Monday, October 27, 2014

A tepid defense of hedge funds by Cliff Asness

Cliff Asness of AQR capital has an excellent blog - well worth reading.  A recent posting is called a tepid defense of hedge funds.  

This is a nice article and from it we can draw a few interesting conclusions...

1. Hedge funds look a lot like boring stocks (they have betas between 0 and 1).

2. Based on 1), hedge funds are not hedged.  If they were, they would have zero betas.

3. The positive alpha earned by hedge funds is probably not enough to cover the 2/20 fees that they charge.

4. Hedge funds didn't really provide much protection in 2008.

Tuesday, October 14, 2014

Is Yahoo worthless?

I missed this story earlier when Alibaba went public, but as we're talking about stock valuation, it is timely to talk about why Yahoo's US operations is basically worthless.  Another article is here
The math is pretty simple (numbers as of 10/14/2014):

YHOO owns 16% of BABA.  So YHOO's share of BABA is 0.16*209Bn = $33.44Bn
YHOO also owns 35% of Yahoo Japan (YAHOY) Mkt Cap = $20Bn.  
So YHOO's share of YAHOY is 0.35*20 = $7Bn.

So YHOO's non-BABA, non-Japan operations are worth:  38 - 33.44 - 7 = $-2.44Bn

What does this mean?
There are two ways of looking at this.   One is to say that YHOO is worthless.  This is perhaps a little surprising given that the company is profitable.  

Another way of looking at this is to assume that BABA is overpriced and YHOO is underpriced.  In which case a rational trader would try to short BABA and go long YHOO.  

This latter option isn't as crazy as it may seem.  In fact, it occurred famously with 3COM and Palm.

Saturday, October 11, 2014

Multitasking in class?

Most professors allow students to use laptops in class.   Many students use them to take notes, to look at spreadsheets etc - but many students also use them for multi-tasking.  And I use the term "multi-task" very broadly.

When I sit in other professor's classes to review teaching, I often am surprised by the amount of "multi-tasking" that is going on.   I usually sit at the back where I can get a good view and invariably, students that are engaged in "multi-tasking" are on facebook, checking the weather, checking email etc.   They aren't really multi-tasking, they are just doing a different task from what they are supposed to be doing.

That's why this article was particularly interesting to me.   A Professor of New Media at NYU has basically banned laptops from class (except for specific projects).   He's reporting a much improved environment.

A counter argument from a student might be:"Hey, if the prof says anything interesting or important, I'll pay attention", but I think this is perhaps a little delusional.   I know that if I am at home watching a movie and in the quiet bit, I answer an email on my laptop, I invariably end up having to ask my wife: "what happened?"   I am pretty sure that I can't multi-task effectively.

Your daily latte

Saw this article on today about the cost of daily latte.   Apparently, at some point in the past, the meme was that you're going to live in poverty at retirement because of your latte habit today.

I wanted to check the numbers, so if you assume 250 $5 coffees a year over 30 years, I reckon the future value is about $70,000 in today's dollars.

I assumed a 4% after inflation return, which is important, because I am basically assuming that in real terms, the cost of a coffee stays at about $5.

While $70K is not going to make a monumental difference at retirement, it isn't chump change!

Friday, October 10, 2014

Be wary of those who dismiss the EMH

Nice little article on the EMH - efficient markets hypothesis.

Opportunity costs at Olive Garden.

Olive Garden restaurants don't pay rent to the parent company, Darden.  This raises the question as to whether the true opportunity cost of the real estate that the restaurants sit on is being fulling realized.

The situation has has come to a head now that an activist investor has replaced the entire Board of Darden restaurants in order to effect a change.  

This is a great example of corporate governance and capital budgeting interacting.

Prediction:  Fewer Olive Garden restaurants.

Wednesday, October 1, 2014

Bond Market Liquidity

We typically think of Treasuries as being very liquid - by which we mean that an investor can buy and sell a large quantity of the asset with little impact on the price.  We're also implicitly assuming that there is no new information about the asset's fundamental value.

So look what happened recently for TIPS (Treasury Inflation Protected Securities) when Bill Gross, Chairman of PIMCO (one of the biggest fixed income management shops) quit.  

The day Gross left Pimco to join Janus Capital Group Inc. (JNS), Mexican government bonds declined 0.3 percent, inflation-protected U.S. bonds lost 0.4 percent and debt of Verizon Communications Inc. (VZ) -- one of his bigger company holdings -- dropped 0.3 percent. That compares with a 0.05 percent decline on the Bank of America Merrill Lynch Global Broad Market Index.

“Less liquid sectors such as TIPS continued to weaken as a result of Pimco concerns,” Leduc wrote in a Sept. 30 note. “There has not been measurable impact in most liquid sectors.”

Article here;

If we look at the real rate of return on TIPS since they were first issued, we can see that the real return has declined over the years.   This could be due to a secular decline in real rates, but is also, at least in part, consistent with some liquidity premium being present in the TIPS yield.