Monday, December 15, 2008
Both these ratios point to valuations being below average since the late 1980s. Stocks, by these measures are cheap. Of course, prices could still fall, and even if they are cheap now, they could stay cheap for a long time. But, if you are a long term investor, now would seem like a good time to be buying.
HT: Newmark's door.
Friday, December 12, 2008
I particularly liked the final paragraph which basically sums it up...
Even if Congress does now give carmakers $15bn as a “stay of execution,” postponing the hard decisions, before the next multi-billon dollar dose of medicine we need to think more carefully about who we are really bailing out and why. This should not end up as just another rescue package for bondholders and shareholders.I think its pretty obvious that any loan from the Government is just going to delay the inevitable. Furthermore a Car-Czar will have no real power except to pull the financing. Using a medical analogy, this is like a doctor saying that he'll pull the life support plug if the patient doesn't take all the bad tasting medicine. It ain't gonna happen. 6 months from now the big 3 (or 2) will be back, cap in hand, driving their hybrids and begging for more.
On a related note, the Wall Street Journal reviews the Cadillac Escalade Hybrid. To quote the reviewer...
Not in my lifetime has a car company come up with anything as absurd as the 2009 Cadillac Escalade Hybrid, the latest example of hybrid greenwashing
Which reminds me of this "ad" recently posted by Craig Newmark.
Ok, remind me again why we are wanting to bail out these idiots?
HT: Mankiw's Blog
Tuesday, December 9, 2008
Monday, December 1, 2008
HT: Financial Rounds (Unknown Professor)
Sunday, November 23, 2008
If were thinking: "wasn't it something to do with subprime loans, too much liquidity and a dysfunctional rating system?" then read on...
He starts off with
A nation whose people can't say "Merry Christmas" is a nation capable of ruining its own economy.And then offers the following explanation...
What really went missing through the subprime mortgage years were the three Rs: responsibility, restraint and remorse. They are the ballast that stabilizes two better-known Rs from the world of free markets: risk and reward.Wow. That has to be the stupidest thing I have ever read in the opinion pages of the Wall Street Journal, and frankly, there has been a lot of competition. Of course, now that the Journal is controlled by Rupert Murdoch, we should hardly be surprised that the opinion pages sound like Fox news.
Responsibility and restraint are moral sentiments. Remorse is a product of conscience. None of these grow on trees. Each must be learned, taught, passed down. And so we come back to the disappearance of "Merry Christmas."
It has been my view that the steady secularizing and insistent effort at dereligioning America has been dangerous. That danger flashed red in the fall into subprime personal behavior by borrowers and bankers, who after all are just people. Northerners and atheists who vilify Southern evangelicals are throwing out nurturers of useful virtue with the bathwater of obnoxious political opinions.
The point for a healthy society of commerce and politics is not that religion saves, but that it keeps most of the players inside the chalk lines. We are erasing the chalk lines.
Feel free: Banish Merry Christmas. Get ready for Mad Max.
But the tired old argument that the only reason people behave well is because they are religious has been shown time and time again to be completely wrong. For example, see this article in the Times of London.
Tuesday, November 18, 2008
Notably though, Risk Management is a hot topic.
Monday, November 17, 2008
There are some great one liners in the piece: I liked this one...
“The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.
HT: Newmark's Door.
Friday, October 24, 2008
Still, interesting stuff if you've never seen what a specialist looks like.
Wednesday, October 22, 2008
I wrote earlier that credit rating agencies seem to be run like protection rackets..
In a hearing today before the House Oversight Committee, the credit rating agencies are being portrayed as profit-hungry institutions that would give any deal their blessing for the right price.
Case in point: this instant message exchange between two unidentified Standard & Poor's officials about a mortgage-backed security deal on 4/5/2007:
Official #1: Btw (by the way) that deal is ridiculous.
Official #2: I know right...model def (definitely) does not capture half the risk.
Official #1: We should not be rating it.
Official #2: We rate every deal. It could be structured by cows and we would rate it.
A former executive of Moody's says conflicts of interest got in the way of rating agencies properly valuing mortgage backed securities.
Former Managing Director Jerome Fons, who worked at Moody's until August of 2007, says Moody's was focused on "maxmizing revenues," leading it to make the firm more "issuer friendly."
Monday, October 13, 2008
It is very tempting to try to time the market. We all have 20/20 hindsight. It is clear that selling stocks a year ago would have been an excellent strategy. But neither individuals nor investment professionals can consistently time the market.
I agree. Right now is the time to be shoveling money into stocks. They look cheap. Very cheap. (except GM and Ford that is).
HT: Greg Mankiw's Blog
Thursday, October 2, 2008
Its amusing enough, except that the creator spells Barclays wrong. Call me finicky, but its not like Barclays is some sort of washed up has been, like, er, Leeman Brothers.
Tuesday, September 30, 2008
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
I may be going out on a limb here, but could this have something to do with the current mess?
Saturday, September 27, 2008
The first post is here. The second is here .
Thursday, September 18, 2008
This is consistent with institutions looking for any place to park money while things sort themselves out. Getting a return is probably a secondary issue. This is generally referred to as a flight to quality.
Graph from finance.yahoo.com. The current quote is here.
HT: My colleague Bart.
Both BofA (which used to be North Carolina National Bank - NCNB) and Wachovia are headquartered in Charlotte.
Of course, its very unlikely that Merrill or MS would move the brokerage or investment banking business to the queen city.
What is clear is that going forward, credit will not be as easily available. Particularly to more marginal borrowers, and those who want to borrow at very high leverage rates.
From a personal finance side, I take the view that first you want to remain very well diversified, and second, when the recovery comes, which it will, you want to be in the market. Therefore, I am staying the course.
Monday, September 15, 2008
My MBA students manage a real money portfolio and we took big hits on energy stocks - with Constellation Energy and Frontier Oil both down over 15%. Citigroup was also off 15%. On the bright side, consumer non-durables did relatively well - showing their general recession proof qualities. Overall the portfolio was off about 3.7%, which at least wasn't as bad the market overall.
Friday, September 12, 2008
An alternative to a carbon tax is a cap and trade system. This works fine if you auction a limited number of carbon credits and collect the revenue from the auction and then use the proceeds to reduce the economic burden of the higher energy costs on consumers. But if you just give them away then you achieve nothing. In fact giving too many away basically results in a subsidy to polluting firms who can then sell them at a profit. These firms collect all the excess from the cap and trade system. Case in point: the experience in the EU.
The following quote from the article pretty much sums it up.
One of the largest over-allocation of permits is to Castle Cement, which makes a quarter of all British cement at three works in Lancashire, north Wales and Rutland. The figures show carbon dioxide emissions from the three plants have fallen from 2.3m tonnes in 2005 to 2.1m tonnes in 2007. Yet, under the ETS, the firm has been handed enough permits to produce 2.9m tonnes CO2 for each of the next five years - an annual surplus of 829,000 permits.
A spokesman for Castle Cement said: "Castle Cement will not require all its allocated permits to cover CO2 emissions in 2008 as we continue to reduce our impact on the environment in line with our sustainability strategy.
"Total CO2 emissions from our three works are likely to be less than in 2007 due to further improvements in efficiency, increased use of low-carbon fuels and a weakening demand for cement caused by the general economic downturn. Surplus credits will be traded."
At the current price of £21, the company could sell its surplus permits for £83.5m over the five years.
You can bet on either McCain or Obama winning the election. Or you can take a hedge position to offset your post election misery. Your choice.
Finance and Econ researchers have written on these markets. Here are a couple of links. 1. 2.
On Monday (sept 8), UAL (United Airlines) stock dropped 75% amid a story that it had filed for bankruptcy. Turns out the story was from 2002. The original story was on the Florida Sun Sentinel's website. It was on the front page because people had clicked on the old story and made it the most popular news story. (This happens on the BBC news site a lot also).
A google search bot found the story, but as it had no date, assigned the date from the masthead of the paper. Then an analyst (who didn't read the story) uploaded it to Bloomberg. Program trading took over and the "news" triggered a massive sell off of the stock.
The SEC is investigating. The question is: Was this an innocent mistake or was their evidence of a deliberate manipulation of the stock?
Monday, September 8, 2008
Mankiw also explains why cap and trade policies are inferior to a simple carbon tax. The primary reason being that the revenue from the carbon tax can be used to offset the tax burden - for example - it can be used to reduce payroll taxes.
Primary opposition for carbon taxes come from politicians - but as Mankiw points out; just because they oppose a carbon tax - doesn't mean that carbon taxes are a bad idea.
Anyhow, it is an excellent read for both economists and non-economists alike.
Hat tip goes to the Freakonomics blog where I saw this posted.
Wednesday, September 3, 2008
Tuesday, August 26, 2008
The name option arm is ironic really because these loans are very much like options, where the buyer of the house is betting on house price volatility and hoping that the value of the house ends up in the money. Consider this fact also - in most cases, if the homeowner has been paying below the market interest rate for the loan for 5 years, he/she will have also been paying far below the rental cost of the property. So even in the case of default, where they loose the house, the occupant has still lived in a house at a lower cost than if they rented.
The trouble isn't going to be centered in CA either, my local bank Wachovia is in on the action...
An option-ARM product called Pick-a-Pay (a name that gave fair warning it could lead to trouble) accounts for 45% of consumer lending at Wachovia, a large bank.
The five-year CDS spread had more than doubled to 740 basis points (bps), meaning it cost $740,000 to insure $10m of its debt.
Also of interest is the increasing use of the CDS market to speculate on firms. In essence this might provide a means of betting on a firm's declining credit.
Tuesday, August 19, 2008
Sunday, August 17, 2008
Perhaps this will lead to a new area of theological economics.
Thursday, August 14, 2008
We had not fully appreciated that 20% of a very large number (of AAA bonds) can inflict far greater losses than 80% of a small number (of sub investment grade bonds).
italics added by me
Although he doesn't blame the traders, he does say that the risk managers were frequently ignored or overruled, or were under pressure to approve deals. And not surprisingly, the most pressure was on the highest returning deals....
Tuesday, July 8, 2008
As a side, the story notes that coins in India are smuggled to Bangladesh to be melted down into razor blades. The metal content of the coin exceeds the face value of the currency. In the US we're getting close to that point with the 1 cent.
Monday, July 7, 2008
An alternative explanation, and a better one I think, is that investors don't understand how to value stocks in the presence of inflation. They discount real cash flows using nominal rates and they fail to realize that the reduction in earnings due to higher interest costs is merely illusory. In essence, investors suffer from money or inflation illusion. My 2002 Journal of Financial and Quantitative Analysis paper with Jay Ritter discusses this, and several others (here here and here) provide further evidence.
On a related note, Newmark's door has an article about how the onion market is more volatile than the oil market, perhaps because there is not a futures market for onions. This finding is supported by my own work that shows that Single Stock Futures reduce volatility in the spot market for stocks. In fact most evidence shows that futures markets have a stabilizing effect on the underlying spot asset.
Finally, on NPR this weekend I heard a story about people trying to trade in their SUVs for more fuel efficient vehicles. In the story, one person brought a 2007 Escalade to a CarMax dealership. The truck was a year old, and cost over $70K. The owner was making $1400 a month payments on it. The CarMax buyer offered him about $30K for it. Here's what I don't get. You buy a 70 grand SUV a year ago when gas prices are $3 a gallon, but when gas prices hit $4 a gallon, you can't afford to run it? What's more, the owner said he would have sold it for $40,000 to the dealer - basically taking a $30,000 loss to save the pain of an extra $1 per gallon of gas. In behavioral finance this is called "mental accounting".
Wednesday, July 2, 2008
The article discusses whether we are seeing a "finance bubble" - I doubt it, but I am sure that finance jobs are not going to be quite as plentiful and high paying in the near term.
Monday, June 23, 2008
The story is here...
News and Observer article here
The basic idea is this. If you drive some big ugly truck that gets 10 mpg, you'll use 1,000 gallons a year to go 10,000 miles. Now if you trade to a truck that gets 15 mpg you'll use 666 gallons. A savings of 333 gallons a year.
Now consider someone who is getting 25 mpg and they trade up to a hybrid that gets say 35. Their gas savings go from 400 gallons to 285 gallons. A savings of about only 115 gallons a year.
The point then is that the biggest savings come from fairly small improvements on poor mpg vehicles.
The idea is so obvious of course it is brilliant and what is really great is that these guys got it published in Science.
Thursday, June 19, 2008
Google stock screener
You can also screen by sectors etc. What would be nice is if you could screen by index membership as well.
Thursday, June 12, 2008
Salaries for college grads for 2008
HT: Newmark's door.
As Craig Newmark points out - Econ grads earn more on average than finance grads. Food for thought. My limited experience has been that Econ majors taking my classes have always been among my best students. So I suspect that there is a selection bias - on average better quality students become Econ majors.
Tuesday, June 3, 2008
Thursday, May 29, 2008
Wednesday, May 28, 2008
1. Bubbles occur when investors disagree about the significance of some event. The internet being the obvious one. It's hard to bet on prices going down (limits to arbitrage etc), so the optimists dominate and prices shoot up.
2. Bubbles are then identified by intense trading.
3. Bubbles continue even when "smart" investors know that prices are too high - as individually they cannot attack the bubble. Only when they act simultaneously can their actions have an effect.
The conclusion is that it might be in the best interest of the Fed to contain bubbles rather than let them run their course.
Robert Shiller in his book "Irrational Exuberance" talks about bubbles also. He focuses on the feedback loop between the media and market participants. Bubbles make news and are great for exchanges (lots of trading) so plenty of people have an incentive to keep them going. Bubbles also falsely give the impression to investors that they have stock picking skill when in reality they are just riding the bubble with everyone else. The skill is not in buying the stock, but knowing when to sell.
On a related note - an interesting article on the freakononmics blog here talks about how we tend to think we are above average (drivers, stock pickers etc) which relates us back to a recent post on stock trading and speeding....
I read a piece recently about Exxon and it's strategy for managing it's franchises. Basically, Exxon HQ knows exactly what each one is charging and varies the wholesale cost to them based on what the local market can stand. From the point of the franchisee this isn't that great, as in times of high gas prices you are still only making pennies per gallon. The full article is here.... The basic tone of course is that big bad Exxon is sticking it to all of us. Well guess what... they are. Its called capitalism.
Exxon is acting entirely rationally in a shareholder wealth maximizing manner. We may not like it, but that's the way it is. Get over it, or don't buy Exxon gas - but buy Exxon stock.
But, since we are on the issue of so-called wind fall profits here are a few other firms/industries that need to be examined.
1. Apple computer - why can't I have an iphone for $99? You know they are making a boatload on those puppies. Loads of demand and carefully controlled supply helps maintain a high price and a nice margin. Hmmm, maybe congress should sue them to make more. (see here for a related article)
2. Farmers - food prices are up. Corn prices are at records because of global demand and ethanol production. Those guys are enjoying some great "windfall" profits.
Wednesday, May 14, 2008
Apparently some researchers in Scotland have found that different types of wine taste better when different music is played. It appears to be a very scientific study, a key finding was that:
The researchers said cabernet sauvignon was most affected by "powerful and heavy" music, and chardonnay by "zingy and refreshing" sounds.
I'm planning to do a follow on piece on beer and rock music. I'll post the results when I have completed the tests.
Wednesday, May 7, 2008
Thursday, May 1, 2008
It really is a must read article. In it, the finger is pointed at the bond raters - Moodys, S&P and Fitch for being too close to the banks issuing the mortgage backed debt.
Although this is a bigger question, I do sometimes wonder exactly what value bond rating agencies provide. Their business model seems to be not entirely dissimilar from that of running a protection racket. Consider the evidence:
1. You have to pay for the service. If you don't pay, you may not get as good a rating.
2. They will help you structure the product to get a better rating, but you may have to pay more.
3. The amount you can sell the bond for depends on the rating.
4. Bond rating changes usually lag changes in credit quality and thus have little predictive power.
You can hear it here.
There was a fair amount of discussion from the panel about how a gas tax holiday was a bad idea - it encourages consumption, it reduces tax revenue for road building (and thus has an offsetting fiscal effect) etc.
Then Diane asked about the windfall tax that has been proposed. At this point Mark Cooper (director of research for the Consumer Federation of America) said something truly amazing. To paraphrase: he said that the oil companies don't really do anything with the excess profits - they just buy back stock or pay dividends. Then he said, and I quote "If you look at it from an economic point of view, taxing it away is not inefficient because they are not doing anything efficient with it"
What???? So the government should be able to step in and tax excess profits? This has to be one of the daftest things I have heard in a while. Those profits which are paid out as dividends are being used efficiently. Firms that do not have good investment projects are to be commended for paying out surplus cash to shareholders. Shareholders can then invest in other firms which need cash and have more productive growth opportunities.
It is one thing to make a policy decision to legislate a wealth transfer from one sector of the economy to another, but it makes no sense to argue that the government should tax more because it can put the money to a more efficient use.
Tuesday, April 29, 2008
The governor of the Bank of England issued a stern rebuke to the City today, saying that too many of Britain's most talented young people are being lured into financial careers by the huge bonuses on offer.
What???? You'd think that the boss of the Bank of England would have some basic notion of supply and demand in labor (or labour) markets.
Tuesday, April 8, 2008
The article isn't free, but if you are have access to a university library you can probably download it for free.
Given a 30 year bond rate of about 4.3%, this implies a long term return to stocks in the US of 8.3%. Why does this matter??? Well if you are assuming a 40 year investment horizon (someone who is, say 25 now) and you contribute $1,000 a month, 8.3% return will give you about $3.8M in your portfolio at age 65. But if you were using 11% (the long run historical return on equities) you would be expecting $8.6M. Given that most people are not saving enough, a lower return on stocks is not going to help.
This chart is particularly interesting:
Basically it shows that analysts change their earnings forecasts after the market has started deviating from the trend.
As a side note, the weekly newsletter from John Maudlin (from this site) is excellent.
Monday, April 7, 2008
The site is http://www.inspectd.com/. You get shown a historical stock chart and you have to decide whether to buy or sell. Then the outcome is revealed and you can see how you did.
I did terribly. But then again, I'm an indexer.
Wednesday, April 2, 2008
I may be wrong, but it strikes me that the articles that appear in nearly every newspaper every day that describe a particular day’s stock-market movements are pretty much worthless.
Consider, for instance, this A.P. headline and news brief that appeared on Yahoo! News at about 2:30 p.m. yesterday:
“Stocks Surge to Start Q2″
Wall Street began the second quarter with a big rally Tuesday as investors rushed back into stocks amid optimism that the worst of the credit crisis has passed and that the economy is faring better than expected.
Steven suggests an alternative:
“Stocks Surge, Reasons Unknown; May Be Nothing More Than the Random Fluctuation of a Complex System”
Tuesday, April 1, 2008
So here's what you do... send yourself an email on this date telling you to short sell Bear Sterns. March 12 would be a good date. Make the short and sit back and watch your fortune grow.
Thanks to my buddy Kevin for suggesting this brilliant trade...
Tuesday, March 25, 2008
But I still don't get it. He claims he was talking about someone having deposits at Bear Sterns. Since when was Bear Sterns a depository bank?
And in a related post, apparently Fox News Business Channel is playing off the Cramer gaff as a promotion tool.
They (Fox Business news) claims to be a "credible network". Personally I'll stick with the Colbert Report.
For example, for Adobe the bonus formula is:
"Target Bonus x Unit Multiplier x Individual Results."(source WSJ)
But then comes the definition of unit multiplier. Adobe says it is:
Derived from aggregating the target bonus of all participants in the Executive Bonus Plan multiplied by the funding level determined under the funding matrix, and allocating a portion of the funding level to each business or functional unit of Adobe based on that unit's relative contribution to Adobe's success, and then dividing the allocated funding level by the aggregate target bonuses of participants working within each such unit.
Before this era of "transparency" I bet bonuses were just decided in a smoke filled room. Now that companies are expected to reveal their methods, they are opting to make the method as opaque as possible.
The implosion of Bear Stearns is more dangerous.
A host of other banks, broker dealers, and hedge funds have played the same game, deploying massive leverage at the top of the credit bubble to eke out extra yield. Dozens of them are saddled with the same toxic debt - sub-prime property, credit cards, auto loans, and mountains of unsold paper from the merger boom.
Primarily because the rest of the economy is in bad shape and the risk on the damage spreading is much greater. We'll have to wait and see.
The rule change states:
All options contracts listed and traded on the Exchange are subject to position and exercise limits as set forth in Amex Rules 904 and 905. Position limits restrict the number of options contracts that an investor, or a group of investors acting in concert, may own or control in one particular option class or the security or securities that underlie that option class.
Over the past several years, the Exchange as well as the other self-regulatory organizations ("SROs") have increased in absolute terms the size of the options position and exercise limits as well as the size and scope of available exemptions for "hedged" positions. /6/ The exemptions for hedged positions generally require a one-to-one hedge (i.e., one stock option contract must be hedged by the number of shares covered by the options contract, typically 100 shares). In practice, however, many firms do not hedge their options positions in this way. Rather, these firms engage in what is known as "delta hedging," which varies the number of shares of the underlying security used to hedge an options position based upon the relative sensitivity of the value of the option contract to a change in the price of the underlying security. /7/ The Amex believes that delta hedging is widely accepted for net capital and risk management purposes.
Why is this interesting?
Well, as students of mine should know, once we have covered Black Scholes, the appropriate hedge for an option is not 1 share of stock per option, but depends on the delta of the option - that is the sensitivity of the option to the change in the stock price. A 1 for 1 hedge is really only applicable for very in the money options. For most options, the delta is less than 1, and thus a smaller hedge is required. Remember that over hedging is not a good thing.
Wednesday, March 19, 2008
So last week (March 11) Jim Cramer states that Bear is fine - no need to pull your money out....http://www.youtube.com/watch?v=gUkbdjetlY8. At that point the price was at about $60. Then by Friday the stock had collapsed to basically $2.
By this week, he's catching some heat for his comments. See the video here on financeprofessor's blog.
Ahhhh, but does Jim fess up and admit his mistake? Nooooo!!!
In a brilliant use of double meaning, he states that when he was asked "should I pull my money out of Bear?" his answer was referring to whether someone should remove their money from Bear's investment products, not Bear's stock. This is despite the fact that he posted a chart of Bear's stock on the screen.
Given that he had about 3 days to contact this answer I think he did pretty well. This must also mark the first time (on 3/11) that he gave advice about investing in an investment bank's investment products and not the bank itself.
Great stuff Jim. But perhaps you should consider a career in cooking.
Thanks to FinanceProfessor for the original link
Monday, March 10, 2008
This is great stuff and pretty profound really. Fans on indexing should rejoice and can act smug in front of day traders!!! Of course active investors will argue that it doesn't apply to them - for an example see here.
For those of us who buy in to the idea of indexing, this study is not really a surprise, although I have to admit the dollar amount is pretty big!
Monday, March 3, 2008
The article is pretty poor (although the magazine is very glossy!) First of all, it basically rehashes all the material in the PBS Nova TV special from a few years ago which looked at Black Scholes and the collapse of Long Term Capital Management. The Black Scholes Model was blamed for all the ills of the world back then. To make the topic more current, the author of the piece cites a Nicholas Taleb who has basically made a living trashing Black Scholes. People listen to this guy because back in 1987 he correctly bet that the market would crash. By his own admission, he hasn't been able to repeat that feat since - hmmmm. Anyhow, he has this to say about Black and Scholes:
"This is what I'm saying to Merton and Scholes," "You guys are just parasites. You're not bringing anything useful to the market. You are lecturing birds on how to fly. You're watching them fly. And then you're taking credit for it."
He also thinks that they should have the Nobel revoked.
I'm sorry Mr Taleb, but you are so far off base here, your comments barely dignify a response. The Black Scholes model is a model, and just that. It assumes that the risk input that you use is a reasonable estimation of the future risk of the security. If the security does something drastically different to what it has done in the past, then the model will misprice it. Garbage in, garbage out. If you use the model and don't recognize this, then you'll likely get burned.
Mr Taleb, don't go shooting the messengers (or in this case trashing the authors) of the model in such an unprofessional manner.
Thursday, February 28, 2008
But the reason why the stock price shouldn't go up is due to an increase in earnings. EPS will rise after a buyback purely because shares outstanding (the denominator in the EPS) went down. But net income (the numerator) is unchanged. I suspect that there are a lot of analysts who fix upon a valuation multiple - say 20X earnings, and apply that multiple to any EPS number that comes along. Thus by their reckoning, IBM's price should go up because the EPS went up. This is completely wrong, and frankly pretty stupid.
Thursday, February 21, 2008
This paper shows that households do in fact behave in this way, and they offer a theory for why.
But perhaps the simplest illustration of the effect of compounding is the following. Consider $10,000 invested for 10, 20, 30, and 40 years at 10%.
10 years: $25,930
20 years: $67,270
30 years: $174,490
40 years: $452,590
The question then is: If someone gives you $10,000 what should you do with it?
Tuesday, February 19, 2008
Monday, February 18, 2008
A policy implication then, is that by imposing rate limits, the supply of pay day loans will decline.
Sunday, February 17, 2008
link here Evanomics
Link BBC website
There had been some talk of a buyout by Virgin. But according to the Government, the numbers didn't add up. Apparently the shareholders didn't agree with this. Their shares were trading for 90p (about $2) and will now be worthless.
This is the first nationalization of a bank for 25 years or so. But the Northern Rock was the first British bank in 100 years to suffer a bank run.
Wednesday, February 13, 2008
So what - well a study has applied this method to the overall stock market and looked at time dollar weighting the returns based on how much money was invested at a particular time. The results are not encouraging. Market participants are bad at timing the market...For example, the performance of the S&P 500 would fall by 1.4% from 10% a year to 8.6% on a market timing basis.
Article here (source Hal Varian's website and the NY Times)
Yours truly has said more than once - "it doesn't matter whether you are making computer chips or potato chips - finance is finance"
Its nice to see that I am not alone in this...
Hal Varian is a pretty famous academic economist who consults for Google now. He is also well know to most Business PhD students as his microecon text book is standard reading.
Link from the Freakonomics Blog on the NY Times
Tuesday, February 12, 2008
New York Times piece
The research is forthcoming in the Journal of Finance.
Link from Finance Professor
Sunday, February 10, 2008
For those who are not familiar with Thaler - he is a renowned behavioral economist from U. Chicago.
Thanks to Newmark's door for this link
Yahoo to reject MSFT
Realistically, this is the appropriate thing for them to do. When you know that your bidder has very deep pockets you owe it to your shareholders to try and get the best price possible. I doubt though, that MSFT will sweeten the deal much. Its still a good deal for YHOO shareholders.
Jerry Yang is clearly playing hard to get and trying to get an extra few bucks out of MSFT. Given that he owns over 40 million shares of YHOO, pushing the price up to $40 per share will net him a gain of over $20 since MSFT originally bid. His holdings will have increased by $800 million!
What is interesting is that it is Altman himself making the prediction. Great stuff.
FinanceProfessor also lists a couple of nice sites that show you how to implement Altman's method in excel.