSJ.com

FTC Appeals to Court to Undo Whole Foods-Wild Oats Merger - WSJ.com:

"In an unusual move, the Federal Trade Commission is trying to disrupt the merger of natural-foods grocers Whole Foods Market Inc. and Wild Oats Markets Inc. after the deal has already been consummated. The FTC is asking a Washington appellate court to review a federal-district court ruling in August that allowed the $565 million deal to proceed. The agency, which opposes the combination on antitrust grounds, is asking for an expedited ruling. Its appeal is considered a long shot."

I know I said it back in June, but I still do not see why this deal should not be allowed to go through despite the idiotic comments made by the CEO.

Catching up after FMAs before Finance club trip to NYC

Whew...and I thought I became a teacher in part to avoid business travel. LOL...After spending a week in Ohio with BonaResponds, a trip to Orlando for the FMAs, and now to NYC with the finance club should make me ready to stay home for a while.

The FMAs were great. I apologize for not getting more online about them already. I have a notebook full of papers to summarize, just need a few minutes to breathe. From a quality of paper point of view, it may have been the best FMA conference I have been to.

I have not counted how many papers were presented, but it had to be somewhere about 400-500. At any given point there were 25-30 sessions going. Each author had about 20 minutes to discuss the paper and then a discussant had 7 minutes to make comments. For the last few minutes it was then "thrown open" to the crowd for comments. In most of the sessions there were three papers. So it was utterly impossible to see it all.

Combine the many sessions with interviewing (have I mentioned we are hiring ? ;) ) and I only got to see a very small fraction. But I tried to get to the papers that would either help with class or my own research, or just seemed too interesting to pass up. So I think I had a good mix. (of course I had to leave sessions now and then and if I skipped out of yours, I apologize. I assure you it was nothing you said!)

Over the next few weeks I will recap and summarize the best of these so that you too can enjoy some of the conference (of course without having to travel to Orlando, which cemented its place into my least favorite US city list).

Hopefully these summaries will start later this afternoon, but with a NYC trip (I leave at 3:00 AM) and a student life meeting at 4:00 PM, no guarantees ;).

My favorite presentation of the day-Friday

Hard to say today as I had several interviews and missed more presentations than yesterday (we are hiring--if interested, let me know!). The ones I did get to go to were very good.

Probably my favorite was session 148 where Robert Monks and Michael Jensen spoke on corporate governance. Nothing super earth shattering as each said what would be expected if you have read their work, but fascinating none the less.

A few Look-ins:

* Jensen commented that executive stock options should have a strike price that grows each year by the cost of equity. This is better than indexing to overall market or industry (especially in the case where managers can pick the industry).

* One reason why private equity has been so successful is that it avoids the silly game of worrying about quarterly earnings and the all to frequent gamesmanship (which after the latter lecture by Jensen (see below) really should be called lying) of earnings management and the like. (Especially interesting here was the discussion by Jensen on Warren Buffett who is seen as a great manager yet when it comes to not offering earnings guidance, many think he is quirky).

* There is a worry that conflict of interests similar to those at accounting firms may exist in some compensation firms. For instance, if they say cut CEO pay, they would potentially lose the larger business of helping to set employee pay.

* Firing for cause is nearly impossible at many firms due to employment contracts-for instance less than 5% can be fired for cause even if the manager breeches fiduciary obligation. Or only about 40% can be fired for cause even after the manager is convicted of fraud. Interesting these contracts apparently grew out of laws to prevent large golden parachute payments.

* Transparency may not solve all problems, but should improve things.



BTW the quote of the day also came from Michael Jensen in his later presentation on integrity and why and how it impacts finance. The quote grew out of his heuristic "without integrity nothing works" and into "As integrity declines, workablity declines; as workability declines, value declines."

While focused on finance (he used many examples from Boards of Directors, managers, etc), his advice is valuable to all.

WSJ Video on Stock crash of 1987

A twenty year look back

Best paper I saw on Thursday

While many papers I have seen here have been very good, possibly the best was by Agarwal, Boyson, and Naik on Hedged Mutual Funds. It is a really interesting and well done paper that is forthcoming in JFQAA.

I will discuss the paper soon (have to run to next session right now), but here is some background on hedged mutual funds.

From Investopedia:

"Hedged mutual funds, although previously only available to institutional clients, are now
readily available for use in the small retail investor's toolkit. While these types of mutual funds are gaining acceptance overseas, this article will focus on their relatively new existence in the United States retail investor marketplace. As a result of the repeal of the SEC's short-short rule in 1997, these funds draw on the decades-old hedge fund strategies within the traditional mutual fund structure. (To read more about traditional hedge funds, see Introduction To Hedge Funds - Part One, Part Two and A Brief History Of The Hedge Fund.)

With this relatively new mutual fund category, the barriers to entry are much lower."

And an old article on them from Financial Planning--Hedge-Like Mutual Funds Attract Investors: Mutual funds that strive for absolute returns in all kinds of markets rather than beating a particular benchmark are gaining in popularity, according to The Wall Street Journal.:

"...offer lower fees than pure hedge funds, as well as greater transparency and
liquidity, which further guarantee money-making opportunities. They offer a
higher level of oversight, charge lower fees, and face more scrutiny from
watchdogs than most hedge funds. Investors can also withdraw and add money on a
daily basis. "

Hi from the FMAs

Hi everyone,

Just a quick note from the FMAs. I saw many good presentations today. Here is the program (it is slow to load). I will be writing on many of the papers in coming days/weeks.

Free Money Finance: Pennies Add Up to Millions

Free Money Finance has two good articles stressing the importance of small things:

Free Money Finance: Pennies Add Up to Millions:

"...$5 a day over 40 years and invested at 10% yields almost $1.1 million. Is
your daily Starbucks coffee worth a fully-funded retirement when you can drink a
cheaper version of the same thing that costs a fraction of the price? This is
the heart of what Bach talks about. And this is the heart of the post
highlighted above -- a belief that I agree with. No, I'm not saying that you
can't spend on luxuries or other things that make life fun/worth living. Who
would want to live that way anyway? But I am saying that we all have some little
bit of spending we could do without and if we do choose to do without it, saving
and investing that money can add up to a big sum."

and then how to save some of that money ...

"Yahoo Finance has a list of ten money drains along with the annual costs of each of them. I view this as a list of where we all can save a bundle of money. Here's their list as well as
the annual amounts spent on each of them (in other words, what you could save if
you eliminated them):
1. Coffee -- $360 per year.2. Cigarettes -- $1,660 a year.3. Alcohol -- $3,650 per year.4. Bottled water from convenience stores -- $365 per year.5. Manicures -- $1,068 per year.6. Car washes -- $348 per year.7. Weekday lunches out -- $2,350 a year.8. Vending machines snacks -- $260 per year.9. Interest charges on credit card bills -- $4,868 in interest (over
time).10. Unused memberships -- $480 per year"

3 Americans Win Nobel in Economics - New York Times

3 Americans Win Nobel in Economics - New York Times:

"The field of mechanism design theory strives to take into account the realities of economic life systematically. Adam Smith’s “invisible hand” is a powerful metaphor that describes how the market, in theory, will always efficiently allocate scarce resources. Yet real-world conditions tend to complicate things. Competition is not completely free, consumers are not perfectly informed, optimizing private production and consumption may have social costs, and institutions can strongly shape economic bargaining. The work begun by Mr. Hurwicz, and advanced by Mr. Maskin and Mr. Myerson, gave economists and policy makers new intellectual tools to address questions like those listed in the academy’s citation: “How well do different such institutions, or allocation mechanisms, perform? What is the optimal mechanism to reach a certain goal, such as social welfare or private profit? Is government regulation called for, and if so, how is it best designed?”"

So Fama, Jensen, et al will have to wait at least another year.

The Associated Press: Nobel Prizes Look to Economics

The Associated Press: Nobel Prizes Look to Economics:

"Speculation on this year's prize has included economists who deal with international trade, macroeconomics and the labor market, among others. Fromlet said Jagdish Bhagwati, a noted proponent of free trade and critic of opponents of globalization, was one of his favorites. 'International trade is probably worth a prize,'"

Near the end of the article is my favorite:

"Other names figuring in this year's speculation include Americans Eugene Fama"

And of course Ross and Jensen should get some attention.

100 years ago

NPR : Lessons from Wall Street's 'Panic of 1907':

"On Oct. 17, 1907, panic began to spread on Wall Street after two men tried to corner the copper market. In the months preceding the panic, the stock market was shaky at best; banks and securities firms were contending with major liquidity problems. By mid-October, Wall Street was paralyzed; for days, there were runs on several large banks. Millions of dollars were withdrawn, and banks closed their doors. New York City was on the brink of bankruptcy. By 1908, there was a severe but short-lived recession. The man who saved the day was J.P. Morgan, who brought together leading financiers and banks to bail out the ailing market."

Move forward 100 years and the news has an eery resemblance. From Reuters via Yahoo:

"Major banks including Citigroup Inc are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said."

Lessons from the '87 Crash

Twenty years ago....

Lessons from the '87 Crash:

"In the five trading sessions from Oct. 13 to Oct. 19, 1987, the Dow Jones industrial average lost a third of its value and about $1 trillion of U.S. stock market value was wiped out. The losses culminated in a panic-stricken 22.6% decline in the Dow on Black Monday, Oct. 19. The traumatic drop raised recession fears and had some preparing for another Great Depression."

Kimmunique – EDUCATION FOR THE SELF-DIRECTED INVESTOR

Kimmunique – EDUCATION FOR THE SELF-DIRECTED INVESTOR:

"Obsession with performance is a disease inflicting most investors. A principled, rational approach makes more sense, but the medicine is difficult to swallow for most."

Well said. Make a plan and within reason try to stick to it!

Finance rises to the top - News

Congratulations to the BC finance department!

Finance rises to the top - News:

"After years of being close, finance has finally overtaken communication as the most popular area of study at Boston College. This marks the first time in University history that a major outside of the College of Arts and Sciences has held the top spot....the Carroll School of Management's finance concentration boasts 855 enrolled students, a 25-year high..."

Publish and Perish - Forbes.com

Publish and Perish - Forbes.com:

"Before taking over Alpha, Mark Carhart was an assistant professor of finance at the University of Southern California. He had studied under Eugene Fama, a founding father of the efficient-market theory, which says investors can't consistently beat the market. Carhart himself drew attention with a research paper warning investors against mutual funds with 'hot hands.' He wrote that his analysis of 1,892 funds over 32 years showed that high repeat returns had little to do with skill, and the winning streaks didn't last long anyway"

and then:

"Goldman hired Carhart soon after his article appeared in the Journal of Finance, and put him and a fellow Ph.D. from the University of Chicago, Raymond Iwanowski, in charge of the fledgling Alpha. Trading on complex mathematical models, Alpha returned 21% a year in the ten years through 2005. Goldman put many of its private banking customers into the fund.

Then, true to Carhart's theory, hot turned cold. Last year Alpha lost 9%. This year, thanks partly to bad bets on the yen and the Australian dollar, it's down 33%. Assets have fallen to $6 billion from $10 billion and are expected to fall by another 25% as investors bail out in the next few weeks."

Why the Statement of Cash Flows Matters - TheStreet.com University - The Finance Professor - APPB - BAC

Ironically we just did this today in my Advanced Corp Fin class...So for them it is required reading :)

Why the Statement of Cash Flows Matters - TheStreet.com University - The Finance Professor - APPB - BAC:

"A company's statement of cash flows creates a bridge -- or reconciliation -- between a company's cash balances from one accounting period to another. The statement of cash flows is important to investors because it provides insight into how a company generates and expends cash, and ultimately, its ability to return value to shareholders."

A conversation with Alan Greenspan - Charlie Rose

A conversation with Alan Greenspan - Charlie Rose:

"Alan Greenspan A conversation with Alan Greenspan Keywords: Federal Reserve Board , The Age of Turbulence: Adventures in a New World, greenpsan A conversation with Alan Greenspan about his life, his 18 year tenure as chairman of the U.S. Federal Reserve Board and his book, The Age of Turbulence: Adventures in a New World."

Just watched it...interesting. I really enjoy listening to Greenspan even if he often goes on a bit ;)

Brittany Spears Explaining the SubPrime Mortgage Market Problems

No that was not a typo. Watch at your own risk.

I will warn you the music is by Brittany and the finance is somewhat suspect, but close..and it is funny.

1000 posts! A look around at the news

I just realized I have had 1000 posts on this blog. Which is some kind of milestone I guess. As a 1001 post, I will revert back to a newsletter esq piece with a look around at other blogs, stories, etc...

***********************************

The Unknown Professor (Financial Rounds) reports on a WSJ article by Robert Reich on CEO pay.

"Reich then goes on to explain the increase in CEO pay over time as a rational consequence of increasing competition....50 years ago, most large firms were in oligopolistic industries, with stable unions and predictable revenue streams. So, CEOs were almost like quasi-bureaucrats.

In contrast, now the level of competition is so fierce (and entry barriers so low) that even small differences in managerial quality can result in huge changes in profitability and market value."

NY Times (and many others) give us a case study in the making (anyone want to co-author one?) on Northern Rock who got stuck in the quicksand of the current mortgage market and had to turn to the Bank of England for help to stave off a run on the bank.

"Depositors of a big British mortgage lender, Northern Rock, rushed to withdraw money on Friday after the bank, unable to raise financing because of the tight credit market, turned to the Bank of England for an emergency loan."

Bloomberg reports that Alan Greenspan in his new book warns of politicians trying to take more control/independence over the Fed. (Great for Money and Banking)

"There are already some signs that political scrutiny is rising. Democrats including Barney Frank of Massachusetts, who heads the House Financial Services Committee, called last week for a ``meaningful'' cut in interest rates.

``Federal Reserve independence is not set in stone,'' wrote Greenspan....``The dysfunctional state of American politics does not give me great confidence in the short run'' and there may be ``a return of populist, anti-Fed rhetoric,'' he wrote.

Interestingly the NY Times reports more on Greenspan's comments on politics and his inability to forecast the mortgage market problems.

Can you say Hyper-Inflation? Check out this piece from the BBC. (Great for Money and Banking)

"One US dollar now buys 30,000 Zimbabwe dollars on the official market, having previously earned 250 Zimbabwe dollars.

However dealers said that on the illegal market, $1 was buying 250,000 of the Zimbabwean currency

Latest figures put Zimbabwe's annual inflation at 7,634%. The International Monetary Fund (IMF) has warned it could reach 100,000% by the end of the year."

And finally, for those who want something else to worry about, what is we run out of oil sooner than most thought possible. (in a related item, oil is at or near its all time high.) CNN speculates the following:

"At some point in the near future, worldwide oil production will peak, then decline rapidly, causing depression-like conditions or even the starvation of billions across the globe.That's the worst-case scenario for subscribers to the "peak oil" theory, who generally believe oil production has either topped out or will do so in the next couple of years"

It may be time to look back at some of the most important posts soon. Stay tuned.