Monday, March 7, 2011

Top Finance Blogs

Time magazine lists their top 25 finance blogs.  I think financeclippings was number 26.

I'm a supply chain guy - what do I care about insider trading?

In the ever more competitive world of stock analysis, any bit of raw data about a company that could be used to infer revenues or earnings is useful.   Supply chain managers, and other professionals are often uniquely positioned to see this data.   Sharing this data with outsiders though is illegal - it is insider trading.

The FT reports the case of Tony Longoria, a supply chain manager at Advanced Micro Devices who was moonlighting as a consultant for "Primary Global Research".   Allegedly Mr L. was providing detailed information about AMD's shipments right before the company released earnings.   He and several others now face insider trading charges.

Biases in hedge fund return data

It's well known that hedge fund indices are very upwards biased.  An article in the FT today talks in detail about these biases.  They stem from survivorship bias (only winners are in the return data), back fill bias (when successful funds that hadn't reported start reporting returns and back fill their data), and end of life bias (when failing funds stop reporting).   These biases can lead to indices being overstated by a massive amount.  A study of 2006 returns by Roger Ibbotson and Peng Chen reported that while the indices reported a return of 16%, the actual return was nearer 8%.  The FT quotes a hedge fund investor who states that "We adjust single manager indices down by 4 percent a year..."

Tuesday, March 1, 2011

Another example of very poor finance reporting...

Reposted on yahoo Saturday - an article about how house prices have fallen in some markets.  Can you spot the glaring, massive, unbelievably stupid math errors?

HT: Ron Elmer


In case they correct the article, I'll copy part here..

Portland, Ore.Average home sale price in 2010: $270,418
Average home sale appreciation between 2009 and 2010: -91.5 percen
Tallahassee, Fla.Average home sale price in 2010: $220,135
Average home sale appreciation between 2009 and 2010: -91.48 percent
Tucson, Ariz.Average home sale price in 2010: $147,731
Average home sale appreciation between 2009 and 2010: -88.06
Wake Forest, N.C.Average home sale price in 2010: $240,801
Average home sale appreciation between 2009 and 2010: -87.53 percent
Cathedral City, Calif.Average home sale price in 2010: $182,076
Average home sale appreciation between 2009 and 2010: -85.16 percent
Wahiawa, HawaiiAverage home sale price in 2010: $331,498
Average home sale appreciation between 2009 and 2010: -82.13 percent
Weatherford, TexasAverage home sale price in 2010: $131,586
Average home sale appreciation between 2009 and 2010: -77.83 percent
Dover, Del.Average home sale price in 2010: $168,805
Average home sale appreciation between 2009 and 2010: -66.26 percent
Sycamore, Ill.Average home sale price in 2010: $168,053
Average home sale appreciation between 2009 and 2010: -48.49 percent
St. Charles, Md.Average home sale price in 2010: $245,191
Average home sale appreciation between 2009 and 2010: -45.66 percent

Are stock prices determined by facts or human nature?

A surprisingly good summary of behavioral finance from USA Today.

HT: Finance Professor.

How do you estimate the equity premium and what is it now?

Aswath Damodaran discusses the different ways of estimating the equity premium and provides some current estimates from these methods.

Bottom line - here are the ranges:
Surveys: 3-4%
Historic evidence: 4.3% (but very noisy)
Implied (from stock prices): About 5%

Consider this:- if the premium is about 4%, and the long term bond yield is about 4.5%, then you are looking at an 8.5% return on stocks.  8.5% is a far more modest return assumption than the 10-12% number you often hear as the "long run return on stocks".


Pretty much essential reading for all finance students.

What exactly is the function of the financial sector?

An interesting article by Professor Bill Black on the fundamental flaws of the financial sector.  Prof Black makes the argument that the sector is too large and it basically sucks the life out of the real economy.

His arguments are pretty strident, and in most cases rather unsubstantiated, but still thought provoking.   It reminded me of a discussion that I had with a forestry Professor who lives down the street from me.  He asked me what I thought should be the correct size of the financial sector.  I couldn't give him a specific number, but I did note that we may have an oversized financial sector due to some government policies.

The two policies that come to mind are the mortgage interest tax deduction and the implicit guarantee of too big to fail banks.   The interest tax deduction subsidizes home ownership and boosts the mortgage backed securities market, while the too big to fail guarantee causes banks and other financial institutions to get too large and, in effect shift some of their risk to the federal government.

Abolishing the interest tax deduction and imposing size related capital requirements on banks would go a long way to remove these distortions.

The number of stocks listed globally.

Felix Salmon has put together a great graphic showing the number of stocks listed globally.  Note that this shows numbers and not values.  

Article is linked above, but here is the graphic.  As they say, a picture tells a thousand words, or in this case about 45,000 stocks.