Saturday, September 29, 2007

Publish and Perish -

Publish and Perish -
"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."

Wednesday, September 26, 2007

Why the Statement of Cash Flows Matters - 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 - 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."

Friday, September 21, 2007

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 ;)

Tuesday, September 18, 2007

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.

Saturday, September 15, 2007

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.

Friday, September 14, 2007

Evidence on Cross listing, governance, and cash holdings

Is cash good or bad? Actually that is roughly how I started my dissertation. The answer is yes.

It is both bad and good. Good because it gives firms more flexibility, lowers transaction costs, and allows faster responses to opportunities. Cash is bad because it offers managers too much flexibility and worsens agency cost problems by shielding managers from market discipline (essentially Jensen's Free Cash flow problem).

In an upcoming paper (to be presented at the FMAs in Orlando) Fresard and Salva combine that idea with literature suggesting that foreign firms that list their shares in the US experience improved governance. They find evidence fits both hypotheses.

FresardSalva2007.pdf (application/pdf Object)

A few look-ins:

* "...find strong evidence that the value of cash increases when foreign firms list shares in the U.S. More precisely, we observe no significant difference in the value of cash between firms that are not yet cross-listed and their domestic peers. However, once firms cross-list in the U.S., investors significantly raise their valuation of cash.'

* "...the value of cash increases only marginally for firms located in countries with high institutional quality. In contrast, firms from poorly protected environments experience a substantial increase in their value of cash after they cross-list."

Cite: Fresard.Laurant and Carolina Salva 2007, "Does Cross-listing in the US really improve Corporate Governance? Evidence fro the value of liquidity." Working paper Available here.

Interesting! (and people ask me why I always look forward to the FMAs (even when they are in Orlando which is one of my least favorite cities.) This paper is being presented at 8:00 on Wed October 17.

Hedge funds lure business school profs

Hedge funds lure business school profs:
"The growing and lightly regulated hedge fund industry is attracting new players -- business school professors eager to test their theories in a field known for big risks and occasionally bigger rewards. Hedge funds are becoming a tempting tool for faculty members looking to sharpen research and giving a Wall Street perspective to their students, all while making some extra money."

Thursday, September 13, 2007


I know some of the FinanceProfessors who follow this blog also teach a version of class that has real money invested. At SBU we call it SIMM (Students in Money Management). This is my first semester teaching it. (so if you have any advice, please let me know!)

We have (or will soon have) about $150,000 to invest. We have decided to make this as open a fund as possible and will allow much of what we do to be followed by investors, interested parties, and even you!

So in that light, here is a Blog that was started today.
BonaSIMM: "This blog will be for Students in Money Management at St. Bonaventure University. We will use it to keep up to date on changes in our portfolio as well as to communicate with various stakeholders (donors, investors, as well as each other). The students in the class will be writing [much of]the material."

Taleb takes on Black, Scholes, Merton

WOW. This one is hard hitting for any paper, let alone an academic paper.

And on top of that it is co-authored by Espen Haug and Nissam Taleb (yep same one).

The paper itself says "do not quote" so I won't. It also says do not disseminate but the authors (put it online, so I think that one is just for

But the abstract is fair game, so from the abstract:
"However we have historical evidence that 1) Black, Scholes and Merton did not invent any formula, just found an argument to make a well known (and used) formula compatible with the economics establishment, by removing the “risk” parameter through "dynamic hedging", 2) Option traders use (and evidently have used since 1902) the previous versions of the formula of Louis Bachelier and Edward O. Thorp (that allow a broad choice of probability distributions) and removed the risk parameter by using put-call parity. The Bachelier-Thorp approach is more robust (among other things) to the high impact rare event. It is time to stop calling the formula by the wrong name."
Talk about a major claim. So for the record, yes the Black-Scholes Option Pricing model (BSOPM) relies too heavily on the normal distribution. That has been known for seemingly ever. I remember my professors saying it back in the stone age. But the many parts will definitely get your attention (Especially if you have read Taleb rail against the normal distribution in his Black Swan book.)

It is also well known that much of the BSOPM did grow out of Bachelier's work (see for instance the Nova presentation Trillion Dollar Bet.) I do not know the extent of option pricing literature (and use?) prior to the BSOPM but it is worth a look or two.

Cite: Haug, Espen Gaarder and Taleb, Nassim Nicholas, "Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula" . Available at SSRN:

Thanks to Barry over at the Financial Page (which is a great blog btw) for mentioning this one!

Housing costs punish family budgets -

When you increase fixed costs (be they debt, taxes, or whatever) you increase risk since a very minor slowdown is so magnified (rememebr debt makes good times great, bad times horrible).

Thus, this USATODAY article is a partial (and obviously after the fact) look at what is causing so many problems in the sub prime mortgage markets.

Housing costs punish family budgets -
"For some, the financial burden is far worse: 14% of homeowners with mortgages — more than 7 million households — shell out at least half their gross monthly income to cover their home loan, property taxes, insurance and utilities, up from 10% in 2000."

Tuesday, September 11, 2007

Bear Stearns Update

The window of opportunity - Times Online:
"Joe Lewis bought a 7 per cent stake in Bear Stearns, the investment bank which has lost just over a third of its value after the closure of two of its hedge funds. Mr Lewis is best known in the UK for his stake in Tottenham Hotspur. But the investment by the former restaurateur crystallises the question that is on the minds of bankers everywhere: is it time to start buying? There are clearly investors out there who believe that the anxiety is overdone and that, as a result, assets are undervalued. Lehman Brothers has been busy in recent days putting together a $3 billion distressed debt fund. Goldman Sachs has been working on something similar. Just as the boom underestimated risk in the credit markets, the current crisis seems to overestimate risk"

Monday, September 10, 2007

KKR Close to Concession on First Data Deal: Report - New York Times

KKR Close to Concession on First Data Deal: Report - New York Times:
"Kohlberg Kravis Roberts & Co. appears willing to make a concession to the banks financing its $26 billion leveraged buyout of payment processor First Data Corp , according to a report on Sunday, in a move that underscores the intense pressure the credit crunch has put on investment banks and their top private equity clients. KKR has agreed to a covenant that places performance criteria on First Data's debt, the Wall Street Journal reported late on Sunday. The firm has agreed to maintain a certain level of earnings before interest payments, depreciation, tax and amortization (EBITDA) in relation to the senior debt, the report said, citing people familiar with the matter."

What great timing for class! We have been talking about the Nexus of Contracts and will be starting bonds this week.

In lack of the covenant, KKR would have to pay higher interest rates on their new debt.

Private lives of CEOs tied to profit, loss

For a news paper article, this one is great! It is a series of summaries that basically show that CEO's personal life impacts the firm.

Private lives of CEOs tied to profit, loss:

"Should shareholders in a company care if the chief executive's child dies? What if the mother-in-law passes away?.....slid by about one-fifth, on average, in the two years after the death of a CEO's child, and by about 15 percent after the death of a spouse. As for an executive's mother-in-law, the old jokes seem to hold: The researchers found that profitability, on average, rose slightly after her demise."
Great article, read the whole thing!