Dow 12000: More Fun Factoids - MarketBeat - WSJ

Dow 12000: More Fun Factoids - MarketBeat - WSJ:

"* The move from Dow 11000 to 12000 took 1,879 trading days – the third-longest such stretch, which is remarkable since as the Dow gets higher the stretch between milestones shrinks. From 11000 to 12000 is just a 9% move.
* The quickest: Dow 10000 to 11000 took 24 trading days."

Simoleon Sense » Blog Archive » A behavioral neuroscience primer: Reward, decision-making and neuroeconomics

The beginning of a semester is always a good time to put a plug in for one of the best blogs around: Simoleon Sense. Miguel always finds fascinating articles.

Given we just were introducing neuroeconomics last week in class, today's primer will be perfect for students:

Simoleon Sense » Blog Archive » A behavioral neuroscience primer: Reward, decision-making and neuroeconomics:

"Recent work in behavioural neuroscience has examined how humans and animals make economic decisions about gains and losses. This research is based conceptually on animal learning theory and economic choice theory. It investigates how individual neurons in animals and brain regions in humans process information about gains (rewards) and losses (punishments) and use this information to make economic choices."

Robert Shiller on Human Traits Essential to Capitalism | FiveBooks | The Browser

A fascinating look by Robert Shiller of five books that help us to understand the history (and maybe future of) capitalism by understanding Human behavior.

Robert Shiller on Human Traits Essential to Capitalism | FiveBooks | The Browser:

"I think that our economic system reflects our understanding of humankind, and that understanding has been developing, with especial rapidity lately. You have to understand people first before you can understand how to devise an economic system for them. And I think our understanding of people has been accelerating over the last century, or even half-century.

HT to Investmentpostcards.

http://www.economist.com/blogs/dailychart/2011/01/comparing_us_states_countries

http://www.economist.com/blogs/dailychart/2011/01/comparing_us_states_countries


The map lists each US state and the equivalent country based on GDP.

For example: New York State is the equivalent of Australia.

Test-Taking Cements Knowledge Better Than Studying, Researchers Say - NYTimes.com

Test-Taking Cements Knowledge Better Than Studying, Researchers Say - NYTimes.com:

"Taking a test is not just a passive mechanism for assessing how much people know, according to new research. It actually helps people learn, and it works better than a number of other studying techniques."

Interesting!

Microcredit: the Good, the Bad, and the Ugly by David Korten

Microcredit: the Good, the Bad, and the Ugly by David Korten:

"Once praised as a universal panacea, microlenders are now being widely attacked as predatory loan sharks. In December 2010, Sheik Hasina Wazed, the prime minister of Bangladesh and former microcredit advocate, accused microcredit programs of “sucking blood from the poor in the name of poverty alleviation.”

What happened?

It turns out there are two very different models of microcredit. As Muhammad Yunus, winner of the 2006 Nobel Prize, pointed out in his January 15, 2011 New York Times op-ed, one type of microcredit program is designed to serve the poor; another to maximize financial returns"

Will be used in class. Read the whole thing. Look for any bias by author. That said, still a very interesting and important piece.

Peer review: Trial by Twitter : Nature News

Peer review: Trial by Twitter : Nature News:

"Papers are increasingly being taken apart in blogs, on Twitter and on other social media within hours rather than years, and in public, rather than at small conferences or in private conversation.....such rapid response is all to the good, because it weeds out sloppy work faster. 'When some of these things sit around in the scientific literature for a long time, they can do damage: they can influence what people work on, they can influence whole fields,'

Yes this is speaking more on science papers than finance papers, but the same thing is happening in finance (maybe to a lesser degree)..

HT to @pkedrosky

SSRN-Do Firms Buy Their Stock at Bargain Prices? Evidence from Actual Stock Repurchase Disclosures by Jacob Oded, Azi Ben-Rephael, Avi Wohl

SSRN-Do Firms Buy Their Stock at Bargain Prices? Evidence from Actual Stock Repurchase Disclosures by Jacob Oded, Azi Ben-Rephael, Avi Wohl: "

We find that smaller S&P 500 firms repurchase less frequently than larger firms, and at a price which is significantly lower than the average market price. Their repurchase activity is followed by a positive and significant abnormal return which lasts up to three months after the repurchase. These findings do not hold for large S&P 500 firms. Our interpretation is that small firms repurchase strategically, whereas the repurchase activity of large firms is more focused on the disbursement of free cash. "

Which would seemingly fit with most stories of analyst coverage and size being determinants in levels of market efficiency.

I have a feeling we have not heard the last word on this one. Stay tuned!

SSRN-Are There Benefits to Being Naked? by Giovanni Calice, Jing Chen, Julian Williams

Possibly the best name for an academic paper I have ever seen. AND it is a good paper!


SSRN-Are There Benefits to Being Naked? by Giovanni Calice, Jing Chen, Julian Williams:

"In a naked CDS position a party pays an income stream to a seller of protection to swap away default risk on an underlying bond without actually holding the underlying bond. In this paper we construct sector level portfolios of 2,846 corporate CDS positions for the US, UK, Japan and the Eurozone and incorporate these into a very broad portfolio of 42,559 conventional assets observed over seven years at the daily frequency. We find compelling evidence that the naked CDS positions can significantly improve the diversification of broad portfolios, a major motivation for active trading in thess instruments. Specifically, we find that risk adjusted portfolios with CDS positions outperform portfolios of standard assets by up to 30% for a logarithmic utility maximizing investor. In addition, our tests show that cumulative portfolio turnover is lower for all weekly, monthly and quarterly rebalancing strategies when CDS positions are included. An important implication is that the booked return on CDS positions from 2004 to 2010 seem not be replicable by combinations of other assets in the market"

SSRN-Inside Debt and the Design of Corporate Debt Contracts by Divya Anantharaman, Vivian Fang, Guojin Gong

A preview of one of the papers we will be mentioning in class next week:

SSRN-Inside Debt and the Design of Corporate Debt Contracts by Divya Anantharaman, Vivian Fang, Guojin Gong:

"Agency theory posits that debt-like compensation (such as defined-benefit pensions and other deferred compensation) aligns managerial interests more closely with those of debtholders and reduces the agency cost of debt. Consistent with theory, we find that a higher CEO relative leverage, defined as the ratio of the CEO's inside leverage (debt-to-equity compensation) to corporate leverage, is associated with lower cost of debt financing and fewer restrictive covenants, for a sample of private loans originated during 2006-2008. These findings persist after accounting for the endogeneity of CEO relative leverage, and are more pronounced for firms with higher default risk. Additional analysis on a sample of new public bond issues also shows a negative relation between CEO relative leverage and bond yield spread. Overall, the evidence supports the notion that debtholders recognize the incentive effects of executive debt-like compensation and adjust the terms of corporate debt contracts accordingly."

ESP Report Sets Off Debate on Data Analysis - NYTimes.com

ESP Report Sets Off Debate on Data Analysis - NYTimes.com:

"...if the true effect of what you are measuring is small,” said Andrew Gelman, a professor of statistics and political science at Columbia University, “then by necessity anything you discover is going to be an overestimate” of that effect.

Consider the following experiment. Suppose there was reason to believe that a coin was slightly weighted toward heads. In a test, the coin comes up heads 527 times out of 1,000.

Is this significant evidence that the coin is weighted?

Classical analysis says yes. With a fair coin, the chances of getting 527 or more heads in 1,000 flips is less than 1 in 20, or 5 percent, the conventional cutoff. To put it another way: the experiment finds evidence of a weighted coin “with 95 percent confidence.”

Yet many statisticians do not buy it. One in 20 is the probability of getting any number of heads above 526 in 1,000 throws. That is, it is the sum of the probability of flipping 527, the probability of flipping 528, 529 and so on.

But the experiment did not find all of the numbers in that range; it found just one — 527. It is thus more accurate, these experts say, to calculate the probability of getting that one number — 527 — if the coin is weighted, and compare it with the probability of getting the same number if the coin is fair."

Sorry NYTimes for the length of the quote, but the example was too good to break up.

Hu Highlights Need for U.S.-China Cooperation, Questions Dollar - WSJ.com

Hu Highlights Need for U.S.-China Cooperation, Questions Dollar - WSJ.com:

"Chinese President Hu Jintao emphasized the need for cooperation with the U.S. in areas from new energy to space ahead of his visit to Washington this week, but he called the present U.S. dollar-dominated currency system a 'product of the past' and highlighted moves to turn the yuan into a global currency."

BBC News - Making things hard to read 'can boost learning'

BBC News - Making things hard to read 'can boost learning':

"Researchers found that, on average, those given the harder-to-read fonts actually recalled 14% more.

They believe that presenting information in a way that is hard to digest means a person has to concentrate more, and this leads to 'deeper processing' and then 'better retrieval' afterward"

I wonder if the same goes for messy handwriting?

SIMON JOHNSON: Now US Taxpayers Are Subsidizing Goldman's Investment In Facebook--This Madness Must End!

SIMON JOHNSON: Now US Taxpayers Are Subsidizing Goldman's Investment In Facebook--This Madness Must End!:

"These subsidies, professor Johnson says, take the form of special access to the Fed's 'discount window' and ongoing, unwritten 'Too Big To Fail' guarantees that the US taxpayers will cover any major losses the banks incur--by bailing them out all over again.

These subsidies allow the big banks to borrow money at a lower cost than their smaller competitors, and, thereby, win market share and produce higher profits."

Click through to watch the video. Johnson is clearly right.

Avoid investment pain by knowing lessons from the crash - baltimoresun.com

Looking for a easy introduction into (intro into looked too weird) Behavioral Finance (very good for 301 type classes)? Here is one from the Baltimore Sun:


Avoid investment pain by knowing lessons from the crash - baltimoresun.com:

"Studies in 'behavioral finance' show that people are poor at understanding trends of all kinds, not just when investing. If we see something on an upswing or positive trend, we figure it will continue, and if we see something on a horrible or scary trend, we figure that's for keeps too. That gets people in awful trouble with investments. In 2000, people poured money into technology stocks because they had climbed almost 100 percent the previous year; then they plunged 80 percent. In 2005, people figured they couldn't go wrong buying homes and flipping them. You know the rest of that story."

S&P, Moody's Warn On U.S. Credit Rating - WSJ.com

S&P, Moody's Warn On U.S. Credit Rating - WSJ.com:

"'We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase,' Sarah Carlson, senior analyst at Moody's, said.

Separately, Carol Sirou, head of Standard& Poor's France, told a Paris conference on Thursday that the firm couldn't rule out lowering the outlook for the U.S. rating in the future."

Related articles

• Moody's warns US, Europe countries on rising costs (seattletimes.nwsource.com)
• U.S. In Danger Of Losing AAA Credit Rating (outsidethebeltway.com)
• Moody's, S&P May Downgrade U.S. Debt Rating (dailyfinance.com)
• Moody's- US, UK, German, French AAA ratings unthreatened (reuters.com)

Bangladesh opens probe into micro lender allegations - The Times of India

Bangladesh opens probe into micro lender allegations - The Times of India:

"Last week, prime minister Sheikh Hasina accused Yunus of resorting to a 'trick' to avoid paying taxes. Yunus has said he would welcome an investigation into the allegations to 'bring the truth to the citizens of Bangladesh as soon as possible'....

The allegations come at a time when micro lending faces political hostility in several developing countries including India where politicians have accused the bankers of profiteering from the poor.

Yunus, dubbed 'banker to the poor', was awarded the 2006 Nobel Peace for providing the programme of small loans which has led to the creation of similar programmes in other developing countries."

Women and Repayment in Microfinance by Roy Mersland, Bert D'Espallier, Isabelle Guérin

SSRN-Women and Repayment in Microfinance by Roy Mersland, Bert D'Espallier, Isabelle Guérin:

"This paper analyzes gender-differences with respect to microfinance repayment-rates using a large global dataset covering 350 Microfinance Institutions (MFIs) in 70 countries. The results indicate that more women clients is associated with lower portfolio-at-risk, lower write-offs, and lower credit-loss provisions, ceteris paribus. These findings confirm common believes that women in general are a better credit-risk for MFIs. Interaction effects reveal that the effect is stronger for NGOs, individual-based lenders, ‘finance plus’-providers and regulated MFIs. This indicates that two types of MFIs benefit more than others from focussing on women: First, those MFIs that develop hands-on, women-friendly procedures tailored to individual women’s need, and Second, those MFIs that apply coercive enforcement methods to which women are more responsive

I was speaking to a friend over Christmas break about this. It seems KIVA has gone away from lending predominantly to females. It will be interesting to see if repayment rates drop for them."

Related articles

• The Microfinance Backlash (npr.org)
• The Myths Behind Microfinance (forbes.com)
• From a blessing to a curse (theage.com.au)
• Microfinance: Development panacea, or exorbitant, ineffective poverty trap? | Madeleine Bunting (guardian.co.uk)

The Invention of Money on This American Life

Home | This American Life:

"Five reporters stumbled on what seems like a basic question: What is money? The unsettling answer they found: Money is fiction."

Good podcast from This American Life. Was on NPR yesterday. Thanks to @Nateolay for the link!

Uwe E. Reinhardt: How Private Is 'Private Charity'? - NYTimes.com

Uwe E. Reinhardt: How Private Is 'Private Charity'? - NYTimes.com

"A more accurate term would be “private donations coupled with involuntary, tax-financed public subsidies.”

This point was brought home clearly by Prof. Richard Thaler of the University of Chicago in a recent commentary. He questioned the merits of making charitable donations tax-deductible."

And later:

"If charitable giving were not tax-deductible, you would have to sacrifice $10,000 to finance that increase in the charity’s budget.  But if charitable donations were tax-deductible, as they are in the United States, and if you faced a marginal combined rate of, say, 45 percent for federal, state and local income taxes, you would need to sacrifice only $5,500 to enhance the charity’s budget by $10,000.

The other $4,500 would come from fellow taxpayers who might not even know your favorite charity or, if they did, might not much like it."

Related articles

• Rethinking the charitable deduction (causetocommunicate.wordpress.com)
• Video: IRS Rules for Charitable Giving 2009 (turbotax.intuit.com)
• DU Poll: Should Charitable Giving Be Tax Deductible? (dvorak.org)
• The Charitable Deduction (gregmankiw.blogspot.com)

Facebook's Initial Private Offering - BusinessWeek

Facebook's Initial Private Offering - BusinessWeek:

"In 1995 the locus of innovation was Web pioneer Netscape Communications, whose initial public offering ignited five of the most lucrative years in market history. In 2004 it was Google (GOOG), whose 'Dutch auction' IPO invited anyone to bid on a share price; those who bid over $85—small and large investors alike—got in on what has turned out to be a 618 percent return.  Today, the It company is Facebook..."

What is maybe most interesting is this near the end:

"In truth, there has never been anything very public about the initial public offering. "The sad reality is that the only IPOs that the mom-and-pop investor have access to are the ones you don't want," says Rodd C. Langenhagen, a tech banker with Morgan Keegan. "Ironically, the more safeguards we build into the system to protect investors, the more companies don't want to go public, so investor access relies on even less regulated special purpose vehicles and secondary share markets."

Related articles

• SEC rule likely to trigger Facebook IPO in 2012 (sfgate.com)
• Facebook appears on path toward IPO, possibly next year (usatoday.com)
• Facebook IPO In 2012? (blogs.forbes.com)
• LinkedIn preparing for an IPO (tissuepathology.typepad.com)

Edward L. Glaeser: Where to Draw a Line on Ethics - NYTimes.com

Edward L. Glaeser: Where to Draw a Line on Ethics - NYTimes.com:

I personally think this is WAY overblown in this case. Yes, increase transparency and present conflicts of interest. But I really am not sure if there is much of a problem. First you have to identify the conflict. I would wager that few have the supposed conflict (only a relatively small percentage of economists work as consultants etc) and those that do, do not regularly get the "ability" to influence debate. Do some? Yes, but it is a small percentage.

Put another way, even if there were this massive conflict of interest, how much do people actually listen to finance professors or economists.

Secondly as the article notes, the AEA has no power. I am sure a relatively small percentage of professors are members (I am not).

"It would be nice to think that the American Economic Association could lay down a code of ethics that would solve everything, but that would be a vast institutional overreach. The biggest problem with that approach is that the A.E.A. is not a licensing or accrediting association, like the American Bar Association.

The A.E.A. publishes journals, organizes an annual meeting and gives out awards, such as the John Bates Clark Medal. Membership in the A.E.A. is not selective, and many economists choose not to join, without much harm to their professional reputation (I think I’ve let my own membership lapse).

Private Equity Firms at Odds Over Investments’ Value - NYTimes.com

"Something is worth what others will pay for it" is a cliche that has been around forever. But what if the asset is not for sale? Then all of the valuation models in the world are just good guesses and reasonable people may disagree. That is what is happening now in firms that went private:
From Private Equity Firms at Odds Over Investments’ Value - NYTimes.com:

"After so many public companies passed into private hands during the boom years, buyout specialists who defined that era of Wall Street wealth are seemingly at odds over how their investments are — or are not — panning out.

Freescale Semiconductor, for instance, was taken over by a pack of private investment companies in 2006 for $17.6 billion, of which $7 billion came from the firms. That $7 billion is now said to be worth $3.15 billion. Or $2.45 billion. Or $1.75 billion. The owners — the Blackstone Group, the Carlyle Group, Permira Advisers and TPG Capital — disagree on its value.

Clearly this is a problem for many interested parties. From investors to pension plans and creditors. Making matters worse, there is no real solution.

"Accounting rules give the deal makers a lot of wiggle room, because even experts often disagree on how to value investments. At the big firms, at least, independent auditors examine the figures and how they were reached.

But analysts agree that valuations on the books of private equity firms can be skewed by the firms’ motivation to place high values on their investments."

SSRN-Issuer Quality and Corporate Bond Returns by Robin Greenwood, Samuel Hanson

Fascinating. The simple version is that bond returns are low in periods when a higher percentage of low rated firms issue. Once again it suggests that markets are not as efficient as we used to think.

SSRN-Issuer Quality and Corporate Bond Returns by Robin Greenwood, Samuel Hanson:

"..time-series variation in the average quality of debt issuers may be useful for forecasting excess corporate bond returns. We show that when issuance comes disproportionately from lower quality borrowers, future excess returns on high yield and investment grade bonds are low and often significantly negative. The degree of predictability is large in both economic and statistical terms, with univariate R2 statistics as high as 30% at a 3-year horizon."

What causes this? In truth it could be a couple of things. Suppose a world where all firms line up to issue debt and the good ones go first. Of course this has the problem of why the good firms "stop issuing later". A second explanation, and the one Greenwood and Hanson focus on is that the market prices credit differently and when the price of credit quality drops, the lower quality firms come to market.

The paper is best summarized by the authors themselves:

"Our main innovation is to use measures of the quality of corporate debt issuers to forecast excess returns on corporate bonds. Why might issuer quality be a useful barometer of credit market activity? Suppose that debt issuance responds to changes in the expected returns to credit, i.e., firm managers issue more debt when credit is “cheap”....Thus, time-series variation in the quality of debt issuers may be useful for forecasting corporate bond returns. Specifically, following periods when debt issuers are of particularly low credit quality, we might expect credit assets to underperform."

And that is exactly what they find. Namely: following periods of more lower quality issuances, bond underperform.

- Sent using Google Toolbar"

SSRN-The Swedish Corporate Control Model: Convergence, Persistence or Decline? by Magnus Henrekson, Ulf Jakobsson

Another paper that will find its way into upcoming classes.


SSRN-The Swedish Corporate Control Model: Convergence, Persistence or Decline? by Magnus Henrekson, Ulf Jakobsson:

"This paper explores the effects of deregulation and globalization on the dominant mode of corporate governance in Swedish public firms.

The article first looks at the two basic models of governance and then speaks specifically about Sweden.

From the article:

"There are two basic models of corporate governance of public firms: (i) dispersed ownership and managerial control, and (ii) concentrated ownership and private blockholder control. The first model predominates in the Anglo-Saxon world,1 where common law judicial systems largely govern. The second model, which exists in several varieties,2 dominates in virtually all other countries."

The authors report that these is less "convergence" (i.e they are not becoming as similar to the Anglo-Saxon model as would have been predicted), firms are changing as the role of private equity and increased foreign ownership. Additionally they find that the overall importance of the stock market in Sweden is declining.

From the abstract:

"Instead, the control models with the most rapid growth in the most recent decades are found outside the stock market, notably private equity and foreign ownership. After a major revival of the Swedish stock market its importance for the Swedish economy is again in decline. Instead of adjustments in pertinent institutions and practices to ensure effectiveness of the corporate governance of Swedish public firms under these new conditions, a great deal of endogenous adjustment of the ownership structure has taken place""

Interesting.

SSRN-Financial Constraints on Corporate Goodness by Harrison Hong, Jeffrey Kubik, Jose Scheinkman

SSRN-Financial Constraints on Corporate Goodness by Harrison Hong, Jeffrey Kubik, Jose Scheinkman:

"Goodness is costly and its marginal benefit is finite; as a result, less-constrained firms spend more on goodness. We verify that less-constrained firms do indeed have higher social responsibility scores. Our empirical analysis addresses identification issues that have long plagued the corporate social responsibility literature, establishing the causality of this relationship using a natural experiment. During the technology bubble, previously constrained firms experienced a temporary relaxation of their constraints and their goodness scores also temporarily increased relative to their previously unconstrained peers. This convergence applies to all components of the goodness scores such as community and employee relations and environmental responsibility but not governance."

Will DEFINITELY make it to the classroom this semester!

Fama Says Too-Big-to-Fail `Distorting' Financial System - Video - Bloomberg

Fama Says Too-Big-to-Fail `Distorting' Financial System - Video - Bloomberg:

This video is a couple of months old (November 12), but whenever someone sends me a video on Eugene Fama I include it! Genius.

From Bloomberg: Fama--on markets and regulations.

"Nov. 12 (Bloomberg) -- Eugene Fama, a professor of finance at the University of Chicago Booth School of Business, discusses financial regulation and capital requirements for banks. Fama speaks in Chicago with Deirdre Bolton on Bloomberg Television's 'InsideTrack.' (Source: Bloomberg)"

For those in my class, notice the Modigliani-Miller reference!

John Bogle Talks About Stock and Bond Returns Video

John Bogle Talks About Stock and Bond Returns Video: "John Bogle Talks About Stock and Bond Returns"

John Bogle Talks About Stock and Bond Returns
- Watch more Videos at Vodpod.

John Bogle is one of the real chieftains in the field of finance. I was lucky enough to see him speak a few years ago in Rochester. This is an interview from October with him. I got his new book (Don't Count on it) for Christmas (a present from myself).  So far it is pretty much fascinating.

Related articles

• Q&A with fund legend John Bogle (seattletimes.nwsource.com)
• A Thanksgiving With John Bogle (forbes.com)