Thursday, March 26, 2009

B. School Profs say publishing in finance is the hardest.

I knew publishing in finance was hard - turns out business profs in other areas agree. A recent paper published in the Journal of Financial Education reports the results of a survey of business school academics.

One question asked "which field, apart from your own is the hardest to publish in?" All the other areas; Accounting, Marketing, Management, Operations etc on average said that "Finance" was the hardest discipline to publish in.

The study went on to explore why this is so. A couple of reasons were offered - there are fewer finance journals that are considered "A"s compared to other fields and the acceptance rate at these journals were lower.

I need to remember to leave a copy of this article on my dept head's desk! But in the meantime I better get back to trying to get my papers published....

Active vs Passive Management...Mutual Funds

Gene Fama and Ken French have a new paper out. "Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates"

On their blog they summarize their findings....
Our new paper, Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates, takes another look at the performance of mutual funds. Bootstrap simulations produce no evidence that any managers have enough skill to cover the costs they impose on investors. If there are managers with sufficient skill to cover costs, they are hidden among the mass of managers with insufficient skill.
Yet more evidence against buying funds with active management fees. If you are investing for the long run you can basically control two things. Diversification and fees. So buy well diversified index funds.

Friday, March 20, 2009

Did naked shorting bring down Lehman?

Article here on argues that naked shorting (shorting without actually borrowing the stock) might have brought down Lehman (or at least contributed to the downfall).

Ordinarily naked shorting shouldn't drive a firm to bankruptcy, unless a depressed stock price weakens the market's confidence in the firm. Clearly that scenario could play out for a highly levered entity like Lehman.

Wednesday, March 18, 2009

Fama and French on Taleb

Nassim Taleb (of Black Swan fame) has received a lot of press of late for his argument that returns are fatter tailed than the normal distribution assumes. He has taken his arguments one step further and consistently railed against Nobel prize winners in financial economics (and actually academics in general - although this latter piece is more of an incoherent rant).

A fair question then is whether the idea of fatter tails is new to financial economics. Turns out it isn't. As Gene Fama points out the idea is well known and well understood (at least by academics).

Furthermore, Fama's book "Foundations of Finance" which is used by many finance Ph.D. programs as a basic text discusses the issue. My edition of the book is copyrighted 1976.

Fama does point out that from a risk management point of view, the issue of whether tails are fat or not is crucial. But from a portfolio management view it doesn't really matter too much.

Buffet and Moodys

Warren Buffet is rather quiet about the complicity of ratings agencies in the current mess, which is surprising given that he has happily pointed the finger at the other usual suspects.

Could his silence have anything to do with the fact that Berkshire Hathaway owns 20% of Moodys? The NYT takes up the issue.

Wizard of Oz

It is fairly well known that the Wizard of Oz is actually about deflation and the gold standard. Full explanation here

Friday, March 13, 2009

Don't watch CNBC - part 2

More on CNBC.

Citigroup to put "financial experts" on board

From the Wall Street Journal today...

  • Citigroup to Name Board Nominees

    Citigroup is preparing to nominate at least three financial experts, including two former bank CEOs, to be directors as part of the overhaul of its board.

Question: who did they have on their board prior and what was their expertise if it wasn't in finance?

Tuesday, March 10, 2009

Cramer on Stewart

Jim Cramer responds to John Stewart.

I was sort of embarrassed for him, and he should have at least worn a suit that fitted. Of course the really pathetic thing is when pundits become the news story.

Citigroup makes a profit?

Wow, Citigroup made some money in Jan - Feb of this year. Lets just hope that they aren't making the same mistake as the Beardstown ladies who booked capital injections as profits.

Index funds still win.

Index funds are still the way to go.

HT: Newmarks door

Where were the academics?

Academic financial economists have been criticized of late for not forecasting the impending crisis. This criticism is really inaccurate.

As this article indicates, financial economists have in fact been at the forefront of uncovering numerous market problems.

HT: Newmark's door.

Friday, March 6, 2009

Bonds for the long run?

The fairly well known book by Jeremy Siegel, "Stocks for the long run" presented the wealth effects of buying stocks vs. bonds. The basic idea - stocks outperform bonds in the long run. has an article showing that since the Carter years, this hasn't quite held up if you count recent market movements.

Clearly, this graph is dependent upon the stock index used and also the starting point, which is a little arbitrary.

Thursday, March 5, 2009

Don't watch CNBC - life is too short.

I don't watch CNBC because I have better, more rewarding things to do - like rotating my tires or trying to poke my eye out with a pointy stick.

John Stewart on the Daily Show also shares my dim view of the channel.

Putting the brakes on bubbles

Newsweek has an interesting article on how bubbles might form and how we might go about stopping, or slowing them, in the future. For example, adjusting the amount required for a house down payment based upon the aggregate price to rental index. The price to rental index is a bit like a PE ratio for houses. When this index is higher, you would have to put in more equity. This would reduce the feedback loop that exists right now that basically allows you to borrow more and more as asset prices get higher and higher.

On a related note, in the same issue, Warren Buffet pontificates on the evils of leverage, and how houses are for living in, not speculating on. A nice article, but after reading it I felt like I was being scolded by a wise uncle after I had gone out on a bender and woken up with a bad hangover.

Wednesday, March 4, 2009

Peter Schiff

Peter Schiff has become a bit of a celebrity recently because in 2006 he developed a time machine and traveled forward to today so that he could make perfect predictions about the market. Or perhaps he was just smart and looked at the evidence that no-one else was looking at. Anyway I wish that I had paid attention to him.

On a side note, I have to say that every time Ben Stein opens his mouth I have to laugh. The guy must be the perfect contrarian indicator. Why anyone allows him in front of a TV camera is a mystery.

HT: My friend Robert.

GM bankruptcy debate blogger Felix Salmon takes issue with some of GM's arguments against bankruptcy. As Salmon correctly states, chapter 11 is really just a court arranged change of ownership.

Of course it should be no surprise that the management of GM is fighting Ch11. Chapter 11 would result in shareholder's being wiped out and probably a fair amount of the management being replaced. In most cases a firm's management would try to avoid Ch 11 until it becomes impossible because of pressure from debt holders. But GM is in a unique position in that it can keep trying to hit up the Federal Government for more cash.

A reorganized GM would emerge leaner and better able to compete in the future. In the long run, Ch 11 is the best option, regardless of what GM says.

Tuesday, March 3, 2009

Stocks as a leading indicator

Monday's WSJ had a nice article on how stocks can be leading indicators during recessions. The basic idea is that in most past recessions, stocks tend to recover about 6 months before the end of the recession. The reason given is that prices rise as investor's forecasts of more robust growth begin to solidify. At the same time rising stock prices may have an wealth effect on households. Households will then consume more - which further drives the recovery.

However, in this recession, prices are being depressed by more than just lower cash flow growth. Bernanke told congress last week that prices no longer seem to reflect long term profitability, but rather "investor attitudes about risk and uncertainty, which right now are at very high levels".

It's worth remembering that there are two main inputs into stock values. The future cash flows generated by stocks and the riskiness of those cash flows as perceived by investors. While there is no doubt that the future cash flows are being hurt now (for the short run), further out these cash flows should be healthy as the economy expands again.

Investor attitudes to risk are embedded in the risk premium. Historically the risk premium has averaged around 6%, and in the long run this number appears supported by valuations. Towards the end of the tech bubble in the late 90's the risk premium (based on valuation models) was basically zero - consistent with a bubble market. But today I'd wager that the risk premium is 9 maybe 10%. A higher risk premium today means stocks are cheaper - if, and only if your personal view of the risk premium is less that of everyone else's.

Bernanke's appointment

With all the mess going on, I am reminded of this video done by Columbia B School MBA's about their Dean (Glenn Hubbard) allegedly lamenting not getting the Chairman's job.

Bernanke calls AIG a "hedge fund attached to an insurance company"

Apparently the AIG bailout ticked off Bernanke more than anything here