Blackstone Unit Wins in No-Lose Codere Trade: Corporate Finance - Bloomberg

Blackstone Unit Wins in No-Lose Codere Trade: Corporate Finance - Bloomberg: The unit of Blackstone Group LP (BX) structured the loan in a way that would lead to a payout on swaps it held, according to three people with knowledge of the situation who asked not to be identified because the discussions were private. The contracts were triggered on Sept. 18 after Codere delayed an interest payment by two days to comply with the loan terms. GSO held 25 million to 30 million euros of the swaps, meaning it may have made at least 11.4 million euros ($15.6 million), according to one of the people and data compiled by Bloomberg.

Here is John Stewart's version:

The Daily Show
Get More: Daily Show Full Episodes,The Daily Show on Facebook

CEO Pay More Closely Matches Firms' Results - WSJ.com

CEO Pay More Closely Matches Firms' Results - WSJ.com:


"The study is among the first to assess how the rising popularity of performance-based restricted stock is affecting CEO pay. Performance-based stock is the fastest-growing segment of executive pay, accounting for 27.4% of the value of compensation granted to CEOs in 2012, up from 18.8% in 2008, according to a separate study by the Journal and pay consulting firm Hay Group.

So far, the results suggest that the trend toward performance-linked stock hasn't had a big impact on average pay levels."

Related articles

• 10 CEOs in America break all records for executive pay
• Billion Dollar Pay Check? 10 CEOs in America Break All Records for Executive Pay
• US CEOs break pay record as top 10 earners take home at least $100m each
• Top-Tier CEO Pay Grew Nearly 15 Times Faster Than Worker Pay Last Year
• A Proposal To Limit Swiss Executive Pay To 12 Times That Of Low-Paid Employees Has Fat Cats Worried

Financial Crisis Made Us More Likely To Cheat, Steal: 'Think Robin Hood'

Financial Crisis Made Us More Likely To Cheat, Steal: 'Think Robin Hood':

"After suffering a financial loss, people are more willing to lie, cheat and steal to improve their situation, according to a study conducted by a group of researchers including Dan Ariely of Duke University's Fuqua School of Business."

5 things I learned today #2

I had fun with my 5 things yesterday's so I am doing it again.

Five things I learned today:

1. Volume of equity options traded with the Options Clearing House (OCC )is over 10 times that of non equity traded options.  This ratio has stayed relatively constant since 2000.  Data source: OCC. http://www.optionsclearing.com/webapps/historical-volume-query (Sept 26, 2013)

year	equity	non equity	equity percentage	equity to non equity
2012	3,681,820,659	322,050,649	90.23%	11.43
2011	4,224,604,529	338,143,665	91.06%	12.49
2010	3,610,436,931	288,631,739	91.35%	12.51
2009	3,366,967,321	245,669,797	92.57%	13.71
2008	3,284,761,345	297,811,236	91.42%	11.03
2007	2,592,102,961	270,723,257	89.96%	9.57
2006	1,844,181,918	183,665,668	90.20%	10.04
2005	1,369,048,282	135,263,258	90.32%	10.12
2004	1,083,649,226	98,390,870	91.33%	11.01
2003	830,308,227	77,550,428	90.94%	10.71
2002	709,784,014	70,673,329	90.87%	10.04
2001	722,680,249	58,581,686	92.50%	12.34
2000	672,871,757	53,856,182	92.59%	12.49

  2.  Playing with FINVIZ is fun.  For instance:

There are over 3600 firms that trade on the NYSE. (Finviz.com)

391 of the S&P 500 trade on the NYSE
109 of the S&P 500 trade on the NASDAQ

27 of the Dow Jones Industrial stocks trade on the NYSE
 3 of the Dow Jones Industrial stocks trade on the NASDAQ

 http://finviz.com/screener.ashx?v=111&f=exch_nyse,fa_div_pos


3. Given the importance of option trading, Kane's finding that option markets are important for price discovery should not be a surprise, but rather seen as confirmation of what we already assumed.

"I find evidence that the equity prices do adjust towards the option prices to reconcile the mispricing event. The results show that there is a significant movement in the equity prices towards the option prices, however consistent with the model the equity prices only move part of the way and the implied prices move back resulting in a reconciliation price in the middle"

Kane, Hayden, Price Discovery Across Equity and Option Markets (September 13, 2013). Available at SSRN: http://ssrn.com/abstract=2325714 or http://dx.doi.org/10.2139/ssrn.2325714

4. CEO pay was pretty constant from 1936 to 1980...then, not so much:

Time        Median CEO pay in millions of constant 2000 dollars

1936-1939	1.1
1940-1945	1.07
1946-1949	0.9
1950-1959	0.97
1960-1969	0.99
1970-1979	1.17
1980-1989	1.81
1990-1999	4.09
2000-2005	9.2

Source:

Arantxa Jarque: CEO Compensation: Trends, Market Changes, and Regulation in Economic Quarterly, Summer 2008

Available at http://www.richmondfed.org/publications/research/economic_quarterly/2008/summer/pdf/jarque.pdf

Note: the original source of the data is: Frydman and Saks (2007).

5.  The quarterly correlation between bonds and stocks has been negative in the 2000s.   CBS reported on a paper by Harvard's Malcom Baker and NYU's Jeffery Wurgler.

Here is the key table from the CBS report:
     
            Decade   Correlation

• 1970-79: 0.49
• 1980-89: 0.36
• 1990-99: 0.19
• 2000-11: -0.55

Source: http://www.cbsnews.com/8301-505123_162-57464128/the-correlation-of-bond-and-stock-returns/

The second really cool thing about the Baker and Wurgler paper is that in it they break down bonds into different types: for instance "bond like" stocks have a higher correlation whereas more speculative stocks have a lower correlation.  VERY cool!

(as I would label it: I^3: Informative, Interesting, and Important!


  I didn't believe the correlations were so low so I decided to test it myself.  I took a closed end fund and compared it to the S&P and the Dow.  And, well, they seem to be right!  Check for yourself: here.



 

5 things I learned today

I have decided I need to get back to blogging more.  I am not sure where the time will come from, but has to happen, so:

Five things I learned today:

1.  Diversified firms have less underpricing in IPOs.  This may be caused by signaling quality by the more focused firms. 

The source of this new knowledge is: “Industrial Diversification and Underpricing of Initial Public Offerings” with Thomas Boulton and Scott Smart, 2013, Financial Management, 42, 679-704  Available online: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=101895

   2. Better governed firms adjust their capital structure faster.    Especially when further "out of whack"   Source of new knowledge: Liao, Mukherjee, and Wang.  

A look in: 

"...predict that a good corporate governance system would, in

serving the best interest of shareholders, induce managers to make more timely

(upward) adjustments to capital structure deviations."

  3. Dividends have a more pronounced signal (ie are more important) in countries where investor protections are lower.  (FYI this is exactly what I have been hypothesizing in class.  Good to get confirmation.)  

"Results suggest that dividends are more informative in firms with potentially more severe agency problems and in countries with weak investor protection and low transparency" 

 Source of New Knowledge (SONK): Dividend Informativeness and Agency Problems: A Cross-Country Analysis by Wen He, Lilian Ng, Nataliya Zaiats and Bohui Zhan

  4.  There are roughly 4800 ETFs and ETPs in the world.    ETFs have about $2 trillion invested in them.  SONK: http://www.cnbc.com/id/100695142

  5. Credit Default Swaps on US debt are starting to rise in the face of a potential default when the debt ceiling is hit.  SONK: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/24/markets-are-starting-to-worry-about-the-debt-ceiling-in-one-chart/

Selling covered calls is not without risk

Where Did 6 Million Missing Workers Go? | The Exchange - Yahoo Finance

Where Did 6 Million Missing Workers Go? | The Exchange - Yahoo Finance:

"The other reason is a surprising pullback in the portion of Americans who even want to work. The labor-force participation rate is declining for a variety of reasons, such as younger people going to college or graduate school instead of looking for a job, and out-of-work middle-aged people who simply give up looking for a job and become labor-force dropouts. Economists have been expecting the participation rate to inch up as the economy recovers. But it hasn’t."

How serious is this?

Opinions vary, but the New Yorker estimates the unemployment rate at about 11% if not for the dropouts:

"In August, 2008, just before Lehman Brothers blew up, the participation rate was 66.1 per cent. Five years later, it’s still almost three percentage points lower than it was then.
Assuming the participation rate stayed constant over the past five years, ...A bit of grade-school arithmetic provides the answer. In August, 2008, the participation rate was 66.1 per cent. Applying that figure to a working-age population that has grown by about ten million in the past five years, there would be about 162.6 million people in the labor force, rather than the actual figure of 155.5 million. With 144.2 million Americans currently employed, 18.4 million would then be classified as unemployed. (The actual figure is 11.3 million.) And the unemployment rate would be roughly 11.3 per cent...."

In fairness the New Yorker also tries the calculations under different assumptions, but regardless, the "real" unemployment rate is higher than what we see report.  

Measuring fund performance class lesson

How does your fund stack up?

Portfolio math for class

I am loving these videos.  Nice for students to prep for class and to review after.  Feel free to use.

Citigroup sheds more than $6 billion in PE, hedge fund assets: WSJ - Yahoo! Finance

Citigroup sheds more than $6 billion in PE, hedge fund assets: WSJ - Yahoo! Finance: (Reuters) -

"Citigroup Inc (NYS:C) has sold more than $6 billion in private equity and hedge fund assets in the past month to comply with new regulations that limit such investments, the Wall Street Journal reported, citing people familiar with the transactions."

What's an indifference curve?

More class videos:  topic is "what is an indifference curve and how does it relate to diversification?"

What is a put?

Another derivatives video for my classes.  Today's topic: what is a put contract?

A NPV (Net Present Value) refresher

Here is a fast whiteboard video I made to remind my class what NPV is.  

Derivative payoff Diagrams

Working to get ready for the new semester by making some videos in advance.  Here is an attempt using Educreations an online white board app.  Seems VERY easy to use/share.  This was very first attempt with zero script etc. 

Introduction to financial derivatives

We have a new video/class capture program that I was playing with today.  Can't quite figure out how to export to YouTube yet, but here is a link

Hedge Funds And S&P 500 Nearly Identical - Business Insider

Hedge Funds And S&P 500 Nearly Identical - Business Insider:

This one surprised me.  I was expecting the normal "Hedge funds don't outperform" article but this is much better.  It shows that hedge funds while not outperforming indexes, have (on average) had lower risks.

A look in:

" ...the path of achieving the 8.6% return would have been dramatically different between these two. The monthly return volatility for the S&P500 is nearly double that of the hedge fund index. And while the correlation between the two indices is almost 0.6, the beta of the hedge fund index has consistently been low - about 0.33 over the 20 year period."

I definitely recommend clicking through and seeing the charts.  They do tell a story that is often forgotten when only returns are considered.
Read more: http://www.businessinsider.com/hedge-funds-and-sp-500-nearly-identical-2013-8#ixzz2bltKrLgq

Maybe the "Chinese Wall" is not all that we have been led to believe?

With I.P.O.'s on the Rise, Analysts Get New Scrutiny - NYTimes.com:


In the years after the internet bubble, the so-called "Chinese Wall" keeping Analysts and sales people apart was strenthened.  The rationale for this was to reduce the conflicts of interest that arise if an analysts' rating influences whether the firm gets the business or not ("Hey we will rate you a buy if you are our client." ).

Well now the NY Times is suggesting that maybe this wall is not as secure as we had hoped/been lead to believe:

For years, stock analysts have been barred from pitching I.P.O. business.....Today, companies routinely interview analysts when selecting bankers to underwrite their I.P.O.’s. During these meetings, the analysts say, they increasingly feel pressure to say the right things to curry favor with a company’s management and owners. They also see themselves as participating in their banks’ efforts to win business, a potential breach of government regulations."

The article even quotes Jay Ritter (A professor I am convinced is a genius): "“The walls between research and banking can still be porous,” said Jay R. Ritter, a professor at the University of Florida who studies the I.P.O. market. “It doesn’t surprise me that there has perhaps been some backsliding.”"

Why You Shouldn’t Trust Internet Comments | Science/AAAS | News

Why You Shouldn’t Trust Internet Comments | Science/AAAS | News:

In many areas the Wisdom of the crowds rules, but what is the crowd isn't as smart as we think?

 From Reddit:

"The “wisdom of crowds” has become a mantra of the Internet age. Need to choose a new vacuum cleaner? Check out the reviews on Amazon. Is that restaurant any good? See what Yelp has to say. But a new study suggests that such online scores don’t always reveal the best choice. A massive controlled experiment of Web users finds that such ratings are highly susceptible to irrational “herd behavior”—and that the herd can be manipulated."

Here is the abstract of the paper by  Muchnik, Aral, and Taylor. 

Why do I care?

I posted this on Facebook and then decided it was enough finance related to post here as well.

Yes, it is their money (donated by Phil Knight). Yes, they can spend their money in anyway they see fit. No, they are not the only ones to go "overboard".

I concede my "overboard" tends to be significantly less than other people's "just right". And I even bet that the fancy "football complex" will help recruitment (opulence sells), but its almost mind boggling excess sends another message and frankly makes me feel at least a little guilty about liking college football (sports).

The worst thing is I don't know why I feel guilty. It's not the sports aspect; I would feel just as guilty if the building were a new School of Business/Science/Education/Hospital or orphanage. It is the excess.

And yet why? If they want to have a bonfire and burn their money, it is none of my business (ignoring money supply and pollution effects). So why do I care? Strike up another one to behavioral finance I guess. http://www.nytimes.com/2013/08/03/sports/ncaafootball/oregon-football-complex-is-glittering-monument-to-ducks-ambitions.html?_r=0

 

 

 

Stern Advice: Financial Advice That Is Popular -- and Wrong - Yahoo! Finance

Stern Advice: Financial Advice That Is Popular -- and Wrong - Yahoo! Finance:

"The problem is, a lot of that is bad advice. At best it fit a bygone era; at worst it was never right and is dangerous.

Here is a list of my least favorite financial chestnuts."

Vince Young may have possessions seized to pay off $1.7 million loan | Shutdown Corner - Yahoo! Sports

It is always sad and shocking to see people with money burn through it all.  Such is the case of Vince Young.  

Vince Young may have possessions seized to pay off $1.7 million loan | Shutdown Corner - Yahoo! Sports:

"Young's fall has been precipitous....Young signed a contract in July 2006 that, in theory, could have set him up for life. The No. 3 overall pick of the 2006 NFL draft, Young's six-year contract with Tennessee was worth just over $48 million, had a maximum value of $57.79 million, and contained $25.74 million in guaranteed money. Of that initial contract, Young earned over $30 million, as well as another $4 million from Philadelphia in 2011. He'd tried to catch on with Buffalo before the 2012 season, but Bills officials hinted that Young's financial troubles, and the concern about their effects on his psyche, were part of the reason he was cut."

Interesting to see that the Modigliani and Miller assumption of operations being independent of finances was broken here in the eyes of the Bills.  

How do you go through that much money?  One way is to (ALLEGEDLY) throw yourself a $300,000 birthday party. 

That is taking Jensen's Free Cash Flow problem hypothesis to the extreme!

Just How Generous Are Detroit's Worker Pensions for Retirees? - Yahoo! Finance

This is somewhat surprising:

Just How Generous Are Detroit's Worker Pensions for Retirees? - Yahoo! Finance:

"...basic takeaway was that [Detroit's] pension system itself was not overly generous," said Jean-Pierre Aubry, assistant director of State and Local Research at Boston College's Center for Retirement Research."

Great lessons from 25IQ (and Daniel Kahneman) | 25iq

 Great stuff! 

Great stuff!  A Dozen Things I’ve Learned About Investing from Daniel Kahneman | 25iq:

 A Dozen Things I’ve Learned About Investing from Daniel Kahneman

1. “Many individual investors lose consistently by trading, an achievement that a dart-throwing chimp could not match.” Leonard the Wonder Monkey will beat a muppet in an investing contest. Not only will muppets lose to a dart throwing monkey, they will do worse than chance would dictate, especially after fees because of certain behavioral biases.

Read the whole list:  here.

Brain sets prices with emotional value

Brain sets prices with emotional value:

Not super surprised by this one:

"...after a series of experiments in which subjects were asked to modify how they felt about something either positively or negatively, the Duke group is arguing that emotional and economic calculations are more closely related than brain scientists had realized. The study appears July 3 in the Journal of Neuroscience."

earlier in article:

"You might be falling in love with that new car, but you probably wouldn't pay as much for it if you could resist the feeling. Researchers at Duke University who study how the brain values things—a field called neuroeconomics—have found that your feelings about something and the value you put on it are calculated similarly in a specific area of the brain."

Ritholtz: You Can “Eat Cat Food Tacos In Retirement,” Or You Can Do This… | Daily Ticker - Yahoo! Finance

Ritholtz: You Can “Eat Cat Food Tacos In Retirement,” Or You Can Do This… | Daily Ticker - Yahoo! Finance:

"In a recent column in The Washington Post, Ritholtz offered advice to investors who can’t get the memories of 2008 out of their minds and missed out on the massive rally since the March 2009 lows. In the accompanying video, he summarizes the advice for taking emotions out of investing:

• Have a plan.
• Execute it faithfully.
• Be diversified.
• Contribute regularly.
• Max out tax-deferred accounts.
• Be an asset allocator.
• Think long-term."

Forget self-denial: Key to richer, healthier life is a good imagination - Red Tape

Forget self-denial: Key to richer, healthier life is a good imagination - Red Tape:


The "He" is Joesph Kable from Penn.

"Recently, his research took an inspirational turn. He found that subjects whose brains show added activity when imagining the future also make better decisions about money. Kable suspects that consumers who can really, viscerally imagine how great that new car will smell when they drive off the lot, or how excited they will be when getting the keys to a new home, have a much easier time saving money. Conversely, those who have dull imaginations tend to live in the present, and blow their cash on payday"

Former Enron CEO Skilling's sentence cut to 14 years - Yahoo! Finance

 Former Enron CEO Skilling's sentence cut to 14 years - Yahoo! Finance:

"Former Enron Corp Chief Executive Jeffrey Skilling's near decade-long quest to prove he did nothing wrong at the once high-flying energy-trading behemoth ended on Friday when a federal judge shaved 10 years off of his prison sentence."

Why would an organization enourage such a conflict of interest?

I realize organizations need money but sometimes conflicts of interest seem to dominate common sense.  A case in point:


The New Rules for Sunscreen - NYTimes.com:

"Take endorsements and seals of approval with a grain of salt. The Skin Cancer Foundation gives a “seal of recommendation” to sunscreens, but only if their manufacturer has donated $10,000 to become a member of the organization."

 BTW the rest of the article is well worth a read! 

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S&P cuts Berkshire Hahaway's rating, but barely.

S&P cuts Berkshire Hathaway rating by one notch to 'AA' - Yahoo! Finance:

"The lower credit rating on BRK better reflects our view of BRK's dependence on its core insurance operations for most of its dividend income," said Standard &Poor's credit analyst John Iten."

How to bond rating agencies work? Here are a few good links:

From Wikipedia:  (they have really cool tables showing defaults by rating_

A straight forward primer:  
http://www.investinginbonds.eu/Pages/LearnAboutBonds.aspx?id=6186

and a slightly more academic version here is from  JF piece:
http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00311/abstract

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SEC subpoenas ‘political intelligence’ firms in a case of leaked information - The Washington Post

SEC subpoenas ‘political intelligence’ firms in a case of leaked information - The Washington Post:

" The latest case emerged April 1 when Height Securities, a Washington-based stock brokerage firm, alerted its clients that the government would soon make a decision favoring private health insurers who participate in a Medicare program.

The alert went out 18 minutes before the end of the trading day, sparking a surge in trading in the shares of several major health-care firms, including Humana and Aetna. The official government announcement was made after trading closed for the day."

Futurity.org – Bad deeds can tarnish money’s value

Futurity.org – Bad deeds can tarnish money’s value:

"Our work suggests morality is an important force shaping economic decision-making,” says Jennifer Stellar, a doctoral student in psychology at University of California, Berkeley, and lead author of the study. “Though we often think $50 is $50, these results demonstrate that when money takes on negative moral associations, its value is diminished.”

The findings help explain the psychology behind such economic trends as socially responsible investing and the boycotting of sweatshop-produced goods. They also shed some light on why companies go to great lengths to avoid the perception that they are accepting money from corrupt investors or are themselves profiting from illegal or unethical practices, researchers say."

 A more cynical author would suggest this is a possible explanation for high CEO pay?  I wouldn't of course ;)   

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• People care about source of money, attach less value to 'tainted' wealth
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Are hedge fund investors beginning to relaize returns are not that great?

In some recent papers, researchers argue that the return from an investment mainly results from exposure to systematic risk factors. Jaeger, L., Wagner, C., “Factor Modelling and Benchmarking of Hedge Funds: Can passive investments in hedge fund strategies deliver?”, Journal of Alternative Investments (Winter 2005) (Photo credit: Wikipedia)

First the "what": Investors are redeeming hedge funds, especially equity funds:

Hedge fund investor inflows turn negative in March - preference for credit strategies continues - Opalesque:

"After a seven month span of consistent positive flows ending November 2012, during which MBS focused funds took in an estimated $6.1 billion, the group has seen outflows in three of the last four months. Despite having net positive investor flow during this time frame, it is of interest that the group’s flows are no longer universally positive....Investors again were net redeemers of assets from directional equity strategies in March. Q1 marked the seventh consecutive quarter of redemptions from equity strategies, matching the duration of outflows the group endured during/after the financial crisis."

The "why" is unknown, but one possibility is that investors are starting to see that just because a fund has the word "hedge" in it, does not mean it is a great fund.  Indeed, it may be far from that great.

To wit:

Rob Arnott: Why I've had it with hedge funds - The Term Sheet: Fortune's deals blogTerm Sheet:

"Arnott's colleagues started with a portfolio with a basic mix -- 60% stocks and 40% bonds. They then took a look at what would happen if the portfolio was shifted gradually, 10% at a time, into hedge funds. The result: Returns went down, and risk went up as the exposure to hedge funds increased, which is the opposite of what you want.

"Portfolio efficiency didn't improve," says RA's John West, author of the firm's hedge fund study. "In fact, it deteriorates with each additional allocation to hedge funds."

Hedge funds did a little better over the past 15 years. But even over that period, West found that a pension fund would have done better by adding a passively managed mix of commodities, real estate, and other assets, rather than expensive hedge funds."

And yet money flows into hedge funds.  What is the allure?  Maybe Statman is right and it is just that people want to brag (appear rich) and investing in hedge funds does that!

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Mercury News interview: Meir Statman, Santa Clara University professor of finance - San Jose Mercury News

Finance (Photo credit: Tax Credits)

Mercury News interview: Meir Statman, Santa Clara University professor of finance - San Jose Mercury News:

"Santa Clara University finance professor Meir Statman believes that American employers should be forced to set up retirement plans for their workers for one simple reason: "People are stupid," he said.

Statman, an expert in behavioral finance, includes himself among people who sometimes make stupid financial decisions."

Statman's book What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions is one of my all time favorites.

Here is an audio interview I did with him a few years ago:  podcast with Meir Statman.

Kill the 30-Year Mortgage - Bloomberg

Kill the 30-Year Mortgage - Bloomberg:

Bloomberg makes an interesting call for more adjustable mortgages that reduce the boom and bust cycles in real estate: 

"New homes are being built at the fastest rate in years and prices are increasing across the country....

What’s wrong with this picture? None of this would be possible without massive government support. Today, the government owns or guarantees about 90 percent of new mortgages, up from about 50 percent in the mid-1990s. It isn’t sustainable, let alone fiscally acceptable, for the U.S. to have such a domineering presence in what should be a private-sector function."

One more look in:

"The U.S. must figure out a way to better manage these risks if it is to turn housing back over to the private sector. Fortunately, economists have lots of ideas. The common theme is that mortgage principal should be keyed to economic conditions, and monthly payments should rise and fall proportionately. These features ensure that borrowers have a stake in repaying their loans, while also making it easier for them to do so when times get tough."

Insider trading at KPMG?

KPMG Fires a Senior Partner in an Insider Trading Episode - NYTimes.com:

"KPMG said late Monday night it had fired a senior partner in its Los Angeles office after learning that he had provided inside information to an unnamed individual “who then used that information in stock trades involving several West Coast companies.”"

It seems that the company involved was Herbalife:
Again from NY Times:

Herbalife is poised to disclose on Tuesday that KPMG will have to resign as the company’s auditor, after the accounting firm fired a senior partner, according to a person briefed on the matter.

 

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Carl Icahn Unleashed: Wall Street's Richest Man Is On The Attack -- Just Ask Michael Dell - Forbes

Carl Icahn Unleashed: Wall Street's Richest Man Is On The Attack -- Just Ask Michael Dell - Forbes:

Forbes has a fascinating article on a fascinating man: Carl Icahn.

"He used to make runs at companies via junk bonds and other tools of leverage. Then he figured out how to use other people’s money via a hedge fund structure. Now, though, it’s all Carl–with a net worth that FORBES estimates at $20 billion (which makes him the richest Wall Streeter, edging out George Soros). He doesn’t need anyone’s help or approval anymore. And that now makes him very, very dangerous."

Want more on him?  Here is from Wikipedia:

 " Icahn was raised in Far Rockaway, Queens, New York City, where he attended Far Rockaway High School....began his career on Wall Street as a stockbroker in 1961. In 1968, he formed Icahn & Co., a securities firm that focused on risk arbitrage and options trading. In 1978, he began taking control of positions in individual companies.^[2] He has taken substantial or controlling positions in various corporations including RJR Nabisco, TWA, Texaco, Phillips Petroleum, Western Union, Gulf & Western, Viacom, Uniroyal, Dan River, Marshall Field's, E-II (Culligan and Samsonite), American Can, USX, Marvel Comics, Revlon, Imclone, Federal-Mogul, Fairmont Hotels, Blockbuster, Kerr-McGee, Time Warner, Motorola, and Herbalife."

Someone should make a movie!  

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Why Do Firms Pay Stock Dividends: Is it Just a Stock Split? by Xi He, Mingsheng Li, Jing Shi, Garry Twite :: SSRN

Why Do Firms Pay Stock Dividends: Is it Just a Stock Split? by Xi He, Mingsheng Li, Jing Shi, Garry Twite :: SSRN:

Abstract:

"This paper examines why firms choose to pay stock dividends. Using a sample of listed Chinese firms, we find that younger, more profitable firms, with lower leverage, high levels of retained earnings, private ownership prior to listing, investing more in fixed assets and operating in regions with lower shareholder protection are more likely to pay stock dividends. Consistent with stock dividends substituting for stock splits, our evidence indicates that the initiation of a stock dividend is associated with a significant positive market reaction and increased analyst following, suggesting that firms use stock dividends to attract analysts’ attention. In addition, the positive announcement effect for stock dividends increases with the size of the split factor, suggesting that management making use of stock dividends to keep the firm’s stock price within its acceptable trading range."

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Deregulation of Bank Entry and Bank Failures by Krishnamurthy Subramanian, Ajay Yadav :: SSRN

Deregulation of Bank Entry and Bank Failures by Krishnamurthy Subramanian, Ajay Yadav :: SSRN:

Short version: after deregulation there are fewer bank failures. 

From the paper:

"we find that deregulation of bank entry enhances bank stability by lowering instances of bank failures. Consistent with the effects being strongest in environments where the structure of banking markets changed the most, the effects are mainly due to intra-state deregulation and in states that had unit banking laws. In falsification tests, we find no effect of the deregulation on thrift failures. Furthermore, pre-existing bank failures in a state did not determine its timing of deregulation, which assures against any reverse causal effects. The reduction in bank failures seemed to result from: benefits from greater geographic diversification; and banks becoming more efficient post deregulation."

cite: Subramanian, Krishnamurthy and Yadav, Ajay, Deregulation of Bank Entry and Bank Failures (November 18, 2012). Available at SSRN: http://ssrn.com/abstract=2219809 or http://dx.doi.org/10.2139/ssrn.2219809

Earthquakes and the Mind-Bending Laws of Markets - Bloomberg

To summarize: markets (and earthquakes) are not "normal".

Earthquakes and the Mind-Bending Laws of Markets - Bloomberg:

"Unfortunately, centuries of science and mathematics tradition, focusing on the normal statistics of things like weights, heights, and test scores, has taught us to see the world incorrectly. It was a telling moment on April 27, 2010, when Goldman Sachs Chief Financial Officer David Viniar testified to the Senate Permanent Subcommittee on Investigations....

“We were seeing things,” Viniar said... “that were 25-standard-deviation events, several days in a row.”

In Gaussian mathematics, even an eight-standard-deviation event is expected only about once in the entire history of the universe. A 25-standard-deviation event should be expected about once every 10 to the 135th power years -- one followed by 135 zeros. Stocks over a single day typically change less than about 2 percent, so a movement of even 10 standard deviations means a movement of at least 20 percent. While normal statistics says this should happen once every 10 to the 22nd power days, market data show that it happens essentially every week for at least one of the few thousand stocks in the market. So perhaps we should reexamine our assumptions."

Don't be normal: markets, earthquakes, and life often have fat (and important) tails! 

Great article!  Thanks Dave for sending it to me!  (FYI Dave is a hedge fund manager who speaks to my class at least once a semester.)

Related articles

• What's in a standard deviation?
• Earthquakes and the Mind-Bending Laws of Markets - Bloomberg

Spreadsheet for calculating interest payments

My MBA 604 class was asking about this, so I figured I would share it with everyone.  It is simple but shows how early payments go primarily to paying off interest. 

Weighted average cost of capital (WACC) - YouTube

Weighted average cost of capital (WACC) - YouTube  THANKS Bionic Turtle!!!

California Schools Finance Upgrades by Making the Next Generation Pay - NYTimes.com

California Schools Finance Upgrades by Making the Next Generation Pay - NYTimes.com:

This past week I was at a conference where one of the presentations was on these Capital Appreciation Bonds.  Essentially while these look like zero coupon bonds to investors, they take advantage of accounting loopholes that allow the price appreciation to be catergorized at deferred interest. And hence only the loan amount is reported on financial statements not tHE total amount (debt and interest) is due.

Moreover, these are non callable and at rates which are generally higher than current market rates would suggest. 

 From NY Times:

Since 2007, hundreds of school districts and community colleges across California have used capital appreciation bonds to raise nearly $7 billion for various construction projects, according to data from the state treasurer’s office. The bonds have allowed school districts that are short on cash to finance classroom renovations and new athletic facilities while delaying payment for years, or even decades.

and later:

" And in the most expensive case yet, the Poway Unified School District borrowed $105 million to finish modernizing older school buildings, which local property owners will be paying off until four decades from now at an eventual cost of nearly $1 billion. Because payments on the bond do not start for 20 years, current school board members faced little risk of resistance from property owners."


A few comments:

1. The PV of these is not as outrageous as the articles lead you to believe.  Yes the borrower has to pay back 10-20 times the amount borrowed, but paying back in future dollars.  This is a cardinal mistake (dollar today does not equal a dollar tomorrow!). 
2. Genius move to say that the interest accumulates and hence keep it off the balance sheet.  Shaking my head at this one.  Also gets around rules that attempt to limit borrowing as a percentage of assessed valuation etc.  I don't like it as it keeps taxpayers uninformed as to the true amount of their liabilities, but none-the-less I must recognize the creativity and genius to get around the stated rules. 
3. The accounting rule has to be amended.
4. It is a near perfect example of future generations having to pay off our debts.   
5. As general obligation bonds, the school district is not allowed to default.  In the event of a default their will be a special assessment (think tax) that will be used to pay off the loan.  (at the conference the speaker cited examples from the 1930s (Great Depression) where cities closed down and were foreclosed as a result failure to pay off general obligation muni debt.
6. Look for a more on this coming soon!  (Several large media outlets reportedly doing pieces on this from across the US.)

Related articles

• The bank, the school and the 38-year loan
• Bankers push school bonds for C.A.S.H.
• California: Already Stoking the Next Big Financial Crash?

How Pervasive is Corporate Fraud? by I.J. Dyck, Adair Morse, Luigi Zingales :: SSRN

How Pervasive is Corporate Fraud? by I.J. Dyck, Adair Morse, Luigi Zingales :: SSRN:

Abstract:

"We estimate what percentage of firms engage in fraud and the economic cost of fraud. Our estimates are based on detected frauds, and frauds that we infer are started but are not caught. To identify the ‘iceberg’ of undetected fraud we take advantage of an exogenous shock to the incentives for fraud detection: Arthur Andersen’s demise, which forces companies to change auditors. By assuming that the new auditor will clean house, and examining the change in fraud detection by new auditors, we infer that the probability of a company engaging in a fraud in any given year is 14.5%. We validate the magnitude of this estimate using alternative methods. We estimate that on average corporate fraud costs investors 22 percent of enterprise value in fraud-committing firms and 3 percent of enterprise value across all firms."

Swiss vote for tough curbs on executive pay - Europe - Al Jazeera English

Swiss vote for tough curbs on executive pay - Europe - Al Jazeera English:

Shareholder voting on pay that matters?  This will be interesting to watch.  

"Swiss citizens voted to impose some of the world's strictest controls on executive pay, forcing public companies to give shareholders a binding vote on compensation, initial result projections showed.

Claude Longchamp, of pollsters Gfs Bern, told Swiss state television on Sunday early returns in a referendum showed 68 percent backed plans for shareholders to veto executive pay and for a ban on big rewards for new and departing managers."

SEC Speech: Harnessing Tomorrow’s Technology for Today’s Investors and Markets, by Chairman Elisse Walter, on February 19, 2013

High Frequency trading has been in the news (and in class) quite a bit lately.  While high frequency trading seems to have peaked, it is still in the news (For example Warren Buffett sort of talked about it, regulators in the US and Germany are looking into it).   So a short "lesson"

So from Wikipedia:

"High-frequency trading (HFT) is the use of sophisticated technological tools and computer algorithms to trade securities on a rapid basis.^[1][2][3]
HFT usually uses proprietary trading strategies that are carried out by computers. Unlike regular investing, an investment position in HFT may be held for only seconds, or fractions of a second (though sometimes it may extend to longer), with the computer trading in and out of positions thousands or tens of thousands of times a day.[4"

An interesting 60-Minute piece:




Recently SEC Chairman Elisse Walter discussed this and the SEC's moves in the area:

SEC Speech: Harnessing Tomorrow’s Technology for Today’s Investors and Markets, by Chairman Elisse Walter, on February 19, 2013:

"...last year, the SEC put in motion two initiatives that will dramatically increase the quality and quantity of the data we receive and improve our understanding of the way today’s markets function. ...MIDAS stands for Market Information Data Analytics System. It captures all orders posted on the national exchanges, all modification and cancellation of those orders, all trade execution of those orders, and all off-exchange executions....

It can help us monitor and understand mini-flash crashes, or pick up on possibly troublesome or illegal behavior, for example, by noting excessive cancellations of message traffic. But what’s critical in the context of long-term investor protection is that it will give us dramatically better insight into the function of a market that moves many millions of dollars in millionths of a second. It will be like the first time scientists used high-speed photography and strobe lighting to see how a hummingbird’s wings actually move. This information has the capacity to give regulators — as well as academics and other stakeholders — unprecedented insight into the way markets work today"

Related articles

• Why High Frequency Trading is Not a Problem
• FBI And SEC Team Up To Take Down HFT
• Research Library: High-Frequency Trading and the Execution Costs of Institutional Investors (pdf)
• UPDATE 1-US state regulators want high-frequency trading probe
• Mexican Exchange to HFT: Bring Us Your Business