Wednesday, 31 December 2008
The Unknown Wife and Daughter are going to a neighbor's house for a little New Year's cheer (the non-alcoholic kind, since Unknown Wife is expecting), and then home by about 10.
Here's hoping 2009 finds you healthy, prosperous, and happy.
Monday, 29 December 2008
Quantitative easing from Marketplace on Vimeo.
First off, let's start with Credit Default Swaps (CDS). A CDS has a lot of similarities to an insurance policy on a bond (it's different in that the holder of the CDS needn't own the underlying bond or even suffer a loss if the bond goes into default).
The buyer (holder) of a CDS will make yearly payments (called the "premium"), which is stated in terms of basis points (a basis point is 1/100 of one percent of the notional amount of the underlying bond). The holder of the CDS gets paid if the bond underlying the CDS goes into default or if other stated events occur (like bankruptcy or a restructuring).
So, how do you use a CDS to create a synthetic bond? here's the example from Salmon's column:
Let's assume that IBM 5-year bonds were yielding 150 basis points over treasuries. In addition, Let' s assume an individual (or portfolio manager) wanted to get exposure to these bonds, but didn't think it was a feasible to buy the bonds in the open market (either there weren't any available, or the market was so thin that he's have to pay too high a bid-ask spread). Here's how he could use CDS to accomplish the same thing:
- First, buy $100,000 of 5-year treasuries and hold them as collateral
- Next, write a 5-year, $100,000 CDS contract
- he's receive the interest on the treasuries, and would get a 150 basis point annual premium on the CDS
So why go through all this trouble? One reason might be that there's not enough liquidity in the market for the preferred security (and you'd get beaten up on the bid-ask spread). Another is that there might not be any bonds available in the maturity you want. The CDS market, on the other hand, is very flexible and extremely liquid.
One thing that's interesting about CDS is that (as I mentioned above), you don't have to hold the underlying asset to either buy or write a CDS. As a result, the notional value of CDS written on a particular security can be multiple times the actual amount of the security available.
I know of at least one hedge fund group that bought CDS as a way of betting against housing-sector stocks (particularly home builders). From what i know, they made a ton of money. But CDS can also be used to hedge default risk on securities you already hold in a portfolio.
To read Salmon's column, click here, and to read more about CDS, click here.
Thursday, 25 December 2008
In 2002 he was diagnosed with Neuroblastoma, a particularly nasty and resistant childhood cancer. After a great deal of chemotherapy, surgery, radiation, more chemotherapy, and experimental treatments (including an autologous (i.e. "self") stem-cell transplant, he went into remission in 2005.
In January of 2008, he was diagnosed with a Wilms' tumor (a kidney tumor), which resulted in the removal of his right kidney and, after more chemo, he was given another clean bill of health this summer.
Now it looks like he has another tumor - in the lower part of his right lung. We just found out about it two days ago as a result of routing follow-up scans. He's scheduled for more surgery this coming Monday (the 29th). He'll get the tumor removed, which will give us the best information as to what exactly it is. He'll probably have about a week-long hospital stay, and we'll then know if this is a recurrence of the Wilms, tumor or something else (it could be a recurrence of his neuroblastoma, but that's unlikely because there was no indication on his latest MIBG scan a couple of weeks back).
So, please keep us in your prayers.
If you're one of my "non-blogosphere" friends (or a regular reader who knows me by my real name) and you want to keep up with what's going on, we maintain a website that we use to keep family and friends abreast of the little guy's treatment. Drop me an email and I'll send it to you in case you want the url.
Monday, 22 December 2008
- Window Dressing
- Painting The Tape/Banging The Close
- Comparison Shopping
- Window dressing happens when the portfolio manager sells off securities just before the end of the reporting period so that they don't show up in the annual (or quarterly) listing o the portfolio's securities.
- Painting the Tape (also called Banging the Close) occurs when a portfolio manager holding a security buys a few additional shares right at the close of business at an inflated price. For example, if he held shares in XYZ Corp on the last day of the reporting period (and it's selling at, say $50), he might put in small orders at a higher price to inflate the the closing price (which is what's reported). Do this for a couple dozen stocks in the portfolio, and the reported performance goes up. Of course, it goes back down the next day, but it looks good on the annual report.
- Comparison Shopping could also be called "benchmark shopping". This refers to the idea that if a fund manager can't beat his benchmark, he just switches to a new benchmark that he can beat.
For much of the past seven years, President Bush and Vice Prresident Dick Cheney have waged a clandestine operation inside the For much of the past seven years, President Bush and Vice President Dick Cheney White House. It has involved thousands of military personnel, private presidential letters and meetings that were kept off their public calendars or sometimes left the news media in the dark.Read the whole thing here.
Their mission: to comfort the families of soldiers who died fighting in Afghanistan and Iraq since the Sept. 11 terrorist attacks and to lift the spirits of those wounded in the service of their country.
Regardless what else you think about President Bush, he clearly appreciates and honors the role the military plays and the sacrifices those soldiers have made for their country.
Saturday, 20 December 2008
Now that's what I call an information-rich slide.
Thursday, 18 December 2008
Section 13(f) of the Securities Exchange Act of 1934 requires all institutional fund managers with more than $100 million in assets to report their holdings each quarter to the SEC *(within 45 days of the end of the quarter). The hard copies of these filings go back 30 years, but they've been available for free online through the SEC's EDGAR database since 1999. The form name is (not surprisingly) "13F" or "13F-HR". Like many academics, I've used the electronic database of 13F filings put out by Thomson Financial (which has information back to the early 80s on electronic media, runs 5-10 gigabytes, and requires you to have some programming chops to access) in my research. But you can access a fund's data one filing at a time through the Edgar site.
It won't show things like derivatives holdings (at least usually not) or short sales. But if will give you an interesting look at the holding of the big boys. However, you might be looking at a portfolio as much as 45 days old. So, it's best for funds with a long-term (usually value-oriented) approach. As one example, here's the latest filing from Seth Klarman's Baupost Group.
And in case you're interested, here's one for Bernard L. Madoff Investment Securities LLC (I hear the founder has been in the news lately).
HT: World Beta who uses this information in an investment screening tool.
Wednesday, 17 December 2008
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Tuesday, 16 December 2008
- My favorite student got the Terry Pratchett/Discworld references sprinkled on the exam, and one of my others caught a couple of 1980s movie references.
- In between walking up and down the aisles, I wrote about a hundred lines of SAS code
- One of my students already has sent an email asking if we can meet "to discuss his grade." Anyone want to guess how that'll play out?
Oh wait - I already got one of those...
Monday, 15 December 2008
Then I heard about Swoopo.com. It's been called "pure distilled evil in a business plan". Here's their setup:
- Bidding for an item starts at $0.15
- Each bid raises the price by $0.15
- Bids cost $0.75 to make.
- Here's the kicker - a bid in the final seconds extends the auction for 15 seconds. So, auctions can go on and on.
They also hold "penny auctions" on their front page - a bid only increments the price by a penny. I recently saw a TomTom GPS sold for about $12. That means 1200 bids at $0.75 per bid, for revenue of $900, on something that costs them between $300 and $500. Not too shabby.
This is a behavioral economist's dream - it has bidders focusing on sunk costs (I have to make back my bids, and if I win, I get the savings), hubris, and endowment effects (the bidders start viewing the item as "theirs", and therefore value it more highly). And if I thought about it a bit, I could probably come up with other behavioral biases.
It has some similarities to a "dollar auction". In this setting, individuals bid on a dollar. But the catch is that the second highest bidder must also pay their bid, but without getting the dollar in exchange. So, the second place bidder continues to escalate to cut their losses. In Swoopo's setup, the 2nd place bidder isn't obligate to pay, but once they're in the game, they continue bidding to recoup their already-paid bids (that is, if they can get the item at a discount).
It's not a scam per se, because everything is disclosed up front - the rules are clearly stated. But the only advice I can give you about using Swoopo comes from War Games (the 1983 movie starring a very young Matthew Broderick):
UPDATE: Here's a perfect example of how the irrational bidding that can take place - a person "won" an auction for a Sharp 42 inch LCD TV. According to the website, it was "worth up to" $1,199. The "winning" bidder paid $3,360. Assuming that this was a "normal" auction with bid increments of $0.15, this means that Swoopo received total bids of (3,360/0.15) x $0.75 = $16,800 in total bids (including $1,512 from the "winner" alone), in addition to the winning bid of $3,360, for a total of $20,160 -- all for an item worth at most $1200.
UPDATE2: as pointed out by a reader, the auction above was a "fixed price" one where the "winner" got to purchase the item for $119. So, the buyer could have potentially gotten it for a very nice proice. However, they ended up spending over $1500 in bids, plus the $119 winning price, all for a TV that was worth at most $1200. So, the winner endend up overpaying by at least $400, and Swoopo made total revenue of almost $17,000 for the cost of a $1200 TV.
One part of me wishes I'd thought of this - in about a couple of days time I'd have made back all the money my retirement accounts lost this past year. But I'd feel a little bad getting that money from stupid people. Not to say I wouldn;t do it, but I'd feel a little bad.
Michelle Harner over at the Conglomerate posted a very nice piece with some links about distressed debt investing. She highlights the difference between "vulture investing" and "investing for control" (basically traders vs. longer-term investors). She gives a couple of pretty good references. One, from Knowledge@QWharton lays out the basics of "distressed for control" investing:
Simply put, their line of work is to make a profit from companies that have failed to do so and are on the brink of bankruptcy. Unlike traditional hedge funds, however, their investment doesn't stop at buying significant portions of these companies' debt for pennies on the dollar, tidying up the balance sheet and then selling at a higher price. Instead, KPS and Matlin Patterson get in and stay in -- bringing in new managers, installing a new strategy, renegotiating labor and supplier contracts, and so on. (That's the 'control' part.) It's not an easy task, especially given the state of these companies when they step in.Read the whole thing here.
She also cites some of her own research: a survey titled "Trends In Distressed Debt Investing: An Empirical Study of Investors' Objectives" (available on SSRN here).
Finally, Marketwatch gives us a look into the world of "vulture investors." It's a bit dated (April), but it shows how busy the world of distressed debt has become. One of the guys at my church's men's group is an analyst at a local distressed-debt hedge fund. He said he hasn't had this many good choices to buy since he can remember (luckily his firm is sitting on some cash).
I'm teaching the Level 1 Fixed Income material for CFA this spring, and will be teaching Unknown University's Fixed Income class in the fall. So, I'll probably be posting more on the credit market topics as time goes on (I tend to use this blog as a handy place to keep class-related stuff I want to remember).
Sunday, 14 December 2008
If they do, I'll probably give them extra credit.
The Wall Street Journal has a great interview of Miller, and here's the best line:
This meltdown has provided a lesson for Mr. Miller and other "value" investors: A stock may look tantalizingly cheap, but sometimes that's for good reason.It's a very good piece for discussing in class, since it touches on a lot of issues related to market efficiency. Read the whole thing here.
Saturday, 13 December 2008
Tuesday, 9 December 2008
I just came across a paper by a group known as the Brandeis Institute titled "Value vs. Glamour: A Global Phenomenon" that seems to rule out the data diving story. They examine the evidence for the value premium both across time (the mid 1960's to the present) and internationally. They found that
While the degree of outperformance of value stocks vs. glamour stocks varied across data sets, what strikes us as most significant was the consistency the value premium exhibited:The paper has a lot of nice graphs that could be useful in class. You can read the whole thing here.
- across valuation metrics, such as price-to-book, price-to-cash flow, price-to-earnings,and sales growth
- across time, which in this study applies to the 1968-2008 period for U.S. stocks,and the 1980-2008 period for non-U.S. stocks
- across regions, as the results indicated a value premium in developed markets in North America, Europe, and Asia
- across market capitalizations, as the relative outperformance of value stocks to glamour stocks was evident among both large- and small-cap stock universes.
HT: CXO Advisory Group
Friday, 5 December 2008
- Only one meeting left for each of my classes.
- My student-managed fund survive their end-of semester presentation to the advisory board
- I've graded and handed back all assignments except for final exams
- I've even given out and collected my evaluations
The crop is almost in. And man, oh man is it about time.
One of the things I like about this career is that it has a rhythm to it - we have new "crops" each semester, and a feeling of accomplishment once the semester is done. But that final week or two is always a bit crazy.
So, to all my readers: If you're a student, good luck on your exams and projects. If you're faculty, hang in there - it's almost time for the break.
Wednesday, 3 December 2008
Now he has a blog, titled (appropriately enough) Market Design. It's definitely worth a look-see.
HT: Marginal Revolution
Monday, 1 December 2008
Since I'm teaching Fixed Income next year, I'm sure some of these will make their way into my class.
Sunday, 30 November 2008
Saturday, 29 November 2008
He's also got some other videos up on YouTube that I'll post in the next couple of weeks.
Thursday, 27 November 2008
Now go overdose on Tryptophan.
Wednesday, 26 November 2008
There's been tons of work on this topic both in the academic and practitioner literatures. But I haven't seen much on similar relationships for universities. I'm sure that a lot's been done- I just haven't seen it.
There's a good illustration in the Boston Globe of directors at Suffolk University (actually, trustees, which serve a similar role for a university) with significant business ties to the school. It turns out they just awarded the University president a 2.8 million dollar pay package. Of course, there were "good reasons" for doing so. Here's the lede from the story:
Boston lobbyist Robert Crowe was key among the Suffolk University trustees who made David J. Sargent the highest paid university president in the nation in 2006, with a $2.8 million compensation package. Less than a year later, Sargent renewed a $10,000-a-month contract with Crowe's lobbying firm to represent Suffolk's interests in Washington.
This month, as controversy flares over Sargent's pay, the job of publicly defending it falls on George Regan, himself a new appointee to the Suffolk Board of Trustees as well as the beneficiary of a $366,000 annual contract with the university.
Read the whole thing here.Is this necessarily a bad thing? Not really - it could be perfectly innocent, and it's not surprising that trustees of a university might have significant business ties to the university. After all, they tend to be prominent alumni with a long history with the school. But, when you have those ties, a pay package like that is going to get far greater scrutiny than it would otherwise. Or as Ricky Ricardo would have said, "they got some 'splainin to do".
As an aside, if you want to see some excellent examples of affiliated directors in the corporate world (along with other examples of bad governance), there's no better place to go than Michelle Lederer's Footnoted.org. She's made a career out of scouring through company documents to find some truly outrageous examples of corporate mis-governance.
I think the president of Unknown University considered having some trustees with business ties to the school, but we didn't have enough money to pay the required graft.
Monday, 24 November 2008
For the lawyers, here's the disclaimer:For 3 years you YouTubers have been ripping us off, taking tens of thousands of our videos and putting them on YouTube. Now the tables are turned. It's time for us to take matters into our own hands.
We know who you are, we know where you live and we could come after you in ways too horrible to tell. But being the extraordinarily nice chaps we are, we've figured a better way to get our own back: We've launched our own Monty Python channel on YouTube.
No more of those crap quality videos you've been posting. We're giving you the real thing - HQ videos delivered straight from our vault.
What's more, we're taking our most viewed clips and uploading brand new HQ versions. And what's even more, we're letting you see absolutely everything for free. So there!
But we want something in return.
None of your driveling, mindless comments. Instead, we want you to click on the links, buy our movies & TV shows and soften our pain and disgust at being ripped off all these years.
Warning- clicking on the link can result in hours of time wasted, a skewed perspective on life, and adoption of British accents.Now go and enjoy.
HT: Barry Ritholtz.
Friday, 21 November 2008
It looks pretty promising. Although it's less than 2 months old (the first post was made on September 26), it already has a lot of high-quality content, with participation from a pretty large nuimnber of the faculty. Just this last month, it has posts by Viral Acharya, Marti Subramanyam, Edward Altman, and Joel Hasbrouk among others).
It's definitely one to add to your feed reader.
Thursday, 20 November 2008
Tuesday, 18 November 2008
It should make for an interesting case. Cuban has the resources to fight this thing pretty much as far as he wants (even potentially all the way to the Supreme Court), and is definitely stubborn enough to do exactly that. He's already posted a response to the complaint on his blog:
Mr. Cuban stated, “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”Not surprisingly, Stephen Bainbridge has a very thorough legal analysis of the issue. After all, it's in his wheelhouse.
In the meanwhile, I have SAS programs to run and papers to write.
Thursday, 13 November 2008
Wednesday, 12 November 2008
In fact, my favorite Churchill story is the one about the time that Churchill was standing at the urinal in the men's room of the House of Commons. Atlee came into the room and stood at the urinal next to Winston's. Churchill looked up at him, zipped up, moved a couple of urinals farther down and resumed his business. "Why Winston, I had no idea you were so modest.", said Atlee. "It's not modesty, Prime Minister. It's only that every time you find something that is large and functions well, you try to nationalize it, and I thought it best not to take a chance!".What will they nationalize next?
C is for Credit Default Swaps, defined for me by a Wall Street watcher as: Risk whatever you want, and we insure it; risk too much, taxpayers insure it.The other 21 letters are pretty good too. Read the whole thing here.
L is for leverage (a means of maximizing your losses), liar loans, Lehman (pronounced "lemon")--and the losses/liabilities that unite them all.
M is for where it all started: the mortgage (which, aptly, means death-pledge). Like the dog, it comes in a variety of breeds, "sub-prime" being a cross between a pit bull and a chihuahua.
Q is for quants, who forgot that, every so often, past performance is no indicator of anything at all.
S is for securitization, the process by which one passes off cat food as caviar.
HT: The Big Picture.
Monday, 10 November 2008
The latest new one is a put out by The Applied Portfolio Management Program at Washburn University.
Unlike other academic blogs, this one is unique in that material is contributed both by faculty and by students in the program.
Go check it out, and add them to your feed reader - it's been added to the blogroll. And if you come across any other ones, drop me a line.
Friday, 7 November 2008
It's interesting how much the reported ratios change by data source. As one example, for GATX corp, the reported operating margin (trailing 12 months) ranged from 18.92% (reported on Reuters) to 46.7% (on Marketwatch).
HT: Jim Mahar at Finance Professor
Thursday, 6 November 2008
Wednesday, 5 November 2008
Don't ask me why - I just thought it was funny.
Heisenberg gets pulled over by the cops for speeding. Cop walks up to his care and asks,"sir, do you have any idea how fast you were going?"
Heisenberg replies, "no, but I know exactly where I am."
Update: if you haven't managed to get your geek on, click here (hey - a couple of people asked, and I'm nothing if not accommodating).
SnowFlake starts out by blaming the instructor (who, by the way, is one of the best in the college). After some questions and comments on my part like "Gee, that doesn't sound like Professor X at all. Are you sure?", it turns out that he hadn't been keeping up with the work, and hadn't worked more than a problem or two from the end of chapter material. Instead, he tried to cram for the first exam, and did poorly. Since that strategy worked out so well on the first exam, he decided to try it once more on the second exam for good measure. Lo and behold, the same approach yielded the same result (funny how that happens).
So, I gave Snowflake some standard advice on how to study, and then he asked if he could set up a time early this week to set up his classes for the next semester. We set a time (Monday morning at 10), and then came the kicker:
He asked if it was alright if his MOTHER came to the appointment.
I managed to keep my jaw off the floor, since he was a second-semester junior, and if you have hover-moms, they usually get cured of it by sophomore year (and they're almost non-existent in Business schools). But since I couldn't think of anything else to say (other than "You'll be all right once they drop", which didn't seem prudent at this juncture). I said, "Well, Precious, that's entirely up to you".
Monday morning comes around, and I'm running late for our 10:00 a.m. appointment. So, I have the secretary leave a note on my door saying I'd be a few minutes late, and hurry in to the office with visions of MomZilla running loose in the hallway and going on a rampage in the Dean's office.
I get there five minutes late, and there's no sign of either Snowflake or MomZilla. I hang out in my office for a few hours just in case, and it seems like a larger-than-usual number of faculty seem to filter by my office (they keep me off the beaten path, which is probably a good thing). I guess after hearing about Mom coming in, they just couldn't resist sneaking a peek.
In any event, I get a call late that morning from SnowFlake informing me that he had to be in traffic court that morning, had completely forgotten, and wanted to reschedule.
I guess I should have had his Mom remind him.
Tuesday, 4 November 2008
It's pretty cool explaining how our political system works to an 8 year old and a ten year old. This year, I think I'll start working through the Declaration of Independence, the Constitution, and the Bill of Rights with them - it's never too early, and most people (myself included) don't know enough about these foundations of our country.
Friday, 31 October 2008
Tuesday, 28 October 2008
As I grew sicker, I had what for me was an extremely comforting insight. I came to view serious and progressive illness as an ever constricting circle with oneself at the center. The interior of the circle represents the contents of one’s life. As the circle gets smaller, things that were inside get forced out. Some of these things are dearly missed; others that were once thought precious get forced to the exterior and turn out to go surprisingly unlamented.
t the innermost point of the circle are the things that really matter: family, faith, love. These things stay with you until the day you die. At the very end, because the circle has shrunk down to its center, they’re all you have left. But as we approach that end, we finally realize that all along, they were what mattered most. As a consequence, life often remains beautiful and worthwhile right up until the end.A quick reminder: we're all born with a fatal ailment - it's called life, and no one gets out alive at the end. So without getting overly schmaltzy or preachy, we'd all do well to spend more time on that "inner circle" than Barnett wrote about.
To see a list of tributes to the man at the Weekly Standard, click here.
Monday, 27 October 2008
A Short Course In Behavioral Economics: Daniel Kahneman (yes, the Nobel Laureate) has recorded and posted videos of a two day conference called "Thinking about Thinking".
Robert Schiller's Spring 2008 Financial Markets Class at Yale: Schiller has done a great deal of work in market efficiency, and also created the Case-Schiller Index of Home Prices.
While surfing through Yale's Open Classes, I also found a class titled Game Theory, by Ben Polak, a widely published economist. He seems to cover all the big topics: Nash (and other) Equilibrium concepts, Adverse Selection, Signalling, and even Evolutionary Game Theory.
If you know of other finance/econ classes on the web, let me know in the comments section and I'll post them here.
Wednesday, 22 October 2008
There's a great piece on this topic by Joel Sposky in Inc magazine.. Here's a choice snippet:
I'm always on the lookout for these incentive schemes gone wrong. There's a great book on the subject by Harvard Business School professor Robert Austin -- Measuring and Managing Performance in Organizations. The book's central thesis is fairly simple: When you try to measure people's performance, you have to take into account how they are going to react. Inevitably, people will figure out how to get the number you want at the expense of what you are not measuring, including things you can't measure, such as morale and customer goodwill.
...His point is that incentive plans based on measuring performance always backfire. Not sometimes. Always. What you measure is inevitably a proxy for the outcome you want, and even though you may think that all you have to do is tweak the incentives to boost sales, you can't. It's not going to work. Because people have brains and are endlessly creative when it comes to improving their personal well-being at everyone else's expense.
HT: Craig Newmark
Monday, 20 October 2008
According to a new study "Unbundling Hedge Fund Betas" by by Ulloa, Giamouridis, Mesomeris, and Noorizadesh there's evidence that hedge funds increase betas prior to market upswings. Here's the abstract:
This article is concerned with the systematic exposures of equity hedge fund managers. In particular we seek common equity hedge fund systematic exposures through rigorous model selection techniques. We study their time variance to examine if equity hedge fund style characteristics are stable through time. Most importantly, we explore the informational role of manager decisions to shift their exposures to certain styles. Our results suggest that equity fund managers are exposed to three dominant style strategies, namely the 'market', 'value' and 'momentum'. We also discover that there is a considerable degree of variability in the factor exposures over time for the various dominant sources of systematic risk/return. Finally, we show evidence that managers vary their exposures to the 'market' in time to exploit favourable market moves. A similar pattern is however not observed for their 'value' or 'momentum' exposures.
HT: All About Alpha