Thursday, August 30, 2012

SEC says stock picking should be left to the pros

A rather humorous take on a recent SEC study on "retail investors" - that's you and me (in academic finance they - we - are called "noise traders").    Bottom line, many US retail investors are seriously financially illiterate.

Yet another reason to index, if you needed one.

HT Felix.

The costs of HFT

High Frequency Trading (HFT) is stock market trading done entirely by computers.  Trades are sent in fractions of seconds whenever a mispricing or potential profit opportunity arises.

HFT has been criticized for causing dramatic market fluctuations, but this article argues that HFT should be a benefit to market participants because it ensures more efficient pricing.

I think that the problems attributed to HFT perhaps have more to do with computerized trading overall. If there's an error in the code, a computer algorithm can reap a lot of short term damage.   Case in point - Knight Capital... .  While in theory, HFT should result in more efficient markets, because of the magnitude and speed of the trades being executed, any mistake can blow up pretty quickly.

Explaining the LIBOR mess

Nice explanation of the manipulation of LIBOR

HT: Finance at Tepper

Monday, August 27, 2012

Groupon - even our stock price is low!

So what's up with one of the hottest IPOs of last year - Groupon?

Ouch.  That doesn't look good.

Aswath Damodaran takes a close look at whether GRPN is a bargain or in a death spiral.  I'd say the latter.

Readers of this blog probably aren't surprised that most IPOs do badly.

Friday, August 24, 2012

NC Pension Fund and Facebook.

Unfortunately the State of NC bought a load of Facebook stock at the IPO.  I have no idea why - it seemed to me and to many others that this IPO was overpriced.

Now the State Treasurer is suing Facebook and the underwriters of the stock claiming that they were mislead.

I have a couple of observations on this:

First if the Pension Fund was indexed, we wouldn't have this issue. An indexed portfolio wouldn't be jumping into overpriced IPOs.  I've argued before that indexing this and most pension funds is the way to go.

Second, there are questions being raised about potential conflicts of interest.  I'm in no position to make judgments either way on this, except that I think that more transparency is always the best answer.

Tuesday, August 21, 2012

1 hour course for NCSU MBAs

This is only of interest to NCSU MBA students.   I'll be teaching a one hour course on asset allocation this fall.   Details are here.
Contact me directly if you are interested.

Thursday, August 9, 2012

The state of state pension funds.

Many state pension plans are in trouble, but while 34 states are less than 80% funded, North Carolina is apparently well funded.  I'd argue that NC could do a lot better by reducing the fees paid to managers from about $300 million per year.

It's also worth noting that being 100% funded doesn't mean that the fund will meet liabilities, it just means that the present value of liabilities equals the present value of the investments.  The key here is that the same discount rate is used (incorrectly) to find both present values.  All funds should use a lower discount rate to value the liabilities, which will result in the liabilities having a higher value.

Therefore just because a fund says that it is 100% funded, it doesn't mean that it really is.

HT: Newmark's Door.

Friday, August 3, 2012

A $440 Million computer glitch.

Ouch - a bad bit of software cost Knight Capital nearly half a billion when they accidentally sold all the stocks that they had bought the prior day.

As they say, to err is human, but to really screw things up you need a computer.