Tuesday, June 30, 2009

Armstrong, ‘Celebrity’ Directors Targeted in SEC Rule (Update1) - Bloomberg.com

Will talk about this after the workout, but since it has both Lance (Asrmstrong) and David (Becher) in it, it has to be a good article!

Armstrong, ‘Celebrity’ Directors Targeted in SEC Rule (Update1) - Bloomberg.com:
"Recruiting celebrity directors can bring benefits, such as helping a company burnish its image or pursue new business opportunities, said David Becher, an associate finance professor at Drexel University in Philadelphia."

(Lance is my hero, David my former roommate at Penn State).

Monday, June 29, 2009

Tweets of the Week (June 22-29

BTW I will fix the links and make it look better later....getting something online better than zero...

Tweets of the Week!

Lots of good ones this week. Take a look at some. Not in any real order.

researchpuzzler RT @BrightScope: Steven Covey would be proud: The 7 habits of highly suspicious hedge funds. http://bit.ly/Txqf7

researchpuzzler investment news on twitter and compliance issues for investment professionals http://bit.ly/Pcy1h $$

mashableFacebook Sets the Stage for IPO With New CFO - http://bit.ly/i09YI

Columbia_BizMore on the business-nonprofit nexus from Prof. Horton in Ideas at Work - http://tinyurl.com/no2p2e.

planetmoneyWhen boring = great, John Lorinc profiles the head of Canada's central bank, via @freakonomics /mk http://bit.ly/RqlNp

planetmoney New podcast up now: how pension funds bankroll private equity with WNYC's Lisa Chow. /jg http://snurl.com/ky5pc

planetmoney Got a ton of student loan debt? You could soon be in luck /mk http://bit.ly/6rYh4

planetmoney Madoff's sentence: one day in prison for every $1.2 million of fraud in the $65 billion scheme /mk http://bit.ly/WG6dc

“Too Big To Fail” Reining In Large Financial Firms: This paper provides a well balanced perspective .. http://tinyurl.com/n9b4rs

What The Bailout Is Really Costing Us: In case you’re wondering the image is adjusted for inflation. Click.. http://tinyurl.com/ndkbu5

SimoleonSense The Effects of Framing, Reflection, Probability, and Payoff on Risk Preference in Choice Tasks: My favorite part.. http://tinyurl.com/mp676k

HarvardBiz How to Tie Equity Pay to Long-Term Performance http://bit.ly/RBlfz

clusterstock Obama: Tear Down These Highways! http://bit.ly/Ay3LO

WallStSource China's Bid to Stir Its Economy Draws Cries of Protectionism http://wssource.com/~7REwRD...

WestPan The creators of Deloitte's Shift Index warn that the boom/bust cycles of the last few decades R ma... http://seekingalpha.com/n/kgy

WallStSource Fed hints it may turn off liquidity tap http://wssource.com/~7RH810...

BreakingNews AP: Bernanke says he didn't pressure Bank of America to buy Merrill, or keep financial woes quiet.

nytimes Bernanke Defends His Role in Merrill Sale http://bit.ly/ZoACU

mises What Changes and What Does Not: "Why, you'd take us back to the horse and buggy." The basic fallacy of this all-.. http://tinyurl.com/mjntkl

Freakonomics: 79 Years Ago, Today: A new blog, News from 1930, summarizes the news that appeared in The Wall Street Journal ea.. http://tinyurl.com/mzw5k5

NellMinow Shareowners.org launch today at 11 EST. Press conf call-in 800 860-2442 Survey results on investor confidence and robust new database.

FinanceDarkSideAs retirement will be funded mostly by discretionary personal savings, should we not teach basic finance in all high schools?

jack_welch Barney Frank at it again..asks FNMA Fred M to lower lending standards for condo buyers...Guy is unbelievable and does it with straight face

Less finance related but still important

mashable Reading: "100 Tips, Tools, and Resources for Twitter Research" - http://bit.ly/21S60r

WOW time flies BreakingNews Ten years ago, the world watched the daring South Pole winter rescue of Dr. Jerri Nielsen FitzGerald. Today, she died at 57, AP reports.

octavianasr CNN"Holding on to anger is like grasping a hot coal with the intent of throwing it at someone else; you are the one getting burned." Buddha

tonyrobbins "Don't look for heroes; be one!" -Tony Robbins

On average, every 5 mph over 60mi/h that you drive is same as paying another $0.24/gal for gas. http://bit.ly/Jjd1H

BonaResponds local service day July 11th. (2 WEEKS!) Can you make it? 10-4:00. Working with RebuildingTogether on three homes in Olean

No Such Thing as a Free Lunch, Revisited - Economix Blog - NYTimes.com

Whether you believe markets are efficient or not, this one has something for you. It will be a definte "MUST read" for my students this coming semester. It is by Ed Glassnor of Harvard.

No Such Thing as a Free Lunch, Revisited - Economix Blog - NYTimes.com:
"The absence of arbitrage possibilities does not imply that market prices always and everywhere reflect some sort of fundamental values. Plenty of housing price changes are predictable, and Las Vegas looked pretty overpriced 30 months ago. But how could I have profited from this knowledge, other than avoiding the folly of buying at the peak? There was no easy way to short Las Vegas real estate."


"...the existence of bubbles and market irrationality doesn’t mean that markets are inefficient, in the sense that they allow easy arbitrage. A classic paper written more than two decades ago by Brad DeLong, Andrei Shleifer, Larry Summers and Robert Waldmann showed that less-than-rational “ noise traders” (a term coined by Fischer Black) could move markets even when rational traders have arbitraged away all the free lunches. The vicious swings of our asset markets suggest that these markets may often be moved by strange, probably irrational forces, but that doesn’t imply that the Efficient Markets Hypothesis is dead."
The article concludes:

"...recognizing the occasional madness of markets can provide a bit of investment guidance. The difficulty inherent in finding free lunches doesn’t mean that buyers should just buy a house, or a mortgage-backed security or a stock, trusting that the market has priced things correctly. A house doesn’t become a good buy just because some other idiot paid a fortune for a similar home down the street. A similar fool may not be around when you are looking to sell."

I would also encourage you to read the comment by Tom Brakke:
"...it generally is good advice to buy asset exposures cheaply (as to fees), but only if you can really buy them cheaply (as to valuation)."

Using Psychology To Save You From Yourself : NPR

Seems like everywhere we look we see another Behavioral Finance Story. This story (also in audio format) is from NPR:

Using Psychology To Save You From Yourself : NPR:

"...devotees of behavioral economics — a school of economic thought greatly influenced by psychological research — which argues that the human animal is hard-wired to make errors when it comes to decision-making, and therefore people need a little "nudge" to make decisions that are in their own best interests.

.....This is the story of how obscure psychological research into human decision-making first revolutionized economics and now appears poised to remake the relationship between the government and its citizens

Later the piece goes on to discuss the "illusion of validity". Which is the unshaken belief that we are better than we are. And to which I reply a resounding "Guilty as Charged."

"It's a problem that afflicts us all, says Kahneman, who won the 2002 Nobel Prize in economics for his work on this subject. From stockbrokers to baseball scouts, people have a huge amount of confidence in their own judgment, even in the face of evidence that their judgment is wrong.

But that mistake is just one of many cognitive errors identified by Kahneman and his frequent collaborator, psychologist Amos Tversky. For more than a decade, the two worked together cataloging the ways the human mind systematically misjudges the world around it."

Good stuff. The audio is about 9 minutes long but well worth it.

Saturday, June 27, 2009

Here's How The Community Reinvestment Act Led To The Housing Bubble's Lax Lending

The following is John Carney's explanation of how he now believes the Community Reivestment Act of 1977 helped lead to the housing bubble.

Here's How The Community Reinvestment Act Led To The Housing Bubble's Lax Lending: "Contrary to my initial conclusion, the evidence is overwhelming that the CRA played a significant role in creating lax lending standards that fueled the housing bubble."

It is fairly complex piece (even if named a "quick" guide), but will give a few look-ins.

"Let's begin:

  • How could a piece of 1977 legislation be significant to the deterioration of mortgage standards 25 years later?
The CRA was not a static piece of legislation. It evolved over the years from a relatively hands-off law focused on process into one that focused on outcomes ...Regulators, beginning in the mid-nineties, began to hold banks accountable in serious ways. Banks responded to this new accountability by increasing the CRA loans they made, a move that entailed relaxing their lending standards"

Another peek:

"Regulators instructed banks to consider alternatives to traditional credit histories because CRA targeted borrowers often lacked traditional credit histories. The banks were expected to become creative, to consider other indicators of reliability.

Similarly, banks were expected by regulators to relax income requirements. Day labors and others often lack reportable income. Stated-income was a way of resolving the gap between actual income of borrowers and reported income. The problem, of course, comes when the con-artists and liars come into the game."

And lest you think this is just an attack on one political party, there is plenty of blame to go around. Note the following:

"George W. Bush was a major proponent of the kind of mortgages that banks had started making under the CRA. He urged low-to-no doc mortgages and the elimination of downpayments, just like the CRA regulators had long done. “We certainly don't want there to be a fine print preventing people from owning their home,” the President said in a 2002 speech. “We can change the print, and we've got to.”"

There is much more, but it is definitely an article that you should read. Even if you do not think you agree with all of his conclusions, it will serve all of us to see the often unintended consequences of relaxing standards.

Interestingly I have sort of gone through a similar metamorphosis. From September when people began saying this was a main cause to now I have come to realize the CRA did play more of a role than I thought. The fact that regulators evaluated banks on making these loans led to more of the loans. To me that has now become unarguable. Was it the only reason for the bubble? No, but it did play a large role. Or in Carney's words:

"Of course it wasn’t the CRA that caused everything. The CRA was a factor in lowering lending standards. This was a necessary, although not sufficient, cause for the mortgage mess"

(BTW the points he addresses are in many ways similar to those raised in academic circles that have led to grade inflation and high passing rates. But that could be a whole other topic for another day!)

Time out for a laugh.

LOW FINANCE CONTENT...but if you are a professor who does research in any field, I am sure you will find this funny.

Someone left this site as a comment on an old post. The cartoons are really funny. Go ahead click on it!

High & Low Impact Factors- "Life in Research" Cartoon | VADLO Biology Databases Search Engine

Friday, June 26, 2009

Holders of Season Tickets Are Having Second Thoughts - NYTimes.com

Is it the economy or the product? Either way the teams (and likely MLB in general) have some work to do!

Teaching point: all too often students ask why should the company care if the stock price in teh secondary market goes up or down. The standard answer includes a mention of what happens when they want to sell more shares in a SEO. This is quite similar. Here the article focuses on the secondary market for baseball tickets, but also shows that this secondary market impacts the primary market as well (as evidence by the teams cutting prices etc).

From the NY Times:

Holders of Season Tickets Are Having Second Thoughts - NYTimes.com:

"The weak resale market has Goldman and a growing number of Mets and Yankees season-ticket holders considering whether to drop their seats next year, or to switch to a plan with fewer games or cheaper seats. The risk of getting stuck with expensive tickets that are hard to resell, they said, is just too high in a weak economy."

and later

"If I can’t move these tickets, I can’t afford to be stuck with them or take a loss,” said Mr. Coleman, who said he was getting 40 percent less this year for tickets to weekday games that he resold. “The proof is the secondary market. If you don’t have people willing to buy tickets at these prices, I hope the message gets across to the Yankees and Mets.”"

Anecdotally, I went to Citi Field for the first time this past Sunday and will definitely agree there were MANY empty seats and purchased the tickets for about 25% under face value in a "Secondary market" transaction and even then wonder if I got my money's worth. Yes the park was nice, but the game itself was not very good. It rained, the game was much too long of game (a MoneyBall result? Must every player try and work a full count?) and they lost.

News from 1930

Fascinating! A blog that is redoing the news from 1930. Eerily similar in some ways.

News from 1930:
"In hindsight it's easy to see the optimism then was mistaken and the downturn was worse than expected, but this was impossible to predict at the time. Also, the conferences did some good - they reduced the panic and pessimism of the time, and helped keep employment and wages from plunging as they otherwise would have. Some now say we should have “plunged headlong into general liquidation,” but would we have been better off with two or three times as many unemployed over the winter? We shouldn't allow frustration with the delayed recovery to upset our nerve."

HT to Freakonomics

Thursday, June 25, 2009

CBC podcast on Behavioral Finance

Why good people make bad money decisions.

Interesting podcast on Behavioral Finance from the CBC. Definitely want to listen to this one!

CBC Radio | Quirks & Quarks | June 20, 2009:
"Dr. Richard Thaler, Professor of Economics and Behavioural Science at the Booth School of Business in Chicago is one of the leading researchers in the relatively new field of behavioural economics. This is the field that's exploring some of the ways in which humans reliably and systematically make decisions that most economists would consider irrational. He's also written a best-selling book, called Nudge, Improving Decisions about Health, Wealth and Happiness that explores ways to work around our irrational tendencies. Other behavioural economists, like Dr. Colin Camerer, the Robert Kirby Professor of Behavioural Economics at the California Institute of Technology, are using advanced technologies, like MRI, to study just what's going on deep in the human brain when we make all sorts of decisions"

Wednesday, June 24, 2009

Today's Crystal Ball Award

First let me make the typical excuses: "There is so much information out there, sometimes something slips through the cracks and is missed; I was busy; I was out of town then; I was going to but....."

Having provided those excuses, let me add that there really is no excuse for my missing Ed Kane's piece for so long. Thankfully, the NY Times had my back and drew it to our attention.

Fair Game - How a Wall Street Revamp Expands the Status Quo - NYTimes.com:
"Last August, Edward J. Kane, a finance professor at Boston College, wrote about just this likelihood in a paper titled “Ethical Failures in Regulating and Supervising the Pursuit of Safety-Net Subsidies.”....
“When a substantial portion of the financial sector appears to be at risk, it is far easier to patch up the weaknesses in the system with ad hoc loans and guarantees than to negotiate genuine reform,” he wrote."....
For top regulators to be able to push through larger bailouts, he argued, two conditions must hold. “First they must be able to control the flow of information,” ...“so as to keep taxpayers and the press from convincingly assessing either the magnitude of the implicit capital transfer or the anti-egalitarian character of the subsidization scheme.”
(FP's emphasis)
and secondly:

"Regulators’ commitment to these bailout policies “must be continually nourished by praise and other forms of tribute from the bankers, borrowers and investors whose losses are being shifted to less-influential parties.”"

Well well. Professsor Kane congratulations on today's Crystal Ball award! You definitely nailed it!

A Butterfly Spreads Its Wings on Wall Street - Barrons.com

A keeper for showing Butterflies in class! My number one piece of advice on ANY derivatives trade? Draw the payoff and profit diagrams.

A Butterfly Spreads Its Wings on Wall Street - Barrons.com:
"Here's how a typical butterfly or fly trade works.

Palsson told clients to consider buying an August 90 put and an August 70 put on the Standard & Poor's Depositary Receipts (SPY), an exchange-traded fund that tracks the S&P 500 index. At the same time, Palsson advised clients to sell two August 80 puts. SPY was at about $89 when he recommended the trade, and was recently at about the same price. The trade costs $1.85, representing the limit of the loss if the strategy fails.

The strategy is called a butterfly because when it is executed it looks like the often colorful insect. Effectively, traders are long the wings -- the August 70 and 90 puts, and short the body -- the two August 80 puts. (Read that sentence again because this can be confusing and complicated material.)"

Economic View - It May Be Time for the Fed to Go Negative - News Analysis - NYTimes.com

Now here is a creative solution!

Economic View - It May Be Time for the Fed to Go Negative - News Analysis - NYTimes.com:
"Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

The idea of making money earn a negative return is not entirely new. In the late 19th century, the German economist Silvio Gesell argued for a tax on holding money. He was concerned that during times of financial stress, people hoard money rather than lend it."

Monday, June 22, 2009

Failed Banks List: 2009 - Financials * US * News * Story - CNBC.com

Failed Banks List: 2009 - Financials * US * News * Story - CNBC.com:
"Below is a list of all the US banks that have closed this year, with the most recent ones first.

A total of 40 banks have failed so far in 2009, versus 25 for all of 2008. For more on failed banks, check out our slideshows of the ten largest bank failures this year and the two dozen of 2008."

Tweets of the week

Tweets of the week (June 22, 2009)

Been on the road some with limited internet access, so this will be a bit unorganized and shorter...

  1. Best NYT business article today in sports section: Golfers hurt themselves by playing it safe /lc http://snurl.com/k8azv
  2. Looks like deflation might not be so scary a threat after all, at least according to the Fed /mk http://bit.ly/1ahpzZ
  3. Brand new podcast: 5 takes on Obamas regulation reform. /jg http://snurl.com/kburp
  4. AIG wins the prestigious Worst Company in America Award, the Golden Poo /mk http://bit.ly/PDnhO

  1. #SSRN East Meets West: A #Cross-Cultural Comparison of #Charismatic Leadership Among #Canadian and #Iranian #Executives http://bit.ly/P4oa9
  2. #SSRN What Should #GAAP Look Like? http://bit.ly/LzLP4
  3. Blog: "Return Factors" GOOD SUMMARY OF "CASE CLOSED" By Bob Haugen http://tinyurl.com/mbeq5s
  4. #CFO: Will the New #FASB Code Change #Accounting? http://tinyurl.com/nsljgv
  5. #SSRN - #Pricing #Model Performance and the Two-Pass Cross-Sectional #Regression #Methodology http://bit.ly/lWuJf
  6. NBER: Do Multinationals or Domestic Firms Face Higher Effective Tax Rates? http://tinyurl.com/lohlmy
  1. RT @CatoInstitute: Paul Krugman's gets his history wrong. Very wrong. #FAIL http://bit.ly/JrKUx @nytimeskrugman @PaulKrugman
  2. RT @leahita A Recent History of the US Economy! Truly enlightening! http://tinyurl.com/ln5o9o #tcot #liberty #C4L (via @codeezra)
  3. Orwell's Time-Tested Warnings By Jeff Jacoby http://ff.im/-4iCnn (via @HighPlainsBlogr)
  4. Protectionism, buying only from your immediate kin , i.e. Buy America, China, Canada, like incest, breeds weak-anemic offspring/economies.
  5. Those who can make you believe absurdities can make you commit atrocities. - Voltaire, rationalist & satirist (1694 - 1778)


clusterstock Goldman Prepares To Pay Biggest Bonuses Ever http://bit.ly/478sk

clusterstock The Moneyball Movie Gets Scrapped http://bit.ly/MleYP

EverydayFinance Wealthy Nations Investing in Africa. TIME mag http://bit.ly/xuql3

EverydayFinance List of all bank failures to date in 2009 CNBC: http://www.cnbc.com/id/3104...

Eco_Feed: Stocks Cheap? Don't Be A Fool: Fund manager John Hussman looks at stock valuations a few different .. http://cli.gs/mbTB1X

SimoleonSenseDaily Behavioral Bias: The Issue Of Framing: Bias: Framing Quick Definition:(Via Wikipedia & Behavioral Fina.. http://tinyurl.com/mnh88s

diane1859: The fightback against 'Nudging' begins - just found fab new paper dissing fashion for behavioral economics, at http://snurl.com/knuqs

Convertbond Too big to fail? I say too big to succeed! 4 biggest US banks control 70% of all assets held by US banks Vs < 50% in 2000! #paulson #economy

Lee Iacocca says the only way to get the US auto industry back to health is to take the keys away from the #government $F GMAC Rescap

mises The Deflating Bubble: The residential meltdown is nowhere close to being over. There is reportedly a million-hou.. http://tinyurl.com/nvzfv4

thecorplibrary New blog post about "The Future of Corporate Reform" conference: http://is.gd/14C1t #tclconference

Eric Johnson comments on behavioral economics making an appearance in policy - regulation as intelligent, not intrusive http://bit.ly/6glDC

jimmahar Interesting interview: Geithner by @terrymoran (not T$). Discusses regulation, recovery, and the Fed. http://tinyurl.com/lu44hu

kevinlacroix The Boardroom Guide to Litigation -- analysis of legal climate in all 50 states http://bit.ly/Vi7HL

Some of little finance content, but:

allafrica Uganda: All Citizens to Get Free Mosquito Nets: http://allafrica.com/storie...

allafrica East Africa: Al-Qaeda Threatens Peace in Region: http://allafrica.com/storie...

KaztheProf If we want to reduce the cost of government then it starts with you...the more we do the less the government will think it has to do!!!

Friday, June 19, 2009

‘Impossible to Understand’ Swap Burns 290-Person Italian Hamlet - Bloomberg.com

"If your friends jumped off a cliff, would you?"

‘Impossible to Understand’ Swap Burns 290-Person Italian Hamlet - Bloomberg.com:
"Ortenzio Matteucci points to towns down the wooded Nerina valley in Italy’s Umbria region and blames peer pressure for his decision to let Polino, population 290, buy a U.S.-inspired financial swap he didn’t understand.

A retired steelworker with wavy gray hair, Polino’s Mayor Matteucci says he agreed to the interest-rate swap because Milan...and local towns Arrone and Stroncone all bought derivatives to try to save money....Derivatives have burned towns from Polino to Milan to Erie, Pennsylvania. Jefferson County, Alabama, said it might need to declare bankruptcy because of costs associated with the contracts. Responsibility for the expenses in Italy’s second- biggest city and in Umbria’s smallest village sits with elected officials who agreed to financial instruments they didn’t fully grasp"

Turning Nonprofits into For-Profits - BusinessWeek

Time to rewrite my notes again to incorporate these new organizational forms.

Turning Nonprofits into For-Profits - BusinessWeek:
"Social enterprises...often don't fit neatly into existing ownership structures. Those that register as nonprofits have trouble tapping private capital to expand, while for-profit companies risk compromising their missions because they must put shareholders' returns first. But growing interest in hybrid business models has spurred recent efforts at the state level to create new corporate structures that allow entrepreneurs to integrate nonfinancial goals into for-profit businesses..

...known as the Low-profit Limited Liability Company (or L3C), is intended for companies that put their missions before profits. The structure lets them qualify for "program-related investments" from foundations—loans or investments that further a foundation's goals and also may yield financial returns. "

From the NonProfitBlog:

"The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors.

A principal advantage of the L3C is its qualification as a program related investment (PRI), an investment with a socially beneficial purpose that is consistent with and furthers a foundation’s mission. Because foundations can only directly invest in for-profit ventures qualified as PRIs, many foundations refrain from investing in for-profit ventures due to the uncertainty of whether they would qualify as PRIs or use costly time and resources to acquire a Private Letter Ruling from the IRS to verify that the venture is a valid PRI."

I can definitely see this as being useful. The ability (even if never occurs) to get money back at some point would likely be a very strong selling point to contributors. Indeed, I can see this as something BonaResponds or likely better our student run money management class could look into in the future if we were to truly have the time/desire to maximize our impact.

For Colleges, Small Cutbacks Are Adding Up to Big Savings - NYTimes.com

Wow, things are getting tough.
For Colleges, Small Cutbacks Are Adding Up to Big Savings - NYTimes.com:

The article lists many cuts that are happening around the country, but my favorite (actually least favorite) is this:
"At Dickinson College in Carlisle, Pa., the women’s swim team held a “virtual swim meet” with Bryn Mawr College, in Pennsylvania, about 112 miles away. Each team swam in its home pool, then compared times to determine the winners. (“We probably saved $900 on bus travel,” said William G. Durden, Dickinson’s president.)"

SSRN-Corporate Governance Systems and Firm Value: Empirical Evidence for the Value of Committee Systems with Outside Directors by Robert Eberhart

This fits theory so well it is exciting!

SSRN-Corporate Governance Systems and Firm Value: Empirical Evidence for the Value of Committee Systems with Outside Directors by Robert Eberhart:
"The paper presents evidence that the adoption by Japanese firms of a shareholder-centric, more transparent, system of corporate governance creates greater corporate value in comparison to the traditional system.... The effect is not only significant, it is important in magnitude. This paper takes advantage of the unique opportunity afforded by Japan’s introduction of a dual system of corporate governance in 2003, when companies were offered a choice to adopt a new system incorporating outside directors on governing committees. Data analysis shows a significant increase in firm valuation as measured by Tobin’s q, for companies that adopted the committee system, even though comparative financial data show little difference. This finding is attributed to signal sending, as companies who adopted this system signal a choice toward transparency and openness."

Thursday, June 18, 2009

Secretary Tim Geithner Discusses the 'Healthy, but Slow' Economic Recovery - ABC News

Well he is saying the right stuff...will it play out like this?

Secretary Tim Geithner Discusses the 'Healthy, but Slow' Economic Recovery - ABC News:

MORAN: Why? What in this package today would have prevented what happened last fall?

GEITHNER: ... maybe three key things. The first is we need to give consumers better protections against the risk they get taken advantage of....

The second is to make sure that banks can't take on this much risk and other institutions can't take on risk that threatens the basic fabric of the economy. And so we've put in place much stronger protections, safeguards, stronger constraints on leverage, capital requirements.... again"

And the third because we're not going to be able to prevent....all crises in the future, we need to have better capacity to manage...potential failure of large institutions

MORAN: Now one of the things you're already hearing is that in the effort to protect the system you're stifling it. Too much new regulation and you'll crush the life out of the financial system.

GEITHNER: We've got to get the balance right. I don't think we had it right.

and then later (it is a pretty long interview):

"MORAN: One of the things in this proposal is more power for the Federal Reserve Board and that is very controversial. There are a lot of people saying that's a dangerous thing to do. The Fed should just be about the money policy and not get involved in regulation. What do you say to that?

GEITHNER: All central banks, including ours, our Federal Reserve, are given responsibility for monetary policy, to keep growth stable over time, inflation low and stable. But alongside that responsibility, in the United States, almost 100 years ago, an in countries round the world, central banks also have this critical responsibility for financial stability.

The question is, and the challenge is to make sure they have the authority to discharge that responsibility well."

From FT.com: Crisis of faith for high priests of rational markets

Not sure if survey data really is the way to get at it, but the article is worth reading and does convey the way much of the field seems to be going.

FT.com / MARKETS / Equities - Crisis of faith for high priests of rational markets:
"The British CFA recently asked its members for the first time if they trusted in “market efficiency” – and discovered that more than two-thirds of respondents no longer believed that market prices reflected all available information.

...77 per cent of the CFA group also “strongly” or “very strongly” disagreed that investors in aggregate behaved “rationally” – in apparent defiance of the “wisdom of crowds” idea that has driven much investment theory.

The shift is significant as the assumption of efficient markets is a cornerstone of the financial calculations of valuing everything from stocks to pension fund liabilities to executive compensation.

William Goodhart, chief executive of the CFA Society of the UK, on Monday admitted that the results showed a new mood of “questioning” following the financial crisis."

Tuesday, June 16, 2009

Business.view: Coffee and pastries but no debate | The Economist

Interesting look at shareholder meetings from The Economist.

Business.view: Coffee and pastries but no debate | The Economist:
"Exxon Mobil is not alone in giving the appearance of regarding the annual meeting as a pointless legal obligation, a sort of tax on the time of the executives and board which must be endured with the least possible effort. Indeed, there is no reason to think that Exxon Mobil is a particularly serious offender: at least it provides decent pastries, and the entire board attends.

Contrast that with an infamous annual meeting of Home Depot shareholders in 2006. Bob Nardelli, the retailer’s then boss, was the only director to show up. Large clocks were used to keep the utterances of talkative shareholders to a minimum. Mr Nardelli, whose combative style earned the firm the nickname “Home Despot”, did not take questions. The whole event was over in less than 40 minutes. Mr Nardelli was fired soon after, in part because of shareholders’ fury at his annual-meeting arrogance—though more because he had failed, despite a huge pay package, to move the firm’s share price in the right direction."

Want to see an actual shareholder meeting? Here is one from Wal Mart:

Lack of Regulation Didn't Cause the Crisis and More Rules Won't Prevent the Next One: Tech Ticker, Yahoo! Finance

Definitely not the best video ever (Ex. SOX was not designed to prevent these type of problems), but it does get the point across that regulation for regulation sake is not a good idea, that people will find ways around regulations, and that hedge funds did not cause the problems, banks (which were already heavily regulated) caused the problems.

(Watch the video).

Lack of Regulation Didn't Cause the Crisis and More Rules Won't Prevent the Next One: Tech Ticker, Yahoo! Finance:
"Jeff Matthews...wants you...to remember this: 'The epicenter of the financial crisis that almost brought the world to its knees was the regulated portion of the U.S. financial system -- in particular Fannie Mae and Freddie Mac, two of the most regulated entities ever created.'"
Thanks to MT for the link!

SSRN-Hedging Real-Estate Risk by Frank Fabozzi, Robert Shiller, Radu Tunaru

SSRN-Hedging Real-Estate Risk by Frank Fabozzi, Robert Shiller, Radu Tunaru:
"Real-estate assets represent more than one-third of the value of all the underlying physical capital in the United States and the world. The relationship between the level of interest rates and housing prices does not always follow one direction and a shock event in one market may trigger deep repercussions in the other. With the spread of the securitization process, the risks rooted in these two fundamental markets can have far reaching outcomes."

A fairly long "Look-in" that captures the basic idea:

"The introduction of derivatives in the real-estate market is not easy because liquidity is difficult to establish when returns are predictable. An extensive discussion highlighting the important psychological barriers that need to be passed for the establishment of real-estate derivatives is provided in Shiller [2008]. ...The major obstacle for the introduction of real-estate derivatives was that when returns follow trends at certain points in time, then market sentiment is in only one direction and it is difficult to find counterparties trading against the trend. Nevertheless, if a futures contract is already trading for a series of future maturities, then the shape of the forward curve on real-estate index becomes important. Trades may be executed on the curve, say short a futures with a long maturity and long a futures with shorter maturity, which would be impossible to execute otherwise. With futures and options on futures, an entire spectrum of trading strategies becomes available and market participants such as hedge funds, investment houses, and private equity funds may provide much needed liquidity.2"

Monday, June 15, 2009

Tweets of the week

Best Tweets of the week

Some of my favorite tweets from the past week in no particular order:


  1. This administration forecast for solar surprised me -- you can barely find it on the chart /lc http://snurl.com/jp2fs
  2. The solution to the financial crisis? We have to be more boring: http://bit.ly/IR7SU
  3. To continue your Chart-y Friday, a chart of economic growth across income distribution. Courtesy of @freakonomics /mk http://bit.ly/PED15
  4. More fun charts! Comparing the economies of NAFTA countries /mk http://bit.ly/SLw6S
  5. Italian officials seize $134.5 billion in U.S. bonds from two Japanese nationals. Likely fake, but unconfirmed /mk http://bit.ly/RCz7a
  6. Took out a mortgage in 2007? There's a 20+% chance you'll default on it says FHA. Thanks to @ananelson for the idea /mk http://bit.ly/A0uBL
  7. LA Times:House prices drop 84% in outlying areas of CA. Now cheaper to buy than was in 1989: http://su.pr/1hZ0q1 (RT @ericabiz, et al)
  8. Indicator: Molson cuts free beer (or $1300/person) from retiree's pensions to save $1 million a year. /mk http://bit.ly/88DxJ
  9. Intern Matt, Canadian, says he's never heard of "kickball." Apparently they call it "soccer baseball" up there. I feel sort of betrayed /lc
  10. The official rules of the amazing sport of soccer baseball, brought to you by the City of Toronto /mk http://bit.ly/glgh4
Simeonesense: Miguel continues to find amazing content!

  1. How psychological biases can make a mess of our financial decisions.: Here’s a good primer on behavioral f.. http://tinyurl.com/n8tszo
  2. Video: Michael Lewis On The End of Wall Street: I just found this Michael Lewis talk . Do not listen to the fir.. http://tinyurl.com/kqnvb3
  3. Video: The Drunkard’s Walk: How Randomness Rules Our Lives: Awesome video (via Cal Tech)…... http://tinyurl.com/mmymg9
  4. Daily Behavioral Bias: Illusion of Control: I have decided to start posting a daily behavioral bias and it’.. http://tinyurl.com/lcnoa8
  5. Daily Behavioral Bias: The Representative Heuristic: Bias/ Heuristic: Representative Heuristic Quick Definition .. http://tinyurl.com/nfufjc
  6. Daily Behavioral Bias: Overconfidence: Bias: Overconfidence Definition: “People are overconfident. Psycho.. http://tinyurl.com/nx77b2
  7. Remembering Peter Bernstein: Peter Bernstein recently passed away. He was one of my favorite writers I read all .. http://tinyurl.com/np3cg

  1. First Teaser For Michael Moore's Wall Street Movie http://bit.ly/XpQ9v
  2. Hey New York, Here Comes The Housing Bust http://bit.ly/p0eg6
  3. Inflation Will Save Us! Inflation Will Save Us! (1933 Propaganda Film) http://bit.ly/IztSO
  4. CHART OF THE DAY: How Many Big Macs Does A Barrel Of Oil Buy? http://bit.ly/ERHuc
  5. Minimum Wage Hike Coming At The Worst Time Possible http://bit.ly/MdfPw
  6. Ron Paul's "Fed Transparency" Bill Gets Majority House Support http://bit.ly/182dP9
  7. 10 Things That Could Still Go Wrong With The Economy (SLIDESHOW) http://u.mavrev.com/9zur
  8. Report Exposes Federal Reserves $2.1 Trillion Bailout Balance Sheet http://bit.ly/uMTlf
  9. Nassim Taleb's Big Idea: There's Too Much Debt Out There http://bit.ly/17ccre

WayneMarr (give him a break, he was on vacation for a few days but still had a ton of great posts!)
  1. Do Environmental Regulations Cause Firms to Exit the Market? ... http://bit.ly/HilRy
  2. Uninsured Americans vs. Insured Canadians: Who is More Satisfied with Their HealthCare? http://bit.ly/EP696
  3. SSRN Calculating the VIX in #Excel http://bit.ly/fGhCZ
  4. Tax: States with Low #Beer Taxes Have More #Breweries [causality?] http://tinyurl.com/lxaurq
  5. HBS Blog: Three #Reasons Why Your Resume Ends Up in the Discard Pile job -- GOOD POST http://tinyurl.com/mwj2jk
  6. New York Fed: Why Did #FDR's #Bank Holiday Succeed? http://tinyurl.com/le2n6g


  • Ideas at Work: Prof. Brett Gordon looks at @intel & rival AMD to see if competition really begets #innovation: http://bit.ly/8xE1g

(answer? Not always!)


  1. The Daily Stat: Education's Effect on Personal Finance http://bit.ly/4HHlq
  2. Audio Debate: Are Executives Paid Too Much? http://bit.ly/182kb
  3. Can We Please Stop Saying the Market is Efficient? http://u.mavrev.com/a2ud
  4. Peter Bernstein's Lasting Lessons http://bit.ly/g7Maf
  5. (Good) CEOs Are Underpaid http://bit.ly/250S1


  • Andrew Umans '10 blogs about #microfinance and a S&L co-op in Ruhiira, Uganda: http://bit.ly/oYsND
  • Does doing good make you more attractive? Yes, it does, so get volunteering! Story w/ research from CBS's Stephan Meier http://bit.ly/qGnBN


  1. Why I Expect Serious Stagflation: When doing interviews for my new book on the Great Depression, a natural quest.. http://tinyurl.com/kq2ekw
  2. Dead Banks Walking: It's widely acknowledged that hundreds if not thousands of banks are on the ropes and just w.. http://tinyurl.com/kjo24t
  3. Response to the "Market Failure" Drones: Now that we're living through the bust, on the other hand, many people .. http://tinyurl.com/km6s5h
  • WestPan RT @Convertbond: Paul Volcker, "not an environment in which inflationary pressures are likely for some time to come" http://bit.ly/h3dYJ
  • EverydayFinanceSome stats from BusinessWeek on auto industry-interesting. US only 3% global mkt-Japan, Gmy each close to 40% http://bit.ly/pcCRP
  • researchpuzzler allaboutalpha looks at research showing alpha declined as hedge fund AUM and fund nos. rose, reversal at hand? http://bit.ly/vzz2X $$
  • CanWireAre we at Peak Oil? - http://tweeting.ca/0hp (Economist.com)
  • Footnoted SEC's Breheny says SEC rules require comp committees to be independent, but independence measure pretty broad #comphearing
  • Lura_Forcum 7 Questions for Richard Posner at the Economist blog: http://is.gd/TbNy judicial empathy, behavioral economics, stimulus spending, etc.

  • KevinLacroix--New German exec comp law requires execs to pay 1.5% of annual pay toward D&O insurance http://bit.ly/10KkJL (HT @kranenburgesq)

  • Kiva So far today: 866 loans have been made on Kiva.org to US entrepreneurs and $29,700 has been lent to support US businesses!
  • Jimmahar (yeah me!) Cool post tying together Time's Are Stocks Still Good for the Long Run? w/ stuff from @zbodie et al. http://cli.gs/WJ3R85
  • TonyWeaver: New GM chair: "I don't know anything about cars" wonderful.GM not car company anyways,it's a healthcare provider& pension fund
A funny tweet. MikeVaccaro (a SBU grad btw): If Dave Eiland offers no other advice to Joba he must tell him this: "For God's sake, stop watching Wang pitch."

While not a tweet (yes I did tweet it), please read the following post and if you can, make a donation in Jonathan's name.

And I would be remiss if I did not at least mention some of what was going on in Iran. Good luck. I put together a link for my family and friends to keep up with it. Here it is if it helps.

Market Mine: The rapidly changing (reducing) role of the traditional sell-side analyst

Not surprising, given low commissions, less and less research coming from the sell-side.

From Penny Herscher: : The rapidly changing (reducing) role of the traditional sell-side analyst:
"....from Rick Hanley's chart here -- the price of a trade has dropped continuously. Trading volume and investment banking were the two sources of funding for sell-side research -- for the first the price per trade has plummeted, for the second Elliot Spitzer put up a wall between IB and research -- and so the business model of traditional sell-side research within the big broker dealers is broken."

Of course the internet has driven down the costs of research so overall likely the research being done has just been shifted to the actual investor.


Well this is cheery:

"'The real problem is that long-term unemployment is going up dramatically,' said Franklin Allen, finance professor at the Wharton School. 'Unfortunately, many people ...may never get jobs again,' he wrote in a paper published this week.

Allen, alluding to federal statistics that show 27 percent of the 12.5 million unemployed workers in the country have been without a job for more than six months, said the Great Recession will serve as a 'watershed event' for the country."

MLB: Wins and Payroll, a fast fast fast midseason look

Ok, so this is a really bad study (It took all of three minutes to do), but I found it interesting.

Data was sketchy at best and definitley would not hold up even in class let alone a paper, but like I said it took three minutes.

Y is number of wins right as of 1Am eastern today (June 15) (and yes I know some teams have played more games), X1 is payroll as reported by USA Today, X2 is number of players CURRENTLY on the disabled list.

Wins= 26.85 + (4.75E-08)Payroll
Payroll is significant at the 4% level (t=2.23)

Which is expected, pay more for talent get more wins.

What is interesting is to see how well this simple simple simple model predicts wins. (spreadsheet below). The best? The Red Sox. The Worst? The Nationals. The Mets? about 2 fewer ganes than would be expected (given they have one extra game to play than many teams AND won at least 8/9ths of the Friday game, I found this a good sign). LOL.

Then using a very noisy variable for injuries (Hey I am a Met fan, I get to use injuries as an excuse):

Y is number of wins right as of 1Am eastern today (June 15) (and yes I know some teams have played more games), X1 is payroll as reported by USA Today, X2 is number of players CURRENTLY on the disabled list.

Wins= 29.93 + (4.11E-08)(Payroll) + (-0.51627)(number of players CURRENTLY on DL)

t-stat for payroll 1.93, t stat for players on DL= -1.45

So point estimates are in the expected direction but not significant using normal levels. Tjis might be because of the failure to differentiate injury severity (15 vs 60 day DL), importance of player (a mop up player has the same weight as a Jose Reyes or Carlos Delgado), or the total number of games lost (literally this is just the number of players reported by Yahoo that are CURRENTLY) on the DL.

Team payroll Injuries wins expected wins based off of payroll Wins - expected wins
Yankees 201449189 5 36 36.414706 -0.41471
Mets 148373987 8 32 33.896147 -1.89615
cubs 134809000 3 30 33.252453 -3.25245
red sox 121745999 3 38 32.632579 5.367421
tigers 115085145 3 34 32.316504 1.683496
angels 113709000 3 32 32.251202 -0.2512
phillies 113004046 3 36 32.21775 3.78225
astros 102996414 4 29 31.742861 -2.74286
mariers 98904166 6 30 31.548673 -1.54867
braves 96726166 7 30 31.445322 -1.44532
white sox 96068500 2 30 31.414114 -1.41411
Giants 82616450 2 34 30.775778 3.224222
indians 81579166 7 29 30.726556 -1.72656
blue jays 80538300 5 34 30.677165 3.322835
brewers 80182502 2 34 30.660281 3.339719
cardianals 77605109 4 34 30.537977 3.462023
rockies 75201000 4 31 30.423895 0.576105
reds 73558500 3 31 30.345955 0.654045
diamondbacks 73516666 6 27 30.343969 -3.34397
royals 70519333 7 28 30.201738 -2.20174
rangers 68178798 8 35 30.090673 4.909327
orioles 67101666 4 27 30.039561 -3.03956
twins 65299266 3 32 29.954032 2.045968
rays 63313034 9 34 29.85978 4.14022
As 62310000 7 27 29.812183 -2.81218
nationals 60328000 7 16 29.718132 -13.7181
pirates 48693000 5 30 29.166021 0.833979
padres 43734200 7 28 28.930713 -0.93071
marlins 36834000 5 32 28.60328 3.39672

Geithner and Summers writing in the Washington Post

Obama to propose regulation overhaul Wednesday - Jun. 15, 2009:
"In a commentary published in Monday's Washington Post, Treasury Secretary Timothy Geithner and the Director of the National Economic Council, Lawrence Summers, defended the need for an tighter regulatory control.

'The financial system failed to perform its function as a reducer and distributor of risk,' Geithner and Summers wrote. 'The economic pain felt by ordinary Americans is a daily reminder that, even as we labor toward recovery, we must begin today to build the foundation for a stronger and safer system.'

Developments in the financial markets have outstripped developments in the regulatory system, Geithner and Summers said, leaving markets virtually unregulated. 'The goal is to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.'

The two officials said the proposal will focus on five points, including the need for deeper cash reserves at major financial institutions. Those firms with a web of impact on other firms,'interconnected firms,' will be moderated by a consortium of Federal Reserve leaders.

In addition, the proposal intends to impose stricter reporting standards for asset-backed securities"

Study hints that alpha may be finite (at least in the short term)

Fascinating look (albeit not over a seriously long time frame) from AllAboutAlpha that is consistent with the long held economic view that if there are positive abnormal returns to be had (in financial or product markets), newcomers to market will drive down the returns (hence importance of barriers to entry etc).

AllAboutAlpha.com» Today's Post » Study hints that alpha may be finite (at least in the short term):
"As the hedge fund industry smashed through the one trillion dollar level a few years ago, it became vogue to ponder whether the new assets would dilute existing alpha opportunities. Was alpha a finite resource that needed to be shared among an ever growing number of industry players? And if so, was the hedge fund industry destined to become a victim of its own success...?

Research seemed to indicate that average alpha was indeed on the decline as the industry grew. But many also argued that the industry was being diluted by “unskilled” new entrants.

But if the new entrants were really “unskilled”, their effect on the returns of the incumbents should be minimal. If a group of 200 “skilled” managers were joined by 5,000 dart-throwing monkeys, then the original 200 should arguably be able to maintain their aggregate alpha. The simian stock-picking efforts of the monkeys should cancel themselves out...."
The finding? Sure enough the collective alpha of the industry fell thus supporting the long held view that competition will drive down abnormal returns.

BTW the finding that new entrants outperform (on average) existing participants really should not be surprising given that the new funds were presumably created to take advantage of an existing pocket of inefficiency and for at least a short period of time, would be more liekly to outperform.

The article is based off of this Weidenmueller and Verbeek paper.

Good stuff.

Saturday, June 13, 2009

How Safeway Is Cutting Health-Care Costs - WSJ.com

Ok, so it is a grocery store chain, that is only a part of the reason I have it included. Fascinating. Using statistical analysis, Safeway has focused on what drives cost and forced those who want to be insured to internalize the costs. Talk about a nudge. Great. Finally!

How Safeway Is Cutting Health-Care Costs - WSJ.com:
".... The key to achieving these savings is health-care plans that reward healthy behavior. As a self-insured employer, Safeway designed just such a plan in 2005....The results have been remarkable. During this four-year period, we have kept our per capita health-care costs flat (that includes both the employee and the employer portion), while most American companies' costs have increased 38% over the same four years.

... 70% of all health-care costs are the direct result of behavior....74% of all costs are confined to four chronic conditions (cardiovascular disease, cancer, diabetes and obesity). Furthermore, 80% of cardiovascular disease and diabetes is preventable, 60% of cancers are preventable, and more than 90% of obesity is preventable.

...Safeway has done nothing more than borrow from the well-tested automobile insurance model. For decades, driving behavior has been correlated with accident risk and has therefore translated into premium differences among drivers...have pronounced differences in premiums that reflect each covered member's behaviors....focused on tobacco usage, healthy weight, blood pressure and cholesterol levels."

Of course we have to worry about those costs that are not the direct result of behavior, but if we can manage this large chunk, we will be better able to afford (and handle) those costs and help those with the problems.

PLEASE READ IT, PASS IT ON. It is our best example of using disease and injury prevention to reduce health care costs that I have seen. It very well may be out best hope to end the run away health care costs.

New Book: The Myth of the Rational Market

The Myth of the Rational Market: A history of Risk, Reward, and Delusion on Wall Street by Justin Fox (he of the recent Time Magazine piece on Stocks and bonds. .

The following excerpts are from TheBigMoney.

Spinning Math Into Gold: How academic debate transformed into Wall Street wealth. | The Big Money: "
"In the 1970s, the war between random walkers—theorists who believed that stock prices ultimately fit into the predictable pattern of a bell curve distribution—and professional investors began to settle into an uneasy but profitable truce. Hostilities still flared up from time to time, as on a mid-decade summer morning at Stanford Business School. On the first day of a weeklong seminar for money managers, a young accounting professor just arrived from Chicago kicked things off with a ferocious attack on the idea that anybody could beat the market."

Then an interesting insight on some of what led to corporate pension plans--regulations on pay:
"Stock holdings had begun to migrate in the 1950s from individual portfolios to institutionally managed ones....in the 1970s...another group of institutions came to the fore. These were pension funds, first used as a way to circumvent postwar wage and price controls by giving workers benefits that weren't counted as wages, and soon to become part of the social contract between large corporations and their workers. With General Motors leading the way, America's big companies began setting aside money and investing it to pay for future pension benefits. Together with foundations and university endowments, the pension funds had come to constitute a huge new pool of institutional money by the late 1960s."

And from a later Excerpt entitled "The Birth of Quants"

"Because of his bond job, Ibbotson was interested in possessing the sort of historical data on bond returns that his Chicago professors James Lorie and Lawrence Fisher had compiled for stocks. Sinquefield was in the midst of starting a stock index fund ... wanted updated stock market data....so Ibbotson and Sinquefield took on the job themselves. Then Fischer Black, who had recently joined the Chicago faculty as a finance professor...After getting a Ph.D. in applied mathematics (a.k.a. computer science) from Harvard in 1965, Black had gone to work at the Cambridge-based consulting firm Arthur D. Little. There Jack Treynor introduced him to the capital asset pricing model and its simple linkage of market risk and reward. Black soon sought out the other two creators of the theory, paying regular visits to John Lintner at Harvard and getting his employer to fly Bill Sharpe to Chicago for a meeting in a hotel near O'Hare Airport (Michael Jensen was there as well) to discuss CAPM's implications for performance measurement."
Interesting stuff. Both from a history perspective as well as a market efficiency point of view.

Lest we think I have totally given up on rationality, I still do believe markets are VERY tough (exceedingly tough) to beat. But that said, do they act rationally all the time? NO. So if nothing else to learn when these behavioral biases and irrationality problems are most present, the book definitely is next on my "Must Read" list.

And yes I JUST ordered one now.

Six Flags Seeks Bankruptcy to Cut Debt $1.8 Billion (Update1) - Bloomberg.com

Six Flags Seeks Bankruptcy to Cut Debt $1.8 Billion (Update1) - Bloomberg.com:
"Six Flags Inc., the owner of 20 theme parks, sought bankruptcy protection 3 1/2 years after Washington Redskins owner Daniel Snyder become chairman and hired new managers in an attempt to return it to profitability.

The Chapter 11 petition filed in U.S. Bankruptcy Court in Wilmington, Delaware, listed assets of $3 billion and debt of $2.4 billion as of Dec. 31. Thirty-six affiliates also sought protection.

Snyder began a shakeup of Six Flags in late 2005 after winning three seats on the board. The 48-year-old company hasn’t posted an annual profit since 1998 and had losses of $558.8 million in the two years after Snyder became chairman."

So This Is What Politicized Lending Looks Like

Lending becomes increasingly political. This is not good.

Fom BusinessInsider at Clusterstock.com

So This Is What Politicized Lending Looks Like:
"It was inevitable that the increasing role of the Fed in our economy would draw it deeper into the morass of politics.

Now the New York Times describes the efforts of various companies--from rental car giants like Hertz to manufacturers of speedboats, snowmobiles and R.V.s--to get financial assistance from Fed lending programs. The Fed is increasingly having to make politically sensitive choices.

Highly illustrative is the R.V. case. The R.V. industry has been heavily battered by the recession.....But the R.V. people fired up their lobbysts, the president made a trip to Elkhart, Ind--...and by March the Fed said it would finance equipment leasing deals, rental car fleets and “floor plan” loans, which car and R.V. dealers use to finance showroom vehicles."

Friday, June 12, 2009

Can We Please Stop Saying the Market is Efficient? - Freek Vermeulen - HarvardBusiness.org

NOTE this is not talking per se about informational efficiency in the sense of responding to how markets react information, but rather how through economic Darwinsim only the strong are seen to "survive" and thrive. This is saying that this is not always the case.

Can We Please Stop Saying the Market is Efficient? - Freek Vermeulen - HarvardBusiness.org:
"Research - by professors Benner from Wharton and Tushman from the Harvard Business School - has shown that ISO 9000, in the long run, can have a severe negative impact on a firm because it hampers innovation. Yet, the short-term benefits are clear; adopting ISO 9000 often comes with some good reputational effects, an immediate increase in customers, and satisfied stakeholders. However, the negative effect on innovation, in the long run, may outweigh all of this.

Nevertheless, firms adopt the practice because they do see the short-term benefits, but are quite unaware of the long run detrimental stuff.....

The same may very well be true for quite a few of our popular governance mechanisms, the practice of excessive risk taking as we saw it in investment banking, many forms of performance management systems, and certainly for corporate sexisms, and pin-striped suits with purple ties on hot summer afternoon. It is not that Darwin is wrong - and the mechanisms he discovered do not rule our markets - it is just that they're just as difficult to shake off as a common cold. And that they are just as annoying."

Kiva - About Microfinance

Kiva is now making loans in the US as well. Interesting. I realize the literature is very mixed on microfinance, but it has been my experience that many of these borrowers have no other access to capital. Plus with with high repayment rates, I think it is definitely worth a try. Better than charity and more

Kiva - About Microfinance:

This page contains information we have gathered from coleagues, friends, and microfinance organizations we respect to help answer some of your questions.....

"Microfinance is the supply of loans, savings, and other basic financial services to the poor." (CGAP)

As the financial services of microfinance usually involve small amounts of money – small loans, small savings etc. – the term "microfinance" helps to differentiate these services from those which formal banks provide.

Why are they small? Someone who doesn't have a lot of money isn't likely to want to take out a $5,000 loan, or be able to open a savings account with an opening balance of $1,000. Hence – "micro".

A look at inflation from the 1930s

Inflation can save us? Uh, for real?

Clusterstock's BusinessInsider found this "classic". It is a 1930s era video.

Thursday, June 11, 2009

What is a hedge fund and how is it different from a mutual fund?

Had a student ask this question this semester so I am sure he was not the only person who does not know:

From Examiner.com What is a hedge fund and how is it different from a mutual fund?:

"Hedgefunds, unlike mutual funds, employ a wider array of ivesting techniques, which are considered more aggressive. For example, hedge funds often use leverage to amplify their returns (or losses if things go wrong).

The other key difference between hedge funds and mutual funds is the amount of regulation involved. Hedge funds are relatively unregulated because investors in hedge funds are assumed to be more sophisticated investors, who can both afford and understand the potential losses. In fact, U.S. laws require that the majority of investors in the fund are accredited."

Wednesday, June 10, 2009

Are Stocks Still Good for the Long Run? - TIME

Wow. The other day I reTweeted a tweet from Zvi Bodie. I did not have time to blog it then, but saved it. And just finished reading it and two follow-ups to it all I can say it that they are definite must reads! (and will be so for all of my fall classes!)

Are Stocks Still Good for the Long Run? - TIME by Justin Fox:

While now it is commony held that stocks have a higher expected return than bonds because of fact that stocks are more volatile (more risk, more return demanded), the article begins off by recounting that this was not always believed. After this interesting history, Fox brings the reader to the recent finding by Arnott that over the past 40 years stocks underperformed (albeit slightly and at a time when stocks had just fallen precipitously) bonds. (here is a post on that from last month.)

"...[after the 1929 crash the] idea that stocks could be good investments became a joke and remained that--in the popular view, at least--for decades. Yet whenever anyone in later years re-examined the data on stocks' long-run performance--major scholarly studies on the topic were published in 1938, '53, '64 and '76--they reached the same conclusion Smith did. Even with the dire experience of the early 1930s factored in, stocks had proved an excellent long-run investment, with returns that far outpaced those of bonds."

Much of the article is grounded on solid academic research including work done by Jeremy Siegel and others. This research suggests strongly that sometimes financial assets are mispriced and thus there may be significant relative performance differences for long periods of time where bonds outperform stocks (as in the 40 years that Arnott found).

So given what we know about mispricing and the historical performance of index funds vis-a-vis actively managed funds (unstated in article), one solution is to use a hybrid of indexing and picking. This suggests a strategy where rather than buying individual assets that have appreciated greatly (and are thus more likely to be overpriced) it is wiser to invest in assets that are out of favor (so called value stocks).

"He [Siegel] says the one significant change in his advice over the past decade has been an increased emphasis on "value" stocks with prices that are low relative to earnings, book value and other fundamental measures. Both Arnott and Siegel are boosters of a new investment approach called fundamental indexing, in which one assembles a portfolio weighted by earnings, dividends or the like in order to avoid the tendency inherent in conventional capitalization-weighted index funds to load up on the most expensive stocks.

An alternative solution, which Bodie has proposed many many times but has not yet caught on to a great degree, is to use TIPs and long term options. The logic behind this is that stocks are volatile (indeed more volatile in the long term than the short term) and largely because stocks do tend to be so risky, you can never be assured how they will perform over your investment horizon. Therefore, you should invest in TIPs to get the what you NEED for future and if you want to invest the rest in riskier scurities (long term options is Bodie's well reasoned choice) the extra for things you may WANT.

From the Time article and a follow-up piece from Time's Curious Capitalist blog.
"To Boston University finance professor Zvi Bodie, another frequent debating partner of Siegel's, this entire discussion is beside the point for most Americans. "He could be right," he says of Siegel's argument that stocks are a good deal right now. "I'm just more risk-averse than he is." Bodie, co-author of the perennially best-selling business-school textbook Investments, wrote a 2003 book titled Worry-Free Investing and has been trying ever since to steer personal-finance advice in a radically new direction. For most Americans, Bodie says, stocks are entirely inappropriate vehicles for saving for retirement. The reason they outperform bonds over time is the very reason they should be avoided: they're riskier. And if you're putting away money that you're going to need to live off in retirement, you shouldn't be taking any risk at all...."If your goal is to maintain your standard of living, then here's how much you should be saving and putting into TIPS," he says. "If you want to save more than that and speculate in the stock market, by all means, do it. But you need to recognize that you can't count on it when you do that."

In an email to Justin Fox as reported on Time's the Curious Capitalist blog, Bodie writes:
"If you doubt the rationality of the stock market, then isn't investing in stocks a crap shoot? How can you be sure that there is a positive risk premium? The historical evidence is far from conclusive. It depends on what time periods and what countries you look at. Even the experts disagree."

Bodie concludes:

Under such circumstances, shouldn't a rational investor follow the TIPS + calls approach that I advocate?"

The problem is, as Fox points out, that this will likely (albeit not necessarily) yield a lower return so
"To follow Bodie's advice, then, you're probably going to need to save a lot more money for retirement than you've been doing"
So what is the takeaway? With high long term volatility and the academic evidence pointing more and more to markets being less than perfectly efficient, it seems that Fox nails it when he end with

"Stocks are still the best investment for the long run. But maybe not for your long run."

Which again suggests that the investment world (at least individual investors worried about their retirement or other largely fixed future obligations) should give much consideration to Bodie's advice and use TIPs for the part that you "need" and then LEAPs and other risky securites for what you "want".

And lest you doubt that this is a new idea or that Bodie is just saying this after a bad period in stocks, here is from a 2004 FinanceProfessorBlog post.:

"So what is one to do? My favorite idea comes from Zvi Bodie who applies modern hedging theories to retirement planning. As he wrote in in 2001 Retirement Planning: a New Approach paper the first part of the plan is to assure some minimum standard of living (this is the minimum amount that you will need) by investing in "inflation-protected bonds and annuities as the way to guarantee a minimum standard of living in retirement.""
FTR His Worry-Free Retirement book is available here.

So if it is such a good idea why hasn't it caught on? I have thought about that a great deal. The best answer I have is transaction costs.