Thursday, March 29, 2012

CFA Challenge

If you are an MBA student at NCSU graduating in spring 2013 or later and interested in finance, I invite you to apply to be on the the CFA challenge team that we are putting together for next year's competition (starting fall 2012).   Details are here.

Last year's team (our first year entering) placed in the finals.

Monday, March 26, 2012

Do equities always outperform in the long run?

An interesting overview of the equity risk premium from the psy-fi blog.

A couple of key takeaways:

First a quote from Buffet:

Warren Buffett, as usual, looks at this differently. Taking a hindsight view of the twentieth century in US markets:
“To break things down another way, we had three huge, secular bull markets that covered about 44 years, during which the Dow gained more than 11,000 points. And we had three periods of stagnation, covering some 56 years. During those 56 years the country made major economic progress and yet the Dow actually lost 292 points.”

So, do stocks always outperform (in the long run)? No, they don’t. And don’t expect long-run market returns in excess of 7% going forward. It might happen, but it probably won’t.

A point I try to drive home in my classes is that the assumption that stocks will earn their historic average return is very optimistic.  I think investors should assume a 2% real return and plan accordingly - which in most cases means saving more.

Wednesday, March 21, 2012

Why the IPO is broken.

Most firms that do IPOs now don't really need the money - they are just forced to go public.   Excellent article in Wired.

Tuesday, March 20, 2012

Facebook paying 1.1% underwriting fee

Apparently Facebook has cut a sweet deal on underwriting services for its upcoming IPO and is only paying 1.1%.  This is in contrast to the typical fee which is around 7%.[link to a pdf].

HT: Thomas (a student in the Advance Analytics program at NCSU).

An interview with a CDS bond trader

Well worth watching.

Interestingly, it turns out that the CDS contracts on Greek debt may not pay out because they didn't specifically define a principal reduction as a credit event.   This is the inherent problem with CDS contracts - they have to explicitly define what constitutes a credit event before the event occurs.

Monday, March 19, 2012

Felix opines on Apple's dividend.

Felix Salmon, talks about Apple's dividend.  I usually agree with what Felix says - he's a smart, insightful guy, but I think he's off base here on a couple of points.

First he argues that Apple has no control over the level of the dividend yield (D/P) because Apple can't set its stock price.  This is plain wrong.  Sure, Apple can't control its stock price, but it should at least think about the level of the dividend that it is paying relative to the stock price.   Personally, I think that the 1.8% yield is pretty healthy.

Second, Felix doesn't think that the firm should issue debt.  He says - what would the firm do with the cash?   Well, the firm could buy back stock.   As any finance students knows, the firm's cost of capital is based on its WACC.  Debt is tax deductible, and for a firm that is so crazy profitable as Apple, any sort of tax deduction would seem like a good idea.  This would involve a lot of stock buying back, but so what?

Still an interesting post and worth reading.

Apple announces dividend and buyback

Finally, they've found something to do with all that cash.

Friday, March 16, 2012

TIPS are unattractive

A great blog post from a new (to me) blogger, The Calafia Beach Pundit, who talks about what the negative real return on TIPs means for investors.

He concludes:
To sum up: TIPS are only attractive to an investor who believes 1) that inflation will prove to be higher than expected, and 2) that economic growth will continue to be disappointing

Thanks to Ben (one of my MBA students) for sending me the link.  We talked about TIPS this week.

Thursday, March 15, 2012

An open letter to Goldman Sachs

The Epicurean Dealmaker pens an awesome open letter to Goldman Sachs.

And yet your firm still pretends that you put your clients’ interests first. Bullshit. You are a giant f***ing hedge fund which has been trading for its own account for years. The rot has even extended into one of the last presumed bastions of client service left at your organization: M&A advisory. You don’t have clients anymore; all you have are counterparties. 

Wednesday, March 14, 2012

Buy and hold - dead or alive?

My colleague, Craig Newmark, has two on the death (or not) of buy and hold investing.

I am clearly in the buy and hold camp.   There isn't really a better alternative unless you have a time machine.

Treasury yields surge...

In class we've been talking about the risks involved in investing in Treasuries - specifically - what happens when rates change.  Well guess what?  Treasury rates are surging.   As the linked article points out, this isn't actually bad news.

For a cool chart see here.

Morally bankrupt Goldman Sachs...

A GS Director has just resigned and declared the top brass at the European division of GS to be "Morally Bankrupt".   Ouch.

Monday, March 12, 2012

The VIX is low...

This is relevant to my MBA students who currently have an assignment on implied volatility:

The VIX has declined steadily over the past few months, and at the same time, stocks have rebounded.  
From the graph it appears that the VIX is quite negatively correlated with the S&P 500.  Something that is pointed out here and here.  

I decided to grab some data from yahoo finance and look at the correlations.  First of all if you just look at the raw correlation of the VIX and the S&P 500 from 1990 you get a small positive correlation of about 0.14.  However, if you look at the daily change in the VIX and the change in the level of the index, the correlation is -0.57.  That's a pretty large negative correlation.   

What is unclear, of course, is what is causing what?  Is higher volatility hurting prices or is that falling prices increases volatility?  An obvious thing to look at is the correlation between the prior day change in the VIX and the current day change in the index.  Not surprisingly, this correlation is close to zero indicating that there isn't a simple trading rule.  (If there was, do you think I'd blog it?)

Still, the VIX is a pretty interesting index.

Why Ron Elmer is running for NC State Treasurer.

Ron's website is here:

The real Dow index would include dividends and inflation

Because the Dow (and other stock indices) don't account for dividends, it is argued that the "true" level of the Dow should be much higher.    Here's an interesting article that shows the effects of dividends and inflation on stock returns.

What's driving gas prices?

I've said it before, it is not speculators and drilling won't help much.

Personalized Google Scholar pages

This one is for academics only - Greg Mankiw shows how to get a personalized google scholar page.

My page is here (it's like Greg's I just have fewer citations! )

To find someone's page just search google scholar for the name and if they have a page it should show up.
Like this.

Thursday, March 8, 2012

Fender going public

Fender, the maker of guitars including the Stratocaster and Telecaster is going public.  The last time Fender was publicly owned was during its ill fated period as part of CBS.  Fender aficionados still talk about that episode in the company's history.

Monday, March 5, 2012

Damodaran on Apple's cash pile

Professor Damodaran pens an excellent analysis of Apple's huge pile of cash.

The illusion of superior fund performance

It is well documented that past mutual fund performance is a poor predictor of future performance.

And despite the fact that active mutual funds are all but guaranteed to underperform the average index fund in the long run, people still chase winners.   A nice article in the NYT presents some recent data showing the folly in this strategy.

A simple analogy explains the main point - if I flip a coin 4 times and each time it lands on heads, does this mean that it will land on heads the 5th time because I am a skilled coin flipper?

More on target date funds..

Freakonomics blog talks about why not all target date funds are alike.

Sunday, March 4, 2012

Elmer for NC Treasurer.

A good friend of mine, Ron Elmer, is running for North Carolina State Treasurer.  Ron's platform is pretty straightforward - he believes that the $75 billion state pension fund should be run by someone with who is an investment expert.  Ron is an experienced money manager, who, like me, believes that the key to amassing wealth is to minimize the fees that are paid to active managers.  This is true for an individual 401K and also for a multi-billion dollar pension fund.

I'm helping Ron with his campaign.  I'll be using my blog to share some of his ideas as we get closer to the primary date in May.  In the meantime, if you like, you can check out his website and also "like" his facebook page.

He's also on twitter @relmbo

If you're interested in helping with the campaign - there's an email link on the website - or send him a message in facebook.


As a final note: This blog is my own personal blog and is not endorsed by NCSU.  Blog postings regarding the Elmer for Treasurer campaign are done outside of my work as a Professor at NCSU and are on my own personal time.