Some thoughts about oil prices

An article in Fortune says that it is unlikely that higher oil prices are due to futures trading. There are two basic reasons for this. First, these futures traders are not building inventories of oil, in fact oil inventories are down. Second, for every futures contract, there has to be a long and a short. If the longs are paying too much - the shorts should stand to make a killing. As usual, congress is blaming speculators for high oil prices and proposing legislation to reign in these "speculators". A similar article is in the Economist




On a related note, Newmark's door has an article about how the onion market is more volatile than the oil market, perhaps because there is not a futures market for onions. This finding is supported by my own work that shows that Single Stock Futures reduce volatility in the spot market for stocks. In fact most evidence shows that futures markets have a stabilizing effect on the underlying spot asset.

Finally, on NPR this weekend I heard a story about people trying to trade in their SUVs for more fuel efficient vehicles. In the story, one person brought a 2007 Escalade to a CarMax dealership. The truck was a year old, and cost over $70K. The owner was making $1400 a month payments on it. The CarMax buyer offered him about $30K for it. Here's what I don't get. You buy a 70 grand SUV a year ago when gas prices are $3 a gallon, but when gas prices hit $4 a gallon, you can't afford to run it? What's more, the owner said he would have sold it for $40,000 to the dealer - basically taking a $30,000 loss to save the pain of an extra $1 per gallon of gas. In behavioral finance this is called "mental accounting".

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.

Sometimes the simple ideas are the good ones..

This is a little off topic, not really finance. But a couple of Duke Management profs have published a piece in Science that says folks suffer from mpg illusion. Basically, they argue that we focus on trying to get higher and higher mpg, when the biggest savings are for those people who drive vehicles that get really bad mileage.

The story is here...
News and Observer article here

The basic idea is this. If you drive some big ugly truck that gets 10 mpg, you'll use 1,000 gallons a year to go 10,000 miles. Now if you trade to a truck that gets 15 mpg you'll use 666 gallons. A savings of 333 gallons a year.

Now consider someone who is getting 25 mpg and they trade up to a hybrid that gets say 35. Their gas savings go from 400 gallons to 285 gallons. A savings of about only 115 gallons a year.

The point then is that the biggest savings come from fairly small improvements on poor mpg vehicles.

The idea is so obvious of course it is brilliant and what is really great is that these guys got it published in Science.

Google stock screener

Google has a new stock screener. What is cute about it is that you can see the distribution of the values you are screening on graphically. For example you can see the distribution of market values. Very nice.

Google stock screener

You can also screen by sectors etc. What would be nice is if you could screen by index membership as well.

Finance sayings.

Stephen Dubner at the freakonomics blog has a bleg out for finance sayings.

One of my faves is

The market can stay irrational longer than you can stay solvent. - Keynes

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.

Bad news in the charts

My colleague Don sent me this picture. As all chartists know, you should sell when you see the black swan indicator.