You know you are a big company when...

The Commerce department breaks out what national income would have been with and without your dividend!!! Wow.

MSNBC - Incomes jumped record 3.7 percent in Dec.: "The Commerce Department reported Monday that the income gain would have been a smaller 0.6 percent in December without the one-time $3 per share dividend payment Microsoft made on Dec. 2."

Primer on Social Security From Cleveland Plain Dealer

Today's Cleveland Plain Dealer has a nice primer on Q&A: Social Security: A few highlights:

• "Unlike a private trust fund, which can invest in anything, the money in the Social Security trust fund must be invested only in government securities.....By law, the government is required to repay Social Security all it has borrowed. In practice, the government for several years has been spending way beyond its means and running up huge deficits. That means the government will have a hard time finding money to repay Social Security when the loans come due."
• "Many experts have speculated that Bush will favor a plan modeled on one of the options presented to him by an advisory commission he set up in 2001.
  That plan would allow workers to divert up to $1,000 annually from their Social Security taxes into accounts that can be invested in the stock and bond markets. The accounts probably would be overseen by the government and administered by a private firm."
• " What other fixes are possible?
  A: Experts say some of these ideas are likely to come up:
  - Raising the retirement age.
  - Reducing benefits by using a new formula to calculate them.
  - Reducing benefits for people with high incomes.
  - Raising Social Security taxes beyond the 6.2 percent that workers and employers each pay.
  - Raising the income cap on Social Security taxes (workers now pay taxes only up to a certain income level because they get no extra retirement benefit above it).
  - Raising other taxes to help finance Social Security. "

The rest of the article can be read here.

A look around at a few blogs

The SportsEconomist (with a team of writers now joining Skip in putting out a vastly increased number of posts) has an interesting article reminding us that banks get paid before shareholders. What is interesting is some of the consequences. For instance, the article looks are troubled farms where the farmers are not making any money, but the banks are getting paid. The reason for the article is a discussion of how banks are pressuring some NHL owners to settle the lockout.

The Sports Economist also looks at how Pittsburgh's attempt to jump-start the local economy by helping to build sports stadiums has largely failed and left the city in financial distress.

The Financial Accounting Blog comments on whether the growing conservatism of auditors in the wake of the Andersen debacle is too much of a good thing: "practitioners are hesitant to be more aggressive because accounting maneuvers are being increasingly scrutinized by regulators, lawyers and even the media." How is this coming into play? One example is that restatements are up. But as Dennis points out, this may be caused by this increased conservatism:

"Some of the restatements may simply reflect the fact that auditors are much more conservative and more apt to instruct a client to restate earnings after finding an error that several years ago might have been overlooked or ignored."

Brad DeLong suggests that Chile's privatized pension system is not necessarily living up to expectations. Without having seen any other numbers than those from his post and the NY Times Article on which he comments, I would only answer: is our current social security system any better? It too has problems. Indeed any system we adopt will have problems. Is the current social security system in trouble? yes. Is in awful trouble? Maybe not. But that does not mean we can't improve it and allowing some equity is probably a good thing.

And in case you ever wondered why the nickname of Economics as the Dismal Science has stuck around, check out some of the links off of the Marginal Revolution's piece on a supposed real estate bubble. Short version: US interest rates are artifically low given twin deficits and have to rise. The rising interest rates will cause real estate (and equity) prices to fall and economy will suffer. Or so goes the theory. Malthus would be so proud. ;)

Changing times at the NYSE

Speaking at the World Economic Conference in Davos, New York Stock Exchange Chief Executive Officer John Thain confirmed that the NYSE is considering opening 2 hours earlier (at 7:30) in an attempt to capture more European business. (also CNN where Thain states this is not anything new.)

It will be interesting to watch the response of those who work at the NYSE who will most likely be asked to work two more hours.

From the Financial Times:

"...the first big test of earlier trading will be whether Mr Thain can win support for the idea among traders, specialists and NYSE member companies. He says a decision is likely within a year. How soon that decision comes - if indeed it does - will be an important indicator of how seriously London and other European exchanges should take the NYSE offensive."

NPR also has an interesting angle on this is by briefly examining what it will mean elsewhere. For instance, currently many finance professionals around the globe (and especially in the US) tailor their work day around the NYSE open even when they themselves are in different time zones. Will this mean more early mornings? UGH.

Interestingly (and less widely reported), Thalen also discussed plans to increase the value of the NYSE whose seats have fallen sharply in value due at least in part from growing competition. One strategy? A public stock offering.

From the Arizona Republic:

"A public offering would give Thain the currency needed to buy another market, according to exchange members. Thain and Securities and Exchange Commission Chairman William Donaldson, himself a former NYSE chairman, have said they expect consolidation among U.S. exchanges"

Showing why there is a great temptation to do so, the same Arizona Republic article points out the success of the Chicago Mercantile Exchange since they have gone public:

"The Chicago Mercantile Exchange, the largest U.S. futures market, sold shares in December 2002 for $35. They rose $12.80, to $209.90 in NYSE trading Thursday, giving it a market capitalization of almost $7.2 billion. The value of the NYSE's combined memberships is $1.6 billion"

The success of the Chicago market is partially behind the plans for the NYSE to trade more types of securities.

From Reuters.

"Thain said the United States would remain the focus of the exchange's expansion for the coming year as it examines ways to expand its product line to include trading in options, futures, derivatives, convertible bonds and fixed income products, putting it head-to-head with Chicago's derivatives exchanges."

Excel Smart Tags

A student pointed out today in class the usefulness of Excel Smartags. I had never used them before and was quite impressed.

What are smart tags? From the Microsoft Excel Help file:

"You can save time by using smart tags to perform actions in Microsoft Excel that you'd usually open other programs to perform"

For instance, if you have a spreadsheet that computes market capitalization of a group of firms, this can be automatically updated with current share prices and current shares outstanding.

How do you do this? From the pull down menus, go to Tools, autocorrect options, smart tags.

A quick internet search shows that these smart tags have created some enemies since Micorosoft chooses the web site (MSN in this case) they send you to for the data and may even be able to track your usage, but that said, the tags sure are useful! and you can turn them off easily enough.


VERY USEFUL!!!!

Yahoo! 25 Top Jobs for 2005

Yahoo!Finance Special Edition: 25 Top Jobs for 2005

The list is actually compiled by FastCompany. "Fast Company based this year's list of the top jobs on four criteria: job growth, salary potential, education level, and room for innovation."

Drum Roll....the projected top job for 2005 is....Personal finance advisor!

Interestingly, it was the only business job in the top five.

Introducing FinanceJournals.com

I received the following from Jean Heck the Editor of the Journal of Financial Literature

From Jean Heck:

"Want to know who are the most productive finance academics over the
past half-century? The facts can be found in a forthcoming paper in
the new Journal of Finance Literature (JFL). See the rankings of the
most frequent contributors to 72 finance journals over the past 50
years - broken down by top-tier journals, the core-sixteen journals
and all 72 finance journals.

Would you like to rapidly, and easily search the table of contents of
every finance journal ever published over the past 50 years. You can
only do that by subscribing to the new Journal of Finance Literature -
an online searchable database of nearly 50,000 finance journal
references. And access is free to JFL subscribers.
Go to financejournals.com and sample the database.

Access is open to all for the next two weeks so you can see the
benefits of being a Journal of Finance Literature subscriber.
And you surely don’t want to miss out on your copy of the Finance
Literature Index (reference of every finance article ever published in
alphabetical order by author). Only available to subscribers.
Hurry! The inaugural issue is going to press now and will be in the
mail next month.....

Have questions? Feel free to email me."
Regards,

Jean Heck, Editor Journal of Finance LiteratureVillanova University"


I would add that I am sure many of you are familiar with Jean's work from the Financial Literature Index. I have zero doubt that his new endeaveor will prove equally helpful to us all.
Good Luck!

Maybe fund managers can beat the market afterall. An Analysis of Mutual Funds by Alexander, Cici,Gibson

SSRN-Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds by Gordon Alexander, Gjergji Cici, George Gibson

Alexander, Cici, and Gibson provide some interesting evidence that mutual fund managers may be better at picking stocks than previous literature has suggested. The authors show that when mutual fund trades are broken down by the motivation for the trade (for example liquidity driven, tax-loss driven, or for valuation reasons), fund managers do earn abnormally positive returns when trading for valuation reasons.

In the words of the authors:

"We argue that a fund manager who believes that a stock is significantly mispriced will want to trade in its shares. However, heavy investor outflows (inflows) will constrain the manager by forcing him or her to control liquidity by selling (buying) stocks. Accordingly, we condition fund trades on the direction and magnitude of investor flows."

"The hypothesis that fund managers possess the ability to value stocks finds strong support. Valuation-motivated buys (i.e., large buys concurrent with heavy outflows) outperformed their benchmarks by an average 7.95% in the following year whereas
valuation-motivated sales (i.e., large sales concurrent with heavy inflows) underperformed by an average of 1.10%. The 9.05% differential between buys and sales is economically and statistically significant. Results are slightly stronger when October [the month where tax trading would occur given the October tax year end for mutual funds] sales and mandated reporting-month trades are excluded in order to remove tax motivated and window-dressing trades."

Opposed to the valuation trades, fund managers fail to do as well for liquidity driven trades:

"In sharp contrast to valuation-motivated buys, liquidity-motivated buys (i.e., small buys concurrent with heavy inflows) underperformed their benchmarks by an average 1.65% in the following year."

To further buttress the findings, the authors also investigate "buys that add currently unheld stocks to the portfolio and sales that fully terminate existing positions." The findings are again consistent with the managers ability to value stocks better than the overall market.

"We find that initiating buys outperformed their benchmarks by an average of 4.19% in the year after the trade, whereas terminating sales underperformed by an average of 1.07%. The 5.26% differential is both economically and statistically significant, providing confirming evidence that fund managers possess the ability to value stocks."

A few questions that this raises:

1. How are managers picking these winners and what does this ability say about market efficiency? For instance: are the returns from buys that initiate positions driven by IPOs? and if so are the losing trades rewards to the investment bankers? This would be consistent with Nimalendran, Ritter, and Zhang's recent work.
2. Why can the managers pick winners better than they can identify losers?
3. Why don't closed end funds (which are largely free of liquidity driven trading) perform better than open-ended funds?
4. Unrelated, how large a role does the October tax-year end for mutual funds in returns for October? December? January? How does this affect the January Effect?

Overall a VERY interesting paper! Definitely I^3!!! Although I would suggest a new name. When I clicked on the article I expected a managerial pay paper.

Suggested Citation
Alexander, Gordon J., Cici, Gjergji and Gibson, George Scott, "Does Motivation Matter When Assessing Trade Performance? An Analysis of Mutual Funds" . AFA 2005 Philadelphia Meetings. http://ssrn.com/abstract=641743

More Banks, Less Crime? The Real and Social Effects of Bank Competition

Garmaise and Moskowitz report that bank mergers are bad for the community. Specifically, bank mergers (and the resulting reduced competition) lead to reduced lending in the community where the banks merged, a weaker local economy, and increased crime.


Longer version:

Who wins and loses in a merger? In class we analyze various stakeholder groups and try to come to a conclusion for each. It is not as simple of answer as one may think. For example: “the managers of the acquired firm lose because of the increased risk of dismissal”, but how do you measure what a merger does to a community. On one hand the community may suffer from lost jobs etc, but are the jobs lost less than would have occurred had the merger not occurred?

Garmaise and Moskowitz will definitely add to this discussion by providing evidence that bank mergers may be bad for the local community through both economically as well as socially.

In their words:

“We provide micro-level evidence that neighborhoods that experienced more bank mergers are subjected to future reduced loan provision, diminished local construction, lower prices and rents, an influx of poorer households, and higher crime in subsequent years.”

Of course, the immediate question (which the authors do answer somewhat convincingly) is whether the merger causes the problems, or forecasts the problems. Again in the words of Garmaise and Moskowitz:

“We show that these results are not likely due to reverse causation since, among other evidence, we find that while bank mergers precede future crime increases, crime does not precede bank mergers, nor are the two contemporaneously correlated.”

VERY INTERESTING! Definitely the fodder for many discussions, both in and out of class, and possibly even in the regulation of future mergers.


Citation
Garmaise, Mark J. and Moskowitz, Tobias J., "More Banks, Less Crime? The Real and Social Effects of Bank Competition" . AFA 2005 Philadelphia Meetings Paper. http://ssrn.com/abstract=647841

Story on 1830-1865 US banks using slaves as collateral

Ok, first off, I have to say that slavery is awful and totally inexcusable. As an avid reader of Civil War books and many slave narratives, I am utterly amazed that anyone could have allowed it or worst yet owned slaves themselves. Indeed, it is a major black eye that we ever allowed it. (And if slavery is still around today, we all should work to stop it. )

That said, I was particularly interested when I saw the following headline "Bank admits slave trade links", I had to investigate more. What bank today would ever be tied to slavery?! Well, the story, while interesting, is more of a history lesson than a current events item.

It seems that Citizens Bank and Canal Bank (two Louisiana-based banks), accepted slaves as collateral from 1830-1865 (many banks did as slavery was legal and these people were seen as property). The banks were then puchased by Chase in 1931. Now, to meet a Chicago law, JP Morgan-Chase traced their history and found that in the antebellum South, banks that now are owned by JPMorgan-Chase allowed slaves as collateral and even accepted took ownership of some people when the borrowers defaulted.

From the BBC:
BBC NEWS Business JP Morgan admits US slavery links

"Citizens Bank and Canal Bank are the two lenders that were identified. They are now closed, but were linked to Bank One, which JP Morgan bought last year. About 13,000 slaves were used as loan collateral between 1831 and 1865" "Because of defaults by plantation owners, Citizens and Canal ended up owning about 1,250 slaves. "

Because of this finding, the bank issued an apology and started a scholarship program for African-Americans from Louisiana.

From The Seattle Post-Intelligencer:

"JP Morgan officials said the bank undertook the study after Chicago passed an ordinance in 2003 requiring companies that do business with the city to research their history to determine any links to slavery. Among the companies that have been required to do such research are banks, insurance companies, bond underwriters and other financial vendors. Jennifer Hoyle of the city's law department said it was the first contractor's filing to disclose specific slavery information under the new ordinance."

Value and Duration in Retail Financial Markets: The Economics of Bank Deposits

Value and Duration in Retail Financial Markets: The Economics of Bank Deposits

David Hutchinson in Bquest provides an interesting look at bank deposits and the economics of the retail banking industry. (Yeah I know, some of you doubt whether bank deposits can be interesting. Well surprisingly enough, they can be!)

For instance on the role of the FDIC

"Perhaps the most fundamental difference between banks and other financial firms is that under deposit insurance, banks issue a class of liabilities for which most balances are fully insured by the U.S. government. The resulting market structure creates several complications for the implementation of internal profitability and duration models. First, deposit insurance separates the deposit investor from the credit risks of the bank, which are assumed by the FDIC. In essence, when a bank issues a deposit it engages in two transactions: it issues a risk-free (government insured) liability to a depositor and it purchases an insurance contract from the FDIC to cover the credit risks associated with the priority position of the deposit claim"

On duration analysis for retail deposits (and probably the core of the paper):

"Much of the difficulty experienced by bankers and bank economists in measuring value and duration results from the use of analytic tools poorly designed for these markets. Standard valuation/duration models...implicitly assume a competitive market in which a shock to current market interest rates impacts only the economic value of the existing assets and liabilities of the institution. Future bank activity is implicitly assumed to be competitively priced (zero net present value), or at a minimum it is assumed that the profitability of future lending and deposit business is unrelated to current levels of interest rates. In this framework, maturing deposits essentially are assumed to fully re-price to competitive market rates. Thus, determining the value and duration of deposits is simply a matter of determining the maturity of the current deposit liabilities and discounting them at competitive market rates before and after an interest rate shock.

However, because demandable deposits can be redeemed at par at any point in time, they effectively mature and are implicitly re-priced continuously. In the traditional valuation framework, the duration and interest rate risk of these deposits is, therefore, zero .... Yet...neither demandable deposits quantities nor rates respond fully to changing market yields, and thus their behavior is inconsistent with the traditional valuation model."

Now this is not ground breaking news so far and there are proprietary software packages available to analyze this duration, but as Hutchinson points out:

"Although more sophisticated, commercially-available value-added and asset/liability models have become more common, most depositories still depend on traditional modeling techniques. Even among those institutions using more sophisticated methods, frequently the models are a "black box" not well understood by the analysts using them. As will be shown, many of the problems encountered by practitioners result from the inappropriate application of traditional valuation and duration tools that were built for highly competitive markets"

All in all the article is well worth your time and a virtual must for any Money and Banking or Financial Instititutions student/teacher!


In the interest of full disclosure, I am on the editorial board for this journal, but did not review this article for publication nor have any input into the decsion process. Nor for the choice of website format ;)

The new FMA Online is now available!

YES!! The New FMA Online Journal is now available. It is definitely not like any journal you are used to. It is now almost entirely a video journal.

FMA Online

There are videos from various conference sessions (from Both FMA and Emerging Markets Conference series) as well as a series of articles on how to improve your presentations at conferences.

I am biased as I am an Associate Editor (trust me I do virtually nothing), but I think the "journal" is one of the most underrated sites there is. You will love it. Betty Simkins and crew do an excellent excellent job!

I am sure I will have more on individual posts in the weeks ahead from the FMA Online site, but for now just enjoy the whole thing!

FMA Online

LA Times on Investment Activism by state Pension funds

Thanks to the Marginal Revolution for bringing this story to my attention.

Over the past 20 years or so state pension funds have come to play an ever more active role in the stock market. For instance, most of us have heard of Calpers which is the California Public employee Retirement System. Not only do these state funds control Billions of dollars, they are also very active monitors. (For instance: removing NYSE president Richard Grasso.)

Monitoring firms by shareholders is a very good thing. We need it to keep shareholder-manager conflicts low. However, when this monitoring becomes more political than economic, there are problems. We have replaced one agency cost problem (shareholder and firm managers) with another (shareholders and fund managers).

From the Nicole Gelinas in the LATimes:

"Gov. Arnold Schwarzenegger last week proposed shifting California's pensions for state workers from a massive plan guaranteed by taxpayers to individual 401(k)s controlled by the workers themselves. It's a great idea, not just because it would save taxpayers billions but because it would keep the politicians and union activists who currently run the state's pension funds from improperly meddling in corporate boardrooms."

The crux of the article lies in this paragraph:

"Why do they want to meddle? Because they can. Although private-sector fund managers focus on picking lucrative investments — because that's how they get paid — public fund trustees have different incentives. Sure, they want funds to perform well. But if they don't, they know that taxpayers will make up the shortfall. So they're free to pursue political objectives."

"When union advocates and politicians dependent on unions serve as trustees of public pension funds, they have an irreducible conflict of interest: For them, the union workers they represent always come first, rather than the success of the corporations in which they invest."

MMM, sounds a great deal like a changing nexus of contracts. My students laugh at me for bringing that up so much, but I am convinced that the Nexus is really the most important thing they take out of upper level finance classes. People are REMMs and as contracts (or power in this case) change, so too do the problems facing the nexus (shareholders).

Something to think about as we move forward with social security reform.

CFO's top 100 articles

CFO.com is truly a great site. It is the online version of CFO magazine and has several great newsletters (which are free I might add :) ) . In fact one of their free newsletters is what has spurred this post.

The site has a list of the 100 most popular finance articles from 2004. I won't give away the top stories, but I will say that there are many very good articles on everything from what it takes to be CFO, to the importance of spreadsheets, and the impact of Sarbanes-Oxley.

A great way freshen up a class!