Tuesday, April 29, 2008

Lure of City money too strong for young

Sometimes you just have to shake your head and wonder...this article in the Guardian quotes the Bank of England Governor and states that:
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

What is the world equity risk premium?

John Campbell of Harvard has a nice paper published in a Canadian Econ Journal that estimates the equity risk premium. His conclusion: the world (and US) equity premium is around 4% currently.

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.

Living Yield Curve

A student of mine (thanks Craig) sent me this link. Its for a living yield curve. Basically it shows the shape of the yield curve throughout history (or recent history anyway). Very cool.

Living Yield Curve

How good are analysts?

The Investor Insight website has an interesting study that shows that analyst earnings forecasts basically lag the actual forecasts.

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

Test your technical trading skills...

I'm not much of a fan of technical analysis, I think it is pretty much the finance equivalent of reading tea leaves. However, a lot of folks are. The freakonomics blog has a great link to a site where you can test your technical analysis chops.

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

Stock market explanations

Stephen Dubner speculates why journalists feel compelled to concoct reasons for why the market went up.

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.

For example:
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

How to make millions out of the Bear Sterns collapse

OK, don't tell everyone. Google has introduced a new feature that allows you to send emails back in time.

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...