Tuesday, December 18, 2012

Before Facebook Deal, Instagram's Talks With Twitter - NYTimes.com

Before Facebook Deal, Instagram's Talks With Twitter - NYTimes.com:

This one will be talked about for years:

"Facebook’s deal to buy Instagram for $1 billion stunned Wall Street and Silicon Valley when it was announced in April. But executives at Twitter had an additional reason to be surprised. Instagram’s founders “held several meetings as late as March with top Twitter executives,” The New York Times’s Nick Bilton reports. “The sides had verbally agreed weeks earlier on a price for Instagram of $525 million in cash and Twitter shares,”"

Interestingly the deal closed for about $735m down from the $1billion that was based on pre-IPO valuations. 

Wednesday, December 12, 2012

Irving Fisher, the First Celebrity Finance Professor - Bloomberg

Irving Fisher, the First Celebrity Finance Professor - Bloomberg:

A history lesson on the man behind the "Fisher effect"

"Fisher developed revolutionary insights into financial theory that are still invoked today. He explained that the market interest rate coincides with the human tendency to discount an uncertain future when compared with the more pressing present. He argued that we distribute our present and expected future wealth over the consumption decisions we make now and in the future. In doing so, he anticipated the life-cycle hypothesis that would demonstrate, half a century later, why we save and how we consume."

Tuesday, December 04, 2012

Take the money: Why we make better financial decisions for strangers than family

Take the money: Why we make better financial decisions for strangers than family

This one should not really surprise anyone and is essentially the logic behind my recent test question of "what is the role of a financial planner in the face of investors prone to behavioral biases".

"They found participants were more likely to select a smaller immediate reward than delay for a larger pay-off both for themselves and for beneficiaries they were more closely related to. The decisions got progressively less impulsive and steadily more rational as the family connection became more distant. The most rational economic choices were made on behalf of complete strangers.
The study, published in the online journal PLOS ONE, is the first to show that decisions taken on behalf of others are affected systematically by the closeness of the relationship...."

Thursday, November 29, 2012

Why Should Hostess Executives Get The Bonuses They're Demanding? - Forbes

Why Should Hostess Executives Get The Bonuses They're Demanding? - Forbes:

"AP is reporting that the Irving, Texas company is planning to ask a bankruptcy judge to grant approval of bonuses totaling up to $1.8 million for its executives....It’s tough to see why managers should get bonuses for driving a company into the ground and sacrificing some 18,000 jobs. Hostess had become horribly insolvent, with a net loss of $1.1 billion in fiscal 2012 on revenues of $2.5 billion. The company also reportedly has $111 million in unfunded pension obligations."
Gee this could be a good class discussion! 

Former baseball star Doug DeCinces indicted for insider trading - Yahoo! Finance

Former baseball star Doug DeCinces indicted for insider trading - Yahoo! Finance:

"DeCinces was charged with 42 counts of criminal securities fraud and one count of money laundering over the 2008 purchase of stock in a medical device company based on insider information, according to an indictment filed in a federal court in Southern California.

DeCinces, 62, bought $160,000 worth of stock in Advanced Medical Optics Inc, after a "close personal friend" alerted him to an impending takeover bid by Abbott Laboratories, according to prosecutors.

He sold his stock shortly after the takeover bid was announced, making $1.3 million in profits, the department said."

Thursday, October 25, 2012

How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina by Claudia Lambert, Felix Noth, Ulrich Schuewer :: SSRN

How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina by Claudia Lambert, Felix Noth, Ulrich Schuewer :: SSRN:

Two takeaways:
  1. Banks increase risk-based capital ratios in times of great uncertainty.
  2. The increase comes largely from well capitalized banks and by reducing loans.  

From the Abstract:
"[We] find that banks in the disaster areas increase their risk-based capital ratios after the hurricane. This finding shows that banks act precautious by themselves irrespective of regulatory requirements. However, when we examine low-capitalized and high-capitalized banks separately, we find that results are driven by high-capitalized banks. In addition, high-capitalized banks increase their risk-based capital ratios by decreasing loans and not by increasing capital."

Lambert, Claudia, Noth, Felix and Schuewer, Ulrich, How Do Banks React to Increased Asset Risks? Evidence from Hurricane Katrina (March 1, 2012). 29th International Conference of the French Finance Association (AFFI) 2012. Available at SSRN: http://ssrn.com/abstract=2083732


Tuesday, October 23, 2012

Diversifcation: good but not as good as you probably think

Index cohesive force
Index cohesive force (Photo credit: Wikipedia)

For years (at least since 2001) this idea has been a mainstay in my classes.  The benefits of diversification have been overstated.  Why?  The correlations that are used to diversify and get the so called optimal portfolio change and the change is NOT in a random format: the correlations go up in bad times.

The Physics of Finance: Why diversification doesn't work:

"Harry Markowitz introduced the idea of diversification into investing back in the 1950s (at least he formalized the idea, which was probably around long before). Using information on the mathematical correlations between the returns of the different stocks in a portfolio, you can choose a weighted portfolio to minimize the overall portfolio of volatility for any expected return. This is maybe the most basic of all results in mathematical finance.

But it doesn't work; it suffers from the same problem as the balanced man in the canoe. This is clear from any number of studies over the past decade which show that the correlations between stocks change when markets move up or down."

Click through, this will almost assuredly be a test question for SIMM!

UPDATE 10/23/2012

It was rightly pointed out to me that this could be taken the wrong way.  I am not saying the benefits of diversification are non-existent and without any doubt all investors should be diversified across assets classes.  What I was trying to say is that the benefits are overstated as they are based on correlations that will likely climb in the event of a large scale market decline.  

Short term governments have HISTORICALLY been the exception to the rule and clearly derivatives that are designed to act like insurance contracts and have negative correlations (puts for the average investor) do not fall into the category of assets whose correlations increase in bad times.
Enhanced by Zemanta

Thursday, September 27, 2012

'Drunken' Broker Sent Oil to 8-Month High in 2009: Report - US Business News - CNBC

'Drunken' Broker Sent Oil to 8-Month High in 2009: Report - US Business News - CNBC:

 "...an admin clerk called Perkins to ask why he had bought 7 million barrels of crude during the night. Perkins had no recollection of the transactions, and it turned out that he had made the trades during a “drunken blackout," according to the FSA."

Monday, September 24, 2012

ATM fees hit record high, free checking accounts decline - Sep. 24, 2012

ATM fees hit record high, free checking accounts decline - Sep. 24, 2012:

" McBride says that the banking industry has lost income due to an increase in regulations, and that's made free checking accounts harder to find.

"Two regulatory changes in particular have cut the legs out from free checking, he said, "one putting restrictions on overdraft charges, and the other limiting swipe fees when a consumer uses a debit card."

Wednesday, September 12, 2012

CEO pay in the FTSE 100

English: Differences in national income equali...
English: Differences in national income equality around the world as measured by the national Gini coefficient. The Gini coefficient is a number between 0 and 1, where 0 corresponds with perfect equality (where everyone has the same income) and 1 corresponds with perfect inequality (where one person has all the income, and everyone else has zero income). (Photo credit: Wikipedia)
CEO Pay in FTSE 100: Pay Inequality, Board Size and Performance by William Forbes :: SSRN:

Still more evidence that suggests that excessive Executive pay hurts shareholders.  Unlike previous work this looks at more executives and at non-US data. 

Too high of executive compensation negatively affects stockholders of US firms was shown by Bebchuk, Martijn, and Peyers JFE 2011) who showed

"that corporate value, as proxied by Tobin’s Q, post- earnings announcement share price responses, shareholder responses to acquisitions and executive turnover all deteriorate in the CEO pay slice rises. This suggests a high CPS may reflect something other than a reasonable re- ward for services rendered to company shareholders"    

Now Forbes and Pogue  extend the work of team Bebchuk by going beyond the pay of the top 5 executives as well as looking at UK firms.

Their Verdict? 

Excessive Executive pay is still detrimental:

"...additional evidence on the Bebchuk et al hypothesis that a higher CPS damages company performance from outside the US....While much of the debate concerning managerial “power” to set their own pay has been US based Conyon et al ( Conyon (2011)) have shown that, controlling for risk, UK and US CEO pay levels are not as different as had previously been assumed."

BTW you should definitely be aware of the Gini Measure, it looks worse than it really is (key to remember it is a measure of inequality in pay (or wealth etc in other fields).  Again quoting :

"The Gini coefficient (G) is then the ratio of the difference between the 45◦ line of absolute equality and the curve denoting the actual, unequal, distribution to the total area lying beneath the line of equality. While the Gini coefficient has various mathematical representations it turns out to be simply one half of the relative mean difference, defined as the arithmetic average of the absolute value differences, between all pairs of incomes.
nn G=(1/2n2μ)SUM SUM |yi −yj|
i=1 j=1 nn
= 1 − (1/n2 μ) 􏰀 􏰀 M in(yi , yj ) i=1 j=1
= 1 + (1/n) − (2/n2μ)[y1 + 2y2 + ..... + nyn] for y1 ≥y2 ≥....≥yn.    (1)
where μ is the average level of income across members of the group (say a company board) and n is the size of the population (or board size)."


"In this paper we examine the agency costs of seemingly excessive pay awards to CEO's within the FTSE 100 in the last decade. Are CEOs taking a large proportion of the total pot (a big "pay slice") more, or less, able to return value to shareholders by better management? In presenting this evidence we describe variations in whole distribution of executive pay, rather than invoking some arbitrary cut-off point (e.g. the CEO's pay as a percentage of their five highest paid peers or the CPS), to determine how changes in shareholder value match to concurrent changes in the distribution of executive pay. We ask is the impact of executive pay-inequality a function of board size, rendering the CPS measure problematic in this context? If so how does the interaction of board size and corporate performance size, as measured by shareholder returns, explain variation in the sensitivity of the pay-performance relationship for UK FTSE executives? We advance the Gini coefficient as a preferable measure of executive pay inequality in order to capture the impact of perceived inequality upon corporate performance."

Forbes, William Patrick, CEO Pay in FTSE 100: Pay Inequality, Board Size and Performance (September 1, 2012). Available at SSRN: http://ssrn.com/abstract=2140204
Enhanced by Zemanta

Saturday, September 08, 2012

New 'Tail Hedge' ETF Hunts Black Swans - Seeking Alpha

New 'Tail Hedge' ETF Hunts Black Swans - Seeking Alpha:

It is a little eearly in the school year for my classes to cover this, but oh well, we will anyways!  lol

" First Trust recently launched a new "Black Swan" styled ETF that pairs a tail risk hedge with equities, which will help limit an investor's downside risk.....The tail hedging strategy protects a portfolio from extreme market oscillations as a result of unpredictable, random and unexpected events, or so-called Black Swan events. The term was coined in a 2007 book by Nassim Nicholas Taleb published right before the financial crisis hit."

Monday, July 30, 2012

Mark Gongloff: Libor Fraud Was Happening In 1991, Trader Says, 17 Years Before Timothy Geithner Claims He Knew

Mark Gongloff: Libor Fraud Was Happening In 1991, Trader Says, 17 Years Before Timothy Geithner Claims He Knew:

"...the earliest time-stamp on Libor manipulation we've seen yet -- is a Financial Times op-ed by former Morgan Stanley trader Douglas Keenan. He claims that Libor, a key short-term bank lending rate that affects mortgages and other interest rates throughout the economy, was being jerked around for fun and profit as long ago as 1991."

Well then, that puts a different spin on things.
Enhanced by Zemanta

Friday, July 27, 2012

The Agenda: A Closer Look at Middle Class Decline - NYTimes.com

The Agenda: A Closer Look at Middle Class Decline - NYTimes.com:

Interesting NYTimes Blog article:

"Since median inflation-adjusted family income peaked in 2000 at $64,232, it has fallen roughly 6 percent. You won’t find another 12-year period with an income decline since the aftermath of the Depression.

Why?  Hard to say, their attempt:

"In the simplest terms, the relatively meager gains the American economy has produced in recent years have largely flowed to a small segment of the most affluent households, leaving middle-class and poor households with slow-growing living standards."

Which does more to explain what happened and not why.  My short attempt at the "Why" in simple bullet points:
  • Slow economy means less to divvy up.
  • The world is flatter.  Technology, opening markets, and improving world-wide business conditions have increased competition and driven down the "excess profits" that the US grew accustomed to in the past.  (Note excess profits in an economic sense).
  • The same factors that have reduced the excess profitability of firms fall especially hard on the middle and lower classes.  For instance, as technology has reduced the need for middle managers, it has reduced the wealth of the middle class.
Enhanced by Zemanta

Wednesday, July 25, 2012

ANALYSIS: Should airlines hedge their bets on fuel?

English: Chart of jet fuel prices for major US...
English: Chart of jet fuel prices for major US airlines. (Photo credit: Wikipedia)
ANALYSIS: Should airlines hedge their bets on fuel?:

Remember the difference between operational hedges (example Delta's purchase of an oil refinery) and financial hedging (hedging with financial derivatives).  And my prior on this is that hedging should be done and it is best to do it with financial hedging whenever possible.

From Flightglobal.com ANALYSIS: Should airlines hedge their bets on fuel?:

"When Delta Air Lines announced its intention to acquire an oil refinery earlier this year, the unusual move drew a mixed response from analysts. Some praised its innovation, arguing that its daily consumption of 210,000 barrels of jet fuel justified cutting out the middle man. Others questioned whether airlines should be in the business of refining crude oil.

But one thing no one disputed was the urgent need to offset fuel price volatility. According to IATA's latest forecast, Brent crude, the main European benchmark, is likely to average $110 a barrel this year - but in just six months spot prices have ricocheted wildly between $128 and $88."
Enhanced by Zemanta

Sandy Weill: Break up the big banks - Jul. 25, 2012

English: Sanford Weill outside Waverly Inn res...
English: Sanford Weill outside Waverly Inn restaurant in New York City on December 17, 2007. (Photo credit: Wikipedia)
Sandy Weill: Break up the big banks - Jul. 25, 2012:
Reverse course?  Weill seemingly admits the repeal of Glass-Steagall was a mistake.

"The man responsible for creating Citigroup -- the world's first financial supermarket -- said Wednesday that the nation's largest banks should be broken up in order to protect taxpayers.

Former Citigroup chairman Sandy Weill -- who engineered a series of corporate takeovers and lobbying efforts to create Citigroup -- explained during an interview on CNBC why he now thinks a firewall between commercial and investment banks is needed."
Enhanced by Zemanta

Tuesday, July 17, 2012

What Americans Earn : Planet Money : NPR

What Americans Earn : Planet Money : NPR:

Some takeaways: Almost one household out of every four (24.9 percent) makes less than $25,000 a year. About one in three households (30.1 percent) made between $50,000 and $100,000. One in five households (19.9 percent) made more than $100,000 a year.

Thursday, July 12, 2012

Why Floundering Is Good | Psychology Today

Why Floundering Is Good | Psychology Today:

Yes!  I have ammunition now. :)  but My students may not like this but it fits exactly what I have said since even before I started teaching.     (thanks to Farnam Street for pointing this one out!

"...it’s better to let the neophytes wrestle with the material on their own for a while, refraining from giving them any assistance at the start. In a paper published earlier this year in the Journal of the Learning Sciences, Kapur and a co-author, Katerine Bielaczyc, applied the principle of productive failure to mathematical problem solving in three schools in Singapore."

and later:

"First, choose problems to work on that “challenge but do not frustrate.” Second, provide learners with opportunities to explain and elaborate on what they’re doing. Third, give learners the chance to compare and contrast good and bad solutions to the problems. And to those students and workers who protest this tough-love teaching style: you’ll thank me later."

NBA Players Forced to Save Toward Retirement for First Time - Bloomberg

English: Chicago Bulls Scottie Pippen 1995
English: Chicago Bulls Scottie Pippen 1995 (Photo credit: Wikipedia)
NBA Players Forced to Save Toward Retirement for First Time - Bloomberg:

To combat the near epidemic problems of professional athletes going broke after failing to safe for tehir retirement, the new NBA agreement includes a forced saving plan:

"Beginning next season, players also will surrender 5 percent to 10 percent of their salary for retirement. They automatically will be enrolled in the program and would have to opt-out to keep from participating in the plan, Klempner said."
Note how the plan makes use of defaults (lesson learned from behavioral finance!)

Didn't know lack of saving was a problem? Here from the article:

"Former NBA players Scottie Pippen, Latrell Sprewell and Antoine Walker are among retired professional athletes who have experienced financial difficulty after careers in which they earned tens of millions of dollars. Walker filed for bankruptcy after being paid more than $100 million over 12 years in the NBA.

“It’s a start,” player agent Keith Glass said in a telephone interview. “It does force you to save something, and that’s a good idea.”
Enhanced by Zemanta

Monday, July 09, 2012

Futurity.org – In tool trade, chimps reveal a quirky bias

Futurity.org – In tool trade, chimps reveal a quirky bias:

The endowment effect essentially says that you value something you own more than it is worth from an outside perspective.  Now it appears that chimps suffer the same bias:
"Drawing on prior theoretical work by Jones on the evolution of seemingly irrational behaviors, Brosnan and Jones found consistency between chimpanzees and humans with respect to the existence of the endowment effect and, more importantly, showed that variations in the prevalence of the effect could be predicted."
Enhanced by Zemanta

Tuesday, July 03, 2012

PolitiFact | Viral Facebook post on CEO-worker pay ratio has obscure past

PolitiFact | Viral Facebook post on CEO-worker pay ratio has obscure past:

Several of my facebook friends have posted this and, well, there are so many things wrong with this picture it barely deserves mention, but if it is not mentioned, people will only see one side of the discussion. 

So let's see is this true? 

Yes US CEOs are highly paid both historically (excluding late 1990s-early 2000s) and relative to their peers in other countries.  CEO pay has fallen somewhat since the high flying internet boom.  SO CEOs are paid a great deal (pun intended), BUT this is in part due to size differences (larger firms pay CEOs more), the contribution the CEO makes (example in Japan CEO plays a lesser role), and form of pay (more pay is form of options (which CEOs do not value as much as recorded value) the higher the pay.

Moreover, even the numbers (ratios) are questionable:

From PoliticalFact:

"... don’t doubt the chart’s underlying point that the ratio of CEO pay to worker pay is high in the United States, and is likely higher in our free-wheeling economy than it is in the historically more egalitarian nations of Europe.

But in its claim that the U.S. ratio is 475 to 1, the chart conveys a sense of certitude and statistical precision that simply isn't warranted -- and which is contradicted by the facts. The latest number for the U.S. is 185 to 1 in one study and 325 to 1 in another -- and those numbers were not generated by groups that might have an ideological interest in downplaying the gaps between rich and poor"

Thursday, April 26, 2012

A Home in the Colonias | The New York Times

A Home in the Colonias | The New York Times

This video is about 5 years old, but it shows some the living conditions where we will be working in South Texas.    The New York Times

Here is some more:
Border Communities: The Case of Colonias in Texas by Cecilia Giusti

"Education levels are very low there. In El Cenizo, one established colonia in Webb County, only 15 per cent of people older than 25 are high-school graduates, a lower figure than the 76 per cent in the state of Texas and 80 per cent in the US as a whole. The median age of El Cenizo residents is 18.5, much younger than 32 years for Texas.  
Low income levels. Income levels are very low in these settlements. About 60 per cent of the colonia population lives below the official poverty line. In El Cenizo about 68 per cent are under the poverty threshold, much higher than in Texas (15 per cent) and the United States (12 per cent).
Incremental construction patterns. Construction in small steps is common. Colonia residents often work on their homes as schedules and finances permit. Houses are constantly improved and, as families grow, they expand accordingly. During construction, families continue to live in the houses and the building pace is generally slow."

I will update this more in the near future.

Wednesday, April 25, 2012

Shrinking Universe

AM reading: Common Sense of Mutual Funds by John Bogle.  Here is a really cool insight:

Page 359: he is writing about the fact that given normal restrictions (not owning more than 2% of portfolio in any single asset and not owning more than 5% of shares of any individual company), the number of potential investments drops significantly.  For example, using 2009 data, a 1 Billion fund could invest in any of 1,927 firms.  However a $20 billion fund would only be able to choose from 251 firms. 
Enhanced by Zemanta

Tuesday, April 24, 2012

Why U.S. Companies Continue to Pay Dividends - Bloomberg

Why U.S. Companies Continue to Pay Dividends - Bloomberg:

Love it!  Virtually identical to our class discussions:

"It seems clear from our recent work that dividends are very resilient, and are unlikely to disappear. What explains this staying power?

First, some argue that dividends provide important “signals” about the strength or quality of the firm’s underlying earnings stream. (Because investors know that a significant dividend is a very strong commitment to paying out at least the current dividend amount on a continuing basis.)

Second, dividends help discipline managers’ tendency to squander their firms’ cash on wasteful or unproductive projects or acquisitions. This is particularly a problem in large, mature companies that generate sizable free cash flow.

Third, it could be that companies are catering to certain investors..."

Tuesday, April 03, 2012

Wall Street Warriors

A look at what it can be like to work on Wall Street. (this episode focuses on "winners" in Hedge funds, commodities, and currency trading):

I am back

I realize I have been gone, but I was very busy nursing my mom in her battle against breast cancer. It pains beyond words that we lost the battle. I will try to get more articles up in the coming weeks. I also encourage you to "like" financeprofessor on facebook where I do share articles in a much faster manner.

Saturday, March 03, 2012

Wednesday, February 29, 2012

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

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

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

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

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

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

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

5 Simple Hedge Strategies for Volatile Times - Forbes

5 Simple Hedge Strategies for Volatile Times - Forbes

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

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

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

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

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

Could Twitter predict the stock market? | Reuters

Could Twitter predict the stock market? | Reuters

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

Monday, February 27, 2012

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

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

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


Oh the essays questions I could/will write! 


Cronqvist, Henrik and Siegel, Stephan, Why Do Individuals Exhibit Investment Biases? (February 19, 2012). Available at SSRN: http://ssrn.com/abstract=2009094

Too Much Cash in the Corner Office - Businessweek

Too Much Cash in the Corner Office - Businessweek

A definite must-read for my classes!

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

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

UBS hires former Bear Stearns CFO Molinaro | Reuters

UBS hires former Bear Stearns CFO Molinaro | Reuters

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

Congratulations to St. Bonaventure Graduate Sam Molinaro:

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

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

Interesting. And sort of unexpected.

Marin and Olivier document

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

Saturday, February 25, 2012

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

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

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

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

Friday, February 10, 2012

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

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

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

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

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

I should add, that these are not all agreed upon as bubbles. Some explain the high volatility merely using high levels of volatility and a real option analysis. This definitely is a source of some price run-ups, but I have a hard time convincing myself that it explains a large portion of the price changes.
Enhanced by Zemanta

Study: Consumers Keep Up -- or Down -- with the Joneses During Recession - Duke's Fuqua School of Business

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

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

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

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

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

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

Wow, I wish I had thought of that!

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

Thursday, February 09, 2012

Jurf--Journal of Undergraduate Research in Finance

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

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

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

Diamond Foods Debacle May Crack Open a MAC - NYTimes.com

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

Diamond Foods Debacle May Crack Open a MAC - NYTimes.com:

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

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

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

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

Enhanced by Zemanta

Wednesday, February 08, 2012

Simple options thrive in risky world - SuperDerivatives | Reuters

Simple options thrive in risky world - SuperDerivatives | Reuters:

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

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

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

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

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

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

Tuesday, February 07, 2012

Funny stuff--academic "weasel words"

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

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

Professor Is Wary of 'Exciting' Investments and Suggests Mutual Funds to Buy - WSJ.com:

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

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

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

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

"WSJ: How should ordinary investors pick funds?

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

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

Monday, February 06, 2012

Just How Efficient Is The Market? - Seeking Alpha

Just How Efficient Is The Market? - Seeking Alpha:

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

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

a couple of "look-ins"

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

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

H/T Jordan a former student

Friday, February 03, 2012

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

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

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

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

Wednesday, February 01, 2012

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

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

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

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

Sunday, January 29, 2012

New research suggests link between genetics, Wall Street success - ContraCostaTimes.com

New research suggests link between genetics, Wall Street success - ContraCostaTimes.com:

Not too much, not too little, but somewhere in the middle.

"Zak and two graduate students published their research in the January issue of PLoS One, an online science journal. The researchers conducted their study by comparing the genetic codes of working Wall Street traders to a control group of business students.

The researchers found evidence that genes affecting the way the brain processes dopamine, a chemical linked to risk-taking behavior, may be associated with success on Wall Street.

Traders who had successful careers, as measured by length of employment, tended to have genetic backgrounds linked to moderate levels of dopamine.

In other words, a good trader is likely to have a genetic code that influences a person's behavior toward competitiveness, but not the kind of thrill-seeking behavior in which risk taking becomes an addiction."

And people thought I was far-fetched last year when I asked how long before Wall Street Money Managers had to undergo a brain scan and blood work prior to being allowed to manage money.

Saturday, January 28, 2012

Affinity fraud: Fleecing the flock | The Economist

Affinity fraud: Fleecing the flock | The Economist:

"Besides the Madoff saga, Marquet International, a consultancy, has identified more than 300 sizeable Ponzi schemes from the past ten years, with combined losses for investors of $23 billion. It estimates that up to half of those were affinity-based. No one has a reliable number for smaller frauds over the same period, but guesses range from $5 billion to $20 billion. In all, affinity-fraud losses in America could be as much as $50 billion."

H/T Zvi Bodie

Does Board Structure in Banks Really Affect Their Performance? by Shams Pathan, Mamiza Haq, Philip Gray :: SSRN

This one will definitely make it to class!

Does Board Structure in Banks Really Affect Their Performance? by Shams Pathan, Mamiza Haq, Philip Gray :: SSRN:

"Using a panel of 212 large U.S. bank holding companies over the period 1997-2004, we examine if board structure (board size, composition and gender diversity) in banks relate to their performance. After controlling for relevant sources of endogeneity (simultaneity, reverse causality and unobserved heterogeneity) via system generalized method of moments (GMM), we find that board structure in banks affect their performance. Particularly, the results show a negative association between board size in banks and their performance. We also find evidence of a negative relation between board independence and performance. In addition, our results support a positive association between gender diversity and bank performance."