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.)

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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.)

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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"

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China's real estate bubble - 60 Minutes - CBS News

China's real estate bubble - 60 Minutes - CBS News

Heinz CEO Johnson Would Get $200 Million in Post-Berkshire Exit - Yahoo! Finance

Heinz CEO Johnson Would Get $200 Million in Post-Berkshire Exit - Yahoo! Finance:

"H.J. Heinz Co. (HNZ) Chief Executive Officer Bill Johnson could receive more than $200 million should he exit after Warren Buffett's Berkshire Hathaway Inc. (BRK/A) and Jorge Paulo Lemann's 3G Capital Inc. buy the ketchup maker.

Johnson, 64, would get "Golden Parachute Compensation" including $56 million in cash, equity, bonuses and other benefits, the Pittsburgh-based company said in a regulatory filing. Other shares under Johnson's control are worth almost $100 million, while his vested deferred compensation account totals $57 million."

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To Limit Corporate Tax Avoidance, Tax Investors - Bloomberg

Income Tax rates by Country based on OECD 2005 data. "OECD Tax Database". Organisation for Economic Co-operation and Development . . Retrieved 2007-01-30 . (Photo credit: Wikipedia)

To Limit Corporate Tax Avoidance, Tax Investors - Bloomberg:

Thoughts?  

"International companies have so much discretion in allocating costs and revenues across their dispersed units that the corporate tax base is unavoidably slippery -- all the more so when governments promote that very slipperiness in an effort to attract investment.....Why fight it? The best strategy to deal with international tax avoidance is what we have recommended: Cut corporate taxes and increase taxes on individual investment income (dividends and capital gains) instead. It’s much harder for individuals to arbitrage away their tax obligations than it is for companies operating across borders. This way, corporate profits are still taxed -- but on a simpler, less distorting basis than the typical corporate tax code provides."

Mmm...a great essay for some class.   Finance?  Econ?  Tax?  All of the above?  

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SEC sues over Heinz option trading before buyout - Yahoo! Finance

SEC sues over Heinz option trading before buyout - Yahoo! Finance:

"The suit, in federal court in Manhattan, cites "highly suspicious trading" in Heinz call options just prior to the February 14 announcement of the deal. The regulator has frequently in past filed suit against unnamed individuals where it has evidence of wrongdoing, but is still trying to uncover the identities of those involved.

That trading, the suit said, caused the price of the particular call option they bought to soar 1,700 percent and generated unrealized profits of more than $1.7 million."


Interestingly, the event study using yahoo data (which I think does not look at afterhour trading) on the stock looks "clean" with two right angles:

Warren Buffett and Heinz: Why He Made the Investment | TIME.com

Warren Buffett and Heinz: Why He Made the Investment | TIME.com:

"As market watchers know, he’s considered a value investor—someone who buys companies when they’re cheap—which is a strategy he learned from his Columbia Business School professor Benjamin Graham, author of the geeky classic The Intelligent Investor. He’s also partial to the market’s plain vanilla: low-risk companies with rock-solid balance sheets. In this case, Heinz didn’t come cheap. Buffett’s Berkshire Hathaway and 3G paid a 20% premium for Heinz’s shares, which makes them pricier than those of most packaged foods companies (aside from a few elite brands like Nestle and Hershey). For Buffett, the real value of Heinz was its steady stream of cash and safe strategy."

BTW SIMM owns Heinz

Analysis: Accounting risk clouds big U.S. business bets in China - Yahoo! Finance

Analysis: Accounting risk clouds big U.S. business bets in China - Yahoo! Finance:

"Concern is growing about risks to U.S.-based multinationals in a country where American audit regulators are locked out by the Chinese government and bribery and fraud are routine.....On January 18, Caterpillar disclosed "deliberate, multi-year, coordinated accounting misconduct" at the Siwei unit of ERA Mining Machinery. Caterpillar said it would write off most of the $654 million it had paid to acquire ERA only months earlier....Caterpillar has provided few details, but it has disclosed inventory discrepancies, inflated profits and improperly recorded costs and revenue at Siwei."

Don't Make Poison Pills More Deadly - NYTimes.com

Don't Make Poison Pills More Deadly - NYTimes.com:

"Poison pills were developed in the 1980s to enable insiders to block a hostile acquisition. Over time, however — and without sufficient attention by investors and public officials — companies have started to use poison pills to prevent acquisitions of stakes that fall substantially short of a controlling block.

Indeed, among the 637 companies with poison pills in the FactSet Systems database, 80 percent have plans with a threshold of 15 percent or less."

and later

"...by entrenching insiders and insulating them from engagement by large outside shareholders, low-threshold poison pills could well impose costs on public investors who do not wish to sell their shares."

Good stuff from Harvard's Lucian Bebchuk!



UPDATE:

I was asked why this would be bad.  My answer is actually from a previous NY Times article from Lucian as well:

"...the presence of large outside shareholders, or the prospect of their emergence, provides an important source of discipline for management. Often, a company’s stock price is bolstered after S.E.C. records, known as 13D filings, disclose the emergence of a large outside shareholder. This is a reflection of investors’ belief that such a presence can be expected to benefit their fellow shareholders. The proposed 5 percent hard cap, however, would reduce the amount of stock that could be purchased before making a 13D filing. That would lower the potential returns to large outside shareholders produced by identifying an underperforming company and taking a significant stake in it."

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