Monday, November 29, 2010

Thursday, November 18, 2010


The GM IPO seems to have gone fairly well.   Notably, the Government will need to sell the rest of its shares at about $53 to break even from the bailout.  The price of GM today is about $35.

Tuesday, November 16, 2010

PIG spreads

A graph showing the yield spreads of the government bonds of 3 PIGs (Portugal, Ireland and Greece).
It's not pretty.  But it shows a fundamental premise of finance.  Ex-ante, you should get compensated for risk.

Source: The Economist

GM times the market

It's looking like GM's IPO is going to be pretty successful.  Whether by luck or skill, GM has managed to time the market pretty well.  Stock prices are at their highest for quite a while and GM just reported some healthy profits.

Of course we'll have to see whether GM shares turn out to be a good buy in the long run.

Fama talking about efficient markets and the impact of regulation Fama thinks that capital requirements aren't high enough for big banks.  He's absolutely correct of course.

Monday, November 15, 2010

Personal Finance on a Napkin (or three)

NY Times presents some personal finance tips written on napkins.  Brilliant.

HT: FinanceProfessor

Technology and teaching.

The Economist magazine argues that MBA programs should use more technology in their teaching.  As Professor who teaches in an MBA program, I hear this a lot.

I'm not at all averse to technology - I'm a bit of a geek really.  I run linux as my primary O/S and I think cloud storage (dropbox, evernote) is the greatest thing since sliced bread.  But I also think that you should use the simplest technology that gets the job done.  My primary teaching tool is a large white board and a lot of colored markers.  I'll use powerpoint to put up talking points, excel to show examples, and of course the web to grab data.  But beyond that, what is there?

The use of hardware technology seems very overplayed.  Do Ipads, kindles and Ipod touches really help?   Are smart boards, where you can manipulate the items on the screen really worthwhile?  For that matter, is excel 2007 so much better than excel XP?

I think that all these technologies are cute toys, but if I'm teaching target date immunization, they would just get in the way.  Of course I might just be a luddite.

I welcome comments on this topic.  But please, don't suggest that I use Second Life.

Sunday, November 14, 2010

Wednesday, November 10, 2010

Is gold at a record high? Actually, no.

A nice take down in the NYT about the current gold frenzy.   Gold isn't at a record high after you adjust for inflation.   And as the author of the article says "you should always adjust for inflation".

Personally, I think there is a gold bubble forming.  I predict prices below $1000 in a year.

Monday, November 8, 2010

Opportunistic Capital Structure

Aswath Damodaran has an interesting post on whether firms have an optimal capital structure or are more opportunistic and sell whatever security seems cheap at the time.

The idea of an optimal capital structure is often formally called the trade off theory.  The theory states that firms have an optimal capital structure that is based on the trade off of the costs and benefits of debt.  Debt is cheap (tax deductible) but too much increases the risk (and expected costs) of bankruptcy.  Therefore firms pick an optimal combination of both.  Recent work however, shows that there is evidence that firms often time security markets when they issue equity (I've published a couple of papers on this topic).  This theory has come to be known as the market timing theory of capital structure.

Damodaran suggests that perhaps firms have an optimal target and use market timing to take advantage of mispricing opportunities around this target.  This is actually the topic of a working paper of mine (with Bill Elliott of UTEP, Ozde Oztekin of KU and Anjo Ko√ęter Kant of VU University).   In this paper we argue that firms adjust faster or slower to their targets depending on whether market timing makes it advantageous to do so.  In effect we overlay market timing on top of the trade off model of capital structure.  The paper is currently being revised as it is working its way through the review process at a journal so I don't have a current version to post, but when we get through the review process I'll post a more detailed discussion.

Damodaran on Taleb

Aswath Damodaran is a Prof of Finance at NYU.  He's well known for his book on equity valuation, which is excellent.  He also maintains a blog, which unfortunately he doesn't update that often, but when he does, he posts some gems.   For example, here is his take on Nassim Taleb's rant about the Nobel prize committee.

As readers will remember, I've posted on Taleb before.

Aswath also posts on QE2 with the memorable title "QE2 or Titanic"

Duke's Cam Harvey on QE2

Duke Finance Prof, Campbell Harvey, talks about quantitative easing (the Fed's plan to buy government bonds to lower rates).  Suffice to say, he doesn't think it will work.

Link from Newmark's door.

Thursday, November 4, 2010

The Fed's QE plan in plain English

There's plenty of talk about the Fed's plan for quantitative easing.  If you're having trouble understanding the details, then follow this link for a plain English version.

HT: Felix Salmon

What discount rate should the California teacher's fund use?

From my colleague, Craig Newmark:

The Cal teacher's retirement fund is set to vote on whether to reduce their assumed discount rate from 8% to 7.5%.  I've blogged on this a couple of times before (here and here).

Reducing the rate will have the effect of increasing the reported present value of the liability faced by the State of California.  In reality the liability remains unchanged - the fund owes what it owes.  In fact, because this liability is guaranteed - it must be paid - the correct discount rate is probably much nearer the risk free rate of interest which is about 4%.

Tuesday, November 2, 2010

What role commodities?

Ken French talks about the role of commodities in a portfolio.  He makes a brilliant but sometimes overlooked point:

The claims that, going forward, commodity funds (i) will have the same Sharpe ratio as the stock market, (ii) will be negatively correlated with the returns on stocks and bonds, and (iii) will be a good hedge against inflation can't all be true. Who would want the other side of this trade?