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.

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.

Efficient Markets and the financial crisis

Craig Newmark discusses Robert Shiller's view that the Efficient Market Hypothesis predicts that the financial crisis couldn't happen.

Craig thinks Shiller is wrong, and I agree with Craig.  I'm a little surprised that Prof Shiller would actually make such a statement.    

It's worth remembering that the EMH is actually quite narrow in its predictions.   All the EMH states is that prices should reflect all available public information.  This coupled with frictions in the market, such as the inability to short certain stocks means that a market collapse can occur when there is a great deal of uncertainty about the future.  

The EMH does not imply that markets should function in a nice orderly fashion - only that when markets do get out of whack, investors cannot earn abnormal profits by trading on public information.

Although the EMH is quite narrow, it is also very powerful.  A simple way of thinking about how the EMH applies to the financial crisis is to ask the question: - At each point in time, was there clear information available that would allow an investor to risklessly earn an abnormal profit from trading on a mispriced security?  I think the answer to this question is no.

VIX for individual stocks

Another one from my colleague Craig Newmark's excellent blog, Newmark's Door.  This time it's on the plans of the CBOE to create stock specific volatility measures.  Basically a VIX for individual stocks.

Sounds cool although it seems a little like a tool in search of an application.   While overall market volatility is quite important because we can't diversify away market risk, individual stock volatility is less important in the context of a diversified portfolio.

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%.

Small Investors Flee Stock Market

Small investors are pulling money out of stock mutual funds and parking it in bonds.

Investors withdrew a staggering $33.12 billion from domestic stock market mutual funds in the first seven months of this year, according to the Investment Company Institute,

As Warren Buffet once said, "be greedy when others are fearful" (or something like that).


HT: Craig Newmark.

Etrade Babies

My colleague, Craig Newmark posted this link. Awesome stuff.

Origins of the financial mess

Alan Blinder talks about what went wrong and who screwed up. The answer is basically "a lot" and "pretty much everyone".

HT:Newmarks door

The problems with rating agencies...

Craig Newmark agrees that rating agencies are due a good amount of the blame...this article from seeking alpha describes some of the problems.

Must read...by the author of liar's poker

This is a must read piece. It is a little long, but well worth it. It is penned by Michael Lewis, the guy who wrote "Liar's Poker", and frankly it is really excellent. I won't spoil the punch line, but you pretty much know where his story is going once he gets started. Even so, the whole article is still compelling.

There are some great one liners in the piece: I liked this one...

“The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.

HT: Newmark's Door.

Essential Reading on the current mess

My colleague Craig Newmark, has put together an excellent listing of articles discussing the current situation. Many are written by some of the brightest and smartest names in economics. This really is a fantastic resource and makes excellent reading.

The first post is here. The second is here .

Buffet was right....

The oracle of Omaha correctly foretells the future, yet again. (He previously predicted the collapse of the tech market).

HT Newmark's Door

UAL share price drop

Thanks to Craig Newmark for this interesting story.

On Monday (sept 8), UAL (United Airlines) stock dropped 75% amid a story that it had filed for bankruptcy. Turns out the story was from 2002. The original story was on the Florida Sun Sentinel's website. It was on the front page because people had clicked on the old story and made it the most popular news story. (This happens on the BBC news site a lot also).

A google search bot found the story, but as it had no date, assigned the date from the masthead of the paper. Then an analyst (who didn't read the story) uploaded it to Bloomberg. Program trading took over and the "news" triggered a massive sell off of the stock.

The SEC is investigating. The question is: Was this an innocent mistake or was their evidence of a deliberate manipulation of the stock?

Finance Salaries

From Craig Newmark. An article saying that many Harvard grads go into finance because that's where the $$ are.

http://newmarksdoor.typepad.com/mainblog/2008/07/dept-of-no-surp.html


The article discusses whether we are seeing a "finance bubble" - I doubt it, but I am sure that finance jobs are not going to be quite as plentiful and high paying in the near term.

Salaries for college grads

If you are graduating or have just graduated, then this is going to help much - but if it's still interesting.
Salaries for college grads for 2008

HT: Newmark's door.

As Craig Newmark points out - Econ grads earn more on average than finance grads. Food for thought. My limited experience has been that Econ majors taking my classes have always been among my best students. So I suspect that there is a selection bias - on average better quality students become Econ majors.

Triple A Failure

Newmark's door has a great link to a piece by Roger Lowenstein on the role of bond rating agencies in the credit crisis.

It really is a must read article. In it, the finger is pointed at the bond raters - Moodys, S&P and Fitch for being too close to the banks issuing the mortgage backed debt.

Although this is a bigger question, I do sometimes wonder exactly what value bond rating agencies provide. Their business model seems to be not entirely dissimilar from that of running a protection racket. Consider the evidence:
1. You have to pay for the service. If you don't pay, you may not get as good a rating.
2. They will help you structure the product to get a better rating, but you may have to pay more.
3. The amount you can sell the bond for depends on the rating.
4. Bond rating changes usually lag changes in credit quality and thus have little predictive power.