Stingy Investor The Rothery Report
  Home | Articles | Screens | Brokers | Tools | Links | SNW | Rothery Report
 
Topics
  Academia
  Accounting
  Banks
  Behaviour
  Bonds
  Books
  Brokers
  Christmas
  Crime
  Debt
  Derivatives
  Disaster
  Dividends
  DRPs
  Economics
  Economy
  Fun
  Funds
  Government
  Growth Investing
  Halloween
  Health
  Indexing
  Law
  Management
  Markets
  Real Estate
  Retirement
  Stingy Investing
  Stocks
  Taxes
  Thrift
  Trusts
  Value Investing
  Wealth
  World

Personalities
  Warren Buffett
  Benjamin Graham
  Charlie Munger
  David Dreman
  Martin Whitman
  Tweedy Browne
  James Montier
  John Dorfman
  Seth Klarman
  Nassim Taleb
  James Grant
  John Bogle
  Bill Gross
  Tim Cestnick
  Norm Rothery

Article Archive
  2001
  2002
  2003
  2004
  2005
  2006
  2007
  2008
  2009
  2010
  2011
  2012
  2013
  2014




Stingy News Article Link

Not so fast
05/12/08 Permlink | Markets
"Research by the London Business School looked at 17 countries over 108 years. The countries with the slowest-growing economies (as measured by GDP growth over five-year periods) returned 8% a year; the markets in the fastest-growing economies, by contrast, returned just 5% a year. When a broader group of 53 economies, including many emerging markets, were examined, the tortoises beat the hares by a wider margin - 12% to 6-7%."



More articles on the same topic . . .

Technical market indicators
07/18/14 Permlink | Academia Markets
"Current evidence on the predictability of technical analysis largely concentrates on price-based technical indicators such as moving averages rules and trading range breakout rules. In contrast, the predictability of widely used technical market indicators such as advance/decline lines, volatility indices, and short-term trading indices has drawn limited attention. Although some market indicators have also become popular sentiment proxies in the behavioral finance field to predict returns, the results generally rely on using just one or a few indicators at a time. This approach raises the risk of data snooping, since so many proxies are proposed. We review and examine the profitability of a wide range of 93 market indicators. We give these technical market indicators the benefit of the doubt, but even then we find little evidence that they predict stock market returns. This conclusion continuously holds even if we allow predictability to be state dependent on business cycles or sentiment regimes."

Booming until it hurts?
07/18/14 Permlink | Shiller Markets
"Those who warn of grave dangers if speculative price increases are allowed to continue unimpeded are right to do so, even if they cannot prove that there is any cause for concern. The warnings might help prevent the booms that we are now seeing from continuing much longer and becoming more dangerous."

Cynk and short selling
07/12/14 Permlink | Crime Markets
"If you spot what you think is a penny stock pump-and-dump scam, don't short it! It might be a trap!"

U.S. stocks will be very disappointing
07/12/14 Permlink | Shiller Markets
"'I can say with high confidence that investors are going to get very disappointing returns from U.S. stocks over the coming 10 years,' says Rob Arnott, chairman of Research Affiliates"

Never buy expensive stocks. Period.
07/05/14 Permlink | Value Investing Markets
"One can't even simulate a scenario where a diversified portfolio of 30 expensive stocks can beat the worst performing portfolio of 30 cheap stocks. Why investors allocate to expensive, or "growth," stocks is beyond me."

Good businesses at good prices
07/05/14 Permlink | Markets
"Price-to-book is the least impressive value factor I've tested, and ROE is the least impressive measure of quality/profitability."

The power of share repurchases
06/29/14 Permlink | Value Investing Dividends Markets
"One of the most effective stock selection strategies in the U.S. over the past several decades has been to buy stocks that are in the midst of repurchasing significant quantities of their shares-but just blindly following buybacks isn't always the best strategy. While many companies that are repurchasing large quantities of their shares make for great investments, others are dangerous and should be avoided."

Deflating profitability
06/20/14 Permlink | Academia Markets
"Gross profit scaled by book value of total assets predicts the cross-section of average returns. Novy-Marx (2013) concludes that it outperforms other measures of profitability such as earnings, cash flows, and dividends. One potential explanation for the measure's predictive ability is that its numerator - gross profit - is a cleaner measure of economic profitability. An alternative explanation lies in the measure's deflator. We find that net income equals gross profit in predictive power when both measures are constructed using consistent deflators. We then construct an alternative measure of profitability, operating profitability, which better matches current expenses with current revenue. This measure exhibits a far stronger link with expected returns than either net income or gross profit."

A critique of John Hussman's Ccart
06/14/14 Permlink | Markets
"Of all the arguments for a significantly bearish outlook, I find John Hussman's chart of estimated future equity returns, shown below, to be among the most compelling. I've spent a lot of time trying to figure out what is going on with this chart, trying to understand how it is able to accurately predict returns on a point-to-point basis. I'm pretty confident that I've found the answer, and it's quite interesting."

Overdiversification
06/14/14 Permlink | Indexing Markets
"But diversification isn't all peaches and cream. There is such a thing as being overdiversified. Take an index fund. It owns tons of stocks that will stink over the next year. Apple last year is a great example. It was the biggest stock in the S&P 500 (and therefore most impactful on returns), and had a relatively weak year. Owning everything means you will always own certain types of stocks that tend to perform poorly."

Does Academic Research Kill Returns?
06/07/14 Permlink | Academia Markets
"On average, long-short versions of the 82 investment strategies enjoyed risk-adjusted returns (alpha) of 9.5% per year within the data sample. In the second period, after the initial study was concluded but before the paper was published, the alpha dipped by 13%, to 8.5% annualized. After publication, alpha fell much by the much larger percentage of 44%, landing at 4.8%."

Academic research and return predictability
06/07/14 Permlink | Academia Markets
"We study the out-of-sample and post-publication return-predictability of 82 characteristics that are identified in published academic studies. The average out-of-sample decay due to statistical bias is about 10%, but not statistically different from zero. The average post-publication decay, which we attribute to both statistical bias and price pressure from aware investors, is about 35%, and statistically different from both 0% and 100%. Our findings point to mispricing as the source of predictability. Post-publication, stocks in characteristic portfolios experience higher volume, variance, and short interest, and higher correlations with portfolios that are based on published characteristics. Consistent with costly (limited) arbitrage, post-publication return declines are greater for characteristic portfolios that consist of stocks with low idiosyncratic risk."

Valuation and timing
05/30/14 Permlink | Stingy Investing Markets
"It's relatively easy to figure out when the stock market is expensive. Profiting from that knowledge can be much harder."

Value vs the market since 2008
05/25/14 Permlink | Value Investing Markets
"Value investors are right. The period since 2008 has been more difficult for value strategies than it was in the early 2000s. But simple value strategies have still outperformed over the full period, and by a wide margin. This is despite the fact that, in many instances, the value decile often underperforms the market, and in some cases, more than half the time."

Don't succumb to their charms
05/18/14 Permlink | Stingy Investing Markets
"The tulips are in bloom in Toronto and the entire front yard of a house on my street is devoted to them. The flowers were originally planted by the owner's parents who passed away some time ago. But their memory lingers in the glorious blanket of red and yellow that appears each spring. As it happens, tulips and stocks have a sordid history that dates back to the 1600s, when the Dutch were afflicted by tulip mania."

Don't pay for liquidity you don't need
05/10/14 Permlink | Stingy Investing Markets
"The lesson seems clear: Small investors can benefit by avoiding highly liquid stocks. It might not make them the next Warren Buffett, but it should help their returns over the long term."

The 5 year market metamorphosis
05/04/14 Permlink | Markets
"There is less of an edge today in cheap stocks than there was five years ago: there are far fewer U.S. stocks that are very cheap."

Popular stocks stink
04/27/14 Permlink | Markets
"This group of the most highly traded stocks has delivered an annual return of -3.1% since 1984. That is putrid compared to the equal weighted basket of all stocks, which has delivered an 11.4% return in the same period."

The stock market lottery
04/19/14 Permlink | Markets
"Since 1963, the most expensive 10% of the market has underperformed by 8.5% annually. If, since 1963, you bought every lotto stock in the market every year, 60% of those buys would have lost money in the next 12 months (and they'd have been down an average of -41%). Even though the remaining 40% made money, the entire group of lottery stocks has grown at a tiny 1.5% annual rate since 1963 - that's worse than inflation, and significantly worse than the S&P 500 which grew at roughly 10% per year over the same period. The historical record is clear: it doesn't pay to play the stock market lottery."

Index funds trade too much
04/19/14 Permlink | Funds Indexing Stingy Investing Markets
"The problem is, most index funds are too active. Sure, specialty index funds must trade stocks frequently in an effort to track small segments of the market. But some of the biggest and most beloved indexes trade too often."

Buffett the market timer?
03/23/14 Permlink | Buffett Markets
"So yes, Buffett did retire in 1969 due to the lack of investment opportunity so in that sense it does sort of smell like market timing; he got out at the top. But does his retirement really mean that he lost faith in stocks as good long term investments at the then prices? His expectations suggest not."

What would you do?
03/22/14 Permlink | Watsa Markets
"Every investor has held his hand out in the dark and blindly touched the fine line between being very early and very wrong"

A CAPE Crusader
03/02/14 Permlink | Shiller Value Investing Montier Markets
"Having spent a large proportion of my career prior to joining GMO working at investment banks, I'm well aware of what Andrew Smithers describes as 'Stock Broker Economics,' the second tenet of which is 'The market is always cheap.' Over the years I've witnessed many attempts by the practitioners of this most dark art to justify why tried and tested measures of valuation are no longer meaningful, or occasionally create new measures of valuation that purport to show the market to be cheap."

The Glidepath Illusion
03/02/14 Permlink | Retirement Funds Arnott Markets
"Rob Arnott explains why target-date funds fail to either maximize wealth or minimize uncertainty about future income."

The shorting premium
02/23/14 Permlink | Academia Markets
"Short-rebate fees are a strong predictor of the cross-section of stock returns, both gross and net of fees. We document a large "shorting premium"; the cheap-minus-expensive-to-short (CME) portfolio of stocks has an average monthly gross return of 1.45%, a 0.92% net return, and a 1.55% four-factor alpha. We show that short fees also interact strongly with the returns to seven of the most well-known and large cross-sectional anomalies. These anomalies disappear among the 80% of stocks with low short fees, but are greatly amplified among those with high fees. We propose a joint explanation for these findings wherein the shorting premium is compensation for the short-side risk borne by the small minority of investors who do most shorting. It therefore raises prices rather than lowers them. We use the CME portfolio return as a proxy for this short risk and demonstrate that a Fama-French CME factor model largely captures the returns to all seven anomalies within both high- and low-fee stocks."

Getting around the CAPE
02/16/14 Permlink | Markets
"Shiller's cyclically-adjusted price-earnings ratio is, as recent research has shown, one of the best ways of predicting long-term returns in the stockmarket. But it is not popular because it shows the US market as expensive in historical terms. There are various attacks upon it. One is that the inclusion of the 2008 downturn in profits distorts the ratio by pushing it higher; on the contrary, the 2008 experience shows the benefits of averaging profits over the long term and not relying on a single year's measure. Profits fell in 2008 because they had been overstated in preceding years. Another line of attack is that the measure is irrelevant because accounting standards have changed. But that argument applies to all profits-based measures for valuations, like the prospective p/e on which bulls rely."

Standing out from the crowd
02/08/14 Permlink | Behaviour Markets
"Two approaches can be used to assess and monitor the level of 'crowding' in different quantitative strategies. The authors introduce these measures and present anecdotal evidence suggesting that many quantitative strategies were crowded in the period leading up to the global financial crisis."

Is a smooth ride priced like a Cadillac?
02/08/14 Permlink | Markets
"Here's a sure-fire way to get gouged: Walk onto a car lot, ask a salesperson to point out the vehicle with the smoothest ride, then purchase that vehicle regardless of price. It sounds reckless, but this is not far from the logic individual investors are using when shopping for the smoothest ride in the stock market."

How indexing distorts investment reality
02/01/14 Permlink | Indexing Markets
"Is indexing the perfect investment solution for the majority of investors - or is it the most dangerous threat to free markets since Communism? Is the investment management business an intelligent way for an investor to access expertise - or is it a collection of greedy and incompetent thieves? Like most things in life, reality is somewhere between the extreme portrayals that tend to inhabit the media, and taking time to peel away the more nuanced layers is a valuable and productive exercise."

Lose as little money as possible
01/26/14 Permlink | Markets
"LeBaron, 80 years old, spoke to Zweig from his home near Sarasota, Fla. He believes that the name of the game for investors has been to make as much money as possible, but from now on, the prime directive will be to 'lose as little money as possible.'"

Asset Mixer Update
01/12/14 Permlink | Stingy Investing Markets
We've updated our Asset Mixer to include nominal data for 2013.

Periodic Table Update
01/12/14 Permlink | Stingy Investing Markets
We've updated our periodic table of annual returns for Canadians to include nominal data for 2013.

Don't play the prediction game
01/05/14 Permlink | Stingy Investing Markets
"With a spectacular 2013 in the record books, stock market forecasters have been busily looking forward to what 2014 might bring. You should avoid listening to them."

My top 10 peeves
12/08/13 Permlink | Academia Markets
"Clifford S. Asness discusses a list of peeves that share three characteristics: (1) They are about investing or finance in general, (2) they are about beliefs that are very commonly held and often repeated, and (3) they are wrong or misleading and they hurt investors."

Don't fall for the 'Santa Claus rally'
12/01/13 Permlink | Markets
"Wall Street does - or at least is hoping that you do. Every year around this time, many analysts and brokers begin referring to a 'Santa Claus rally' that will propel the market higher. Don't fall for the sales pitch. The stock market's average performance before Christmas is no better than mediocre. It is only in the last week of December that the market has strong seasonal winds blowing in its sails."

Markets are partying like it's 1999
11/17/13 Permlink | Stingy Investing Markets
"As a buyer of stocks, my preference is clear. I would like to buy stocks at more reasonable valuation, which should enable them to achieve good returns in the years ahead. That means I would prefer to see the market come crashing back down to earth sooner rather than later - provided it doesn't cause too much collateral damage along the way."

Was tulipmania irrational?
10/05/13 Permlink | World History Markets
"there has been little attempt to understand how speculation actually works. The example of tulipmania shows the importance of doing that - rather than relying on lazy quips about 'animal spirits' or irrationality."

Never bubbles today
09/22/13 Permlink | Markets
"A cursory reading of the academic literature on asset prices reveals a litany of puzzles, conundrums, paradoxes, and anomalies. Much of the research on asset prices continues to rely on highly stylized models with identical agents, rational expectations, and optimizing behavior. According to the prevailing view, asset price surges that many would perceive to be bubbles are not really so. Instead, they are seen to reflect the influences of fundamental forces, such as a decline in risk appetite. This reminds me of the White Queen in Through the Looking-Glass, who says jam will be given every other day, but never today. Adherents of this view may admit that bubbles have occurred in the past - like the dot-com boom and bust. And they may even be willing to accept that bubbles are something to worry about in the future - say, in financial supervision. But, in practice, they are never willing to find a bubble in the present. There's always a reason why what looks like a bubble, walks like a bubble, and quacks like a bubble is not actually a bubble."

More on long-term returns
09/22/13 Permlink | Markets
"Throw bonds into the mix and a 60/40 portfolio will generate just 2.77% real, the fourth lowest result in all the years since 1871. If we assume a 2% inflation rate, then nominal returns will be a little under 5%, compared with the 7.5-8% assumed by pension funds."

Quality Minus Junk
09/05/13 Permlink | Academia Markets
"We define a quality security as one that has characteristics that, all-else-equal, an investor should be willing to pay a higher price for: stocks that are safe, profitable, growing, and well managed. High-quality stocks do have higher prices on average, but not by a very large margin. Perhaps because of this puzzlingly modest impact of quality on price, high-quality stocks have high risk-adjusted returns. Indeed, a quality-minus-junk (QMJ) factor that goes long high-quality stocks and shorts low-quality stocks earns significant risk-adjusted returns in the U.S. and globally across 24 countries. The price of quality - i.e., how much investors pay extra for higher quality stocks - varies over time, reaching a low during the internet bubble. Further, a low price of quality predicts a high future return of QMJ. "

Quality could still be underpriced by markets
08/04/13 Permlink | Markets
"The researchers measured value creation with their own metric that they call CFROI, for cash flow return on investment. It is based on cash flows (not earnings, on which accounting manipulations are possible and which are affected by leverage), adjusted for inflation, as a proportion of operating assets - a measure that excludes accounting devices such as depreciation allowances. By taking inflation and different accounting rules out of the equation, the metric allows comparisons across time, countries and industries. It produces some fascinating findings."

Bullish on cash
07/21/13 Permlink | Value Investing Markets
"Charles de Vaulx has an investment idea: cash. That may seem an odd choice, since cash earns less than inflation, making it a money-losing proposition. But Mr. de Vaulx, who oversees $17.8 billion as chief investment officer at International Value Advisers in New York, has been boosting his cash position. He is having trouble finding stocks he considers cheap and won't buy overvalued stocks. He considers bonds even more overvalued than stocks, leaving him perched on a lumpy cash pillow."

Chinese stocks earn 1% per year
07/14/13 Permlink | World Markets
"The MSCI China Index has gained about 14 percent, including dividends, since Tsingtao Brewery Co. (168) became the first mainland company to sell H shares to international investors in Hong Kong in July 1993. That compares with a 452 percent return in the Standard & Poor's 500 Index, 322 percent in the MSCI Emerging Markets Index and 86 percent from Treasuries. Only the MSCI Japan Index had a weaker performance among the 10 largest markets, losing about 1 percent."

The long cash squeeze
07/13/13 Permlink | Markets
"But there's a similar emotion that I am seeing and hearing a lot of - the long cash squeeze. That is the feeling of being long cash that you want to deploy as the market rises."

Mind the expectations gap
07/06/13 Permlink | Arnott World Markets
"So it should come as no surprise that the economic performance of the past few decades has strongly influenced expectations about economic growth. However, when optimistic expectations get detached from reality we risk creating a significant expectations gap - a disconnect between what we take for granted given our recent experiences and what we should anticipate given simple arithmetic."

A warning for dividend lovers
07/06/13 Permlink | Stingy Investing Markets
"Even a little bad news has the potential to go a long way. Should rising interest rates slow the economy down, it's fairly easy to envision the possibility of much lower stock prices and more than a few dividend cuts along the way."

Saving investors from themselves
06/30/13 Permlink | Markets
"I was once asked, at a journalism conference, how I defined my job. I said: My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself. That's because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good."

The next financial crisis
06/23/13 Permlink | Markets
"The 2007-2008 financial crisis, you might think, was an unpredictable one-time crash. But Didier Sornette and his Financial Crisis Observatory have plotted a set of early warning signs for unstable, growing systems, tracking the moment when any bubble is about to pop."

What's your outlook on the markets
06/23/13 Permlink | Markets
"No one is happy with these answers. They are not what they want to hear, but often what they need to hear."

Too much liquidity can drain returns
06/23/13 Permlink | Stingy Investing Markets
"Liquidity sounds like something an investor might need after a bad day in the market. But when it comes to stocks, a highly liquid approach is not the way to go. Instead, teetotallers are more likely to outperform."

Boring stocks can bring exciting returns
06/09/13 Permlink | Markets
"In the stock market, boring is often beautiful. That is because 'boring' stocks - those that have exhibited the least historical volatility - on average outperform the most 'exciting' issues - those that have been the most volatile. And not by just a small margin, either."

On stock splits
05/26/13 Permlink | Value Investing Momentum Investing Markets
"This brings me to my conclusion: stock splits are a momentum effect, but it is larger when companies are still have a cheap valuation. Perhaps splits have no effect on stock performance - it is all momentum and valuation."

How predictive is the Fed model?
05/19/13 Permlink | Markets
"Are stocks cheap on the basis of the Fed model? It seems so. Should we care? No."

Is saving for suckers?
05/19/13 Permlink | Stingy Investing Markets
"From time to time, opting for a touch of spendthrift indolence might be the right move"

Stock buybacks beat the market
05/05/13 Permlink | Markets
"Still, numerous studies over periods extending back more than three decades have found that the average buyback stock proceeds to outperform the market."

Absolute momentum
04/07/13 Permlink | Academia Momentum Investing Markets
"There is a considerable body of research on relative strength price momentum but relatively little on absolute, time series momentum. In this paper, we explore the practical side of absolute momentum. We first explore its sole parameter - the formation, or look back, period. We then examine the reward, risk, and correlation characteristics of absolute momentum applied to stocks, bonds, and real assets. We finally apply absolute momentum to a 60-40 stock/bond portfolio and a simple risk parity portfolio. We show that absolute momentum can effectively identify regime change and add significant value as an easy to implement, rule-based approach with many potential uses as both a stand- alone program and trend following overlay."

Most large acquisitions are errors
03/24/13 Permlink | Markets
"One use of free cash flow is acquisitions. Companies that focus on small acquisitions and organic growth use free cash flow wisely. Large acquisitions overpay to buy a trophy asset that the acquirer may unintentionally destroy. Avoid such acquisitive companies. The company may grow, but the stock price likely will not."

Earthquakes and the markets
03/24/13 Permlink | Markets
"Like the devastating Japanese earthquake of 2011, the stock market crash of Oct. 19, 1987, came as a total shock to most people. Yet the crash wasn.t entirely without warning. Five days before, the Dow Jones Industrial Average dropped 95 points, which was then an all-time record. Two days later, it closed down another 108 points. Just like others crashes -- 1929, for example -- and all major earthquakes, the 1987 crash was preceded by significant rumblings."

Mindful of bubbles in a boom for deals
02/24/13 Permlink | Markets
"Thomson Reuters reports that during the first two months of 2013 there have been over a thousand deals valued at almost $163 billion in total. That's more than double the amount for the same months in 2012. If this blistering pace continues, merger and buyout deals could surpass $2 trillion in 2013, far more than the $1.57 trillion in 2007."

Beware of the bias
02/10/13 Permlink | World Markets
"The sponsors of American corporate-pension plans still expect 7.6% nominal returns from their portfolios, and fund their schemes accordingly. But given the plans' allocation of assets to low-yielding bonds, such targets imply a nominal return of 12.5% from equities, or 10% after inflation. That is way above the historical experience of stockmarket returns. Congress has relieved the pressure on pension-plan funding by allowing companies to fiddle with the discount rate so as to make their liabilities look smaller. But as Mr Marsh remarks, this approach is akin to a homeowner who, upon hearing of the approach of a hurricane, decides not to board up his house but to smash his barometer."

Are leveraged ETFs the new portfolio insurers?
01/20/13 Permlink | Indexing Academia Markets
"This paper studies Leveraged and Inverse Exchange Traded Funds (LETFs) from a financial stability perspective and emphasizes their similarities with portfolio insurers of the 1980s. Mechanical positive-feedback rebalancing of LETFs resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987 (Brady Report, 1988). I show that a 1% increase in broad stock-market indexes induces LETFs to originate rebalancing flows equivalent to $1.04 billion worth of stock. Price-insensitive rebalancing of LETFs results in price reaction and extra volatility in underlying stocks. Although LETFs are not as large as portfolio insurers of the 1980s and have not been proven to disrupt stock market activity, implied price impact calculations suggest that their effect could reach a tipping point after a large market move in periods of high volatility."

The uncertainty of market returns
01/09/13 Permlink | Markets
"The dawn of a new year gives birth to a plethora of predictions. Stock market prognostications are entertaining, but they should taken with a big grain of salt."

The winners curse
01/05/13 Permlink | Markets
"Our previous studies suggested that top dog status is of no advantage in the United States; indeed, it's often something of a curse. As we globalize this study, the results confirm the global relevance of "too big to succeed." In the G-8 test of developed economies, we find the same phenomenon in each and every market: a statistically significant performance shortfall for top companies, relative both to the companies' sectors and the stock market as a whole, with no countries immune to the effect."

Asset Mixer Update
01/01/13 Permlink | Stingy Investing Markets
We've updated our Asset Mixer to include nominal data for 2012.

Periodic Table Update
01/01/13 Permlink | Stingy Investing Markets
We've updated our periodic table of annual returns for Canadians to include nominal data for 2012.

The illiquidity premium
12/29/12 Permlink | Academia Markets
"This paper examines the illiquidity premium in stock markets in 45 countries. The premium is the excess return on high-illiquidity stocks minus low-illiquidity stocks across volatility portfolios, after controlling for volatility. The average monthly premium is 0.95% (0.44%) for equally-weighted (value-weighted) portfolio return. After controlling for six common global and regional risk factors, the monthly alpha is 1.04% (0.54%). The premium is much higher for emerging markets than it is for developed ones and it is lower in countries with better disclosure and legal\governance rules. We document significant comovement of country illiquidity premium with both the global and regional average illiquidity premiums."

Small, illiquid, value
12/23/12 Permlink | Value Investing Funds Stingy Investing Markets
"While the return potential of small value stocks is well known, the benefits of low liquidity may be less obvious. That's why I was pleased to read a study on the topic by Roger Ibbotson, and others, in the latest Financial Analysts Journal, which dissects mutual funds."

The Insourcing Boom
12/22/12 Permlink | Markets
"What has happened? Just five years ago, not to mention 10 or 20 years ago, the unchallenged logic of the global economy was that you couldn't manufacture much besides a fast-food hamburger in the United States. Now the CEO of America's leading industrial manufacturing company says it's not Appliance Park that's obsolete - it's offshoring that is. Why does it suddenly make irresistible business sense to build not just dishwashers in Appliance Park, but dishwasher racks as well?"

Save more, work longer
12/14/12 Permlink | Markets
"AQR Capital co-founder on the fiscal cliff and why he sees challenging times ahead for the U.S. economy."

Value vs CAPE
11/17/12 Permlink | Value Investing Stingy Investing Markets
"To probe what value investors can reasonably expect, it's interesting to look at how value stocks tend to do at various levels of market valuation."

Fitting factors into the formula
11/10/12 Permlink | Markets
"For this issue's Morningstar Conversation, we talk with two quant-investing legends. Cliff Asness, co-founder of AQR Capital Management, and Robert Arnott, chairman of Research Affiliates - to gain insights on where academic theory is being practically applied in the marketplace."

Low risk stocks outperform
11/10/12 Permlink | Academia Markets
"The fact that low risk stocks have higher expected returns is a remarkable anomaly in the field of finance. It is remarkable because it is persistent - existing now and as far back in time as we can see. It is also remarkable because it is comprehensive. We shall show here that it extends to all equity markets in the world. And finally, it is remarkable because it contradicts the very core of finance: that risk bearing can be expected to produce a reward."

An old friend: the stock market's Shiller P/E
11/10/12 Permlink | Markets
"It's been a long-time since we've discussed this, but since it's actually the source of some current controversy, now seems like a good time to re-examine the valuation of the entire U.S. stock market, and particularly the relevance and meaning of the Shiller P/E, a measure we have favored in the past."

Is the stock market overpriced?
11/03/12 Permlink | Stingy Investing Markets
"The market is 29 per cent higher than its average CAPE of 16.5, and 31 per cent higher than its average P/PeakE of 11.3. As a result, despite their differences, it turns out that both methods point to similar levels of overvaluation."

Merton vs. Low Vol
10/27/12 Permlink | Markets
"Low volatility investing is becoming more popular, but the question is perhaps it could be better captured via a more inclusive metric of volatility. The Merton model of default popularized by Moody's KMV is basically a function of two inputs: volatility and leverage. If this model is correct, then a probability of firm failure is better captured than mere volatility alone, and perhaps it also captures the true, fundamental volatility that is driving the low vol effect."

The real deal
10/19/12 Permlink | Markets
"Perhaps none of this would matter if the bad news was already reflected in share prices. The biggest bull markets have started when shares looked cheap. But on two crucial measures - the cyclically adjusted price-earnings ratio (as calculated by Robert Shiller of Yale University) and the dividend yield - the American stockmarket looks more expensive than the historic average. Some people may think that low real rates will ignite an equity bull market. But history does not suggest that will be the case."

The Halloween Indicator
10/13/12 Permlink | Markets
"We use all available stock market indices for all 108 stock markets and for all time periods to study the 'Halloween indicator' or 'Sell-in-May' effect. In total 55,425 monthly observations over 319 years show winter returns - November through April - are 4.52% (t-value 9.69) higher than summer returns. The effect is increasing in strength: The average difference between November-April and May-October returns is 6.25% over the past 50 years. A Sell-in-May trading strategy beats the market more than 80% of the time over 5 year horizons. The data allows us to address a number of (methodological) issues that have been raised with respect to the effect."

Multiclass shares suffer
10/06/12 Permlink | Markets
"In the past decade, the number of U.S. companies with controlled share structures has climbed higher, but a new study found their investors sometimes suffer from it."

A Grahamian diagnosis
09/29/12 Permlink | Markets
"In a review of a book on statistics and predictions, Burton Malkiel says that the price/earnings multiple was 'devastatingly inaccurate' for much of the 1990s. Malkiel doesn't say whether he means a trailing P/E or the Cyclically Adjusted P/E (CAPE). Whatever the case, we think the Princeton professor is displaying the classic impatience of an inexperienced investor despite having spent his life studying the markets."

Shiller-PE in emerging markets
07/27/12 Permlink | Markets
"We test the reliability of the Cyclically Adjusted PE (CAPE) or Shiller PE as a forecasting and valuation tool for 35 countries including emerging markets. We find that the Shiller-PE is a reliable long-term valuation indicator for developed and emerging markets and we use the indicator to predict real returns on local equity markets over the next five to ten years."

Online ads decline
07/10/12 Permlink | Markets
"The average cost to reach 1,000 people with an online display ad fell to about $11.50 at the end of 2011 from $13.35 in late 2009, according to SQAD Inc., which tracks negotiated ad deals. In July 1998, Yahoo was getting about $25 per thousand, according to The Wall Street Journal."

Disrupting the pipeline business
07/01/12 Permlink | Markets
"Perry is quickly discovering the power in cutting out a middleman. In pipelines, heavy oil can only flow if it's diluted. In railcars, it is shipped undiluted - and one shipper observed that undiluted crude is a lot like Bunker C, the sludgy fuel that is used to power ocean-going ships. So now small volumes of heavy crude are being loaded directly into those vessels, skipping refineries altogether. Perry relishes the disruption: 'We don't have to sell this heavy oil to refineries,' he says. Railcars are already 'breaking open the market.'" [Ignore the dumb lifter lead, arbitrage is the important lesson.]

Michael J. Burry commencement address
06/23/12 Permlink | Markets
"2012 UCLA Department of Economics Commencement featuring Dr. Michael J. Burry as keynote speaker"

Q ratios and stock market crashes
06/04/12 Permlink | Markets
"At current valuations - and if this 110-year relationship continues - there is an expected (median) drawdown of 20%, and a 20% chance of a larger than 40% correction in the S&P500 within the next few years these probabilities continually reset as valuations remain elevated, making an eventual deep drawdown from current levels highly likely."

Equity Q ratio
06/04/12 Permlink | Markets
"Tobin's Q ratio is the ratio between the market value of the stock market and against the aggregate net worth of the constituent stocks measured at replacement cost. It can be defined to include or exclude debt. We exclude debt for ease of calculation, and refer to it in this form as 'Equity Q'."

The austrians and the swan
06/04/12 Permlink | Markets
"Over the past century-plus there have clearly been sizeable annual losses (of let's say 20% or more) in the aggregate U.S. stock market, and they have occurred with exceedingly low frequency (in fact only a couple of times). So, by definition, we should be able to call such extreme stock market losses 'tail events.' But can we say this, just because of their visible depiction in an unconditional historical return distribution?"

Low P/Es are possible when interest rates are low
06/01/12 Permlink | Shiller Stingy Investing Markets
"It is entirely possible for the market to trade at low ratios when rates are low. If anything the recent ratios have been high compared to past levels. If you just consider times when interest rates have dipped below 3 per cent, you'll find that Shiller's P/E has averaged 13.6. As a result, history provides even more meat for the bears because it bolsters their arguments that stocks are pricey."

Predictability of the simple trading rules
05/28/12 Permlink | Markets
"In a true out of sample test we find no evidence that several well-known technical trading strategies predict stock markets over the period of 1987 to 2011. Our test is free of the sample selection bias, data mining, hindsight bias, or any of the other usual biases that may affect results in our field. We use the exact same technical trading rules that Brock, Lakonishok and LeBaron (1992) showed to work best in their historical sample. Further analysis shows that this poor out-of-sample performance most likely is not due to the market becoming more efficient - instantaneously or gradually over time - but probably a result of bias."

Equity cult still dying
05/28/12 Permlink | Markets
"Since then, two 50% bear markets have taken their toll. On our measures, the equity cult is now dead in continental Europe and Japan. It is looking decidedly unhealthy elsewhere. A bond cult has risen in its place."

Norway's day traders take on the algos
05/17/12 Permlink | Markets
"Yet despite the prevalence of these supposedly smart machines, some traders are making a tidy profit getting the better of these systems, which can make costly mistakes if they are not set up correctly or if their trading patterns can be understood."

Shiller's earnings yield
04/07/12 Permlink | Stingy Investing Markets
"Many stock market indicators are about as useful as cracked crystal balls. But Robert Shiller, a professor of economics at Yale University, advocates one forecasting tool that has demonstrated a modicum of predictive power over the long term."

When safe assets return
04/07/12 Permlink | Markets
"Less debt, lower value, higher haircuts, and reduced collateral velocity: in our view, this is an ongoing and significant monetary shock."

Is 'derisking' even riskier?
02/25/12 Permlink | Markets
"When you 'derisk,' be sure you understand whether you are eradicating risk - or just replacing old risks with new ones."

Credit Suisse 2012 Yearbook
02/08/12 Permlink | Markets
"112 years of market data for 19 countries."

Lower prices via new tech
01/18/12 Permlink | Markets
"Due to the record levels of natural gas production and the unseasonably warm weather this winter, prices keep falling. The price for U.S. natural gas futures contracts dropped to a ten-year low of $2.47 per million BTUs in trading on the NYMEX yesterday"

Cycle bodes ill for the markets
01/07/12 Permlink | Markets
"In June 1964, the real return over the previous 15 years averaged 15.6 percent a year, the highest that figure had ever been. The stock market did not begin to fall then, but it could no longer maintain the torrid pace, and the 15-year return figures began to decline. On a real total return basis, stock prices hit their highs for the era in late 1968, and by the mid-1970s were in free fall as high inflation combined with a bear market. By 1979, an investor who bought stocks in 1964, when the market seemed to be a sure moneymaker, had lost money after adjusting for inflation, even after including dividend income."

Natural gas bear market
01/01/12 Permlink | Markets
"U.S. natural gas prices fell to their lowest point in more than two years, underscoring how the nation's booming energy business is becoming a victim of its own success."

Curbing short sales
12/16/11 Permlink | Markets
"The New York Fed did a quick study this fall after markets plunged in August when Standard and Poor's decided to downgrade the credit of the United States government. That study, by Hamid Mehran, a Fed economist, and two finance professors from Notre Dame, Robert Battalio and Paul Schultz, also looked at the impact of the 2008 bans on short sales of financial stocks, which were imposed in many countries at the height of the financial crisis. They concluded that there was no evidence that stocks then being sold by short-sellers did worse in August than did shares of other companies, and in fact a little evidence that they did better. That would seem to indicate that short-selling did not play a major role in the market turmoil."

Mandelbrot beats economics on markets
12/06/11 Permlink | Markets
"Over the past 15 years or so, physicists have demonstrated this in mathematical studies of market volatility. Inspired by work of the mathematician Benoit Mandelbrot in the 1960s, these scientists have used enormous sets of historical data -- hundreds of millions of minute-by-minute prices stretching over more than a decade, and daily and monthly prices over half a century -- to show that large market movements, up or down, follow a single mathematical pattern. Larger movements of, say, 10 percent to 15 percent, are less likely than movements of 3 percent to 5 percent. And the probability of a movement decreases in simple inverse proportion to the cube of its size: If moves of 5 percent or more have a certain likelihood, then moves of 10 percent or more are 8 (2 cubed) times less likely, and moves of 20 percent or more are in turn 8 times even less likely. But they still occur with some regularity. This pattern, it turns out, can be seen in markets for stocks, foreign exchange and futures around the world."

Building the 3-D shelter
10/28/11 Permlink | Markets
"Unlike "the market," we believe inflation will be a factor in the next decade or two because of the game-changing effects of deficits, debts, and demographics. Combined these three "Ds" could produce hurricane force headwinds to developed world growth and tailwinds to bursts of rising prices as debt levels are manipulated down to more manageable levels."

King of the mountain
10/08/11 Permlink | Markets
"What about the future? In the next six months, the deflation from late 2008 will shortly drop out of our three-year rates. CPI is up by 7% over the past 30 months, which works out to 2.3% per year. If we add our 2% adjustment to create more of an applesto- apples comparison with history, "true" inflation is above 4% and the "true" real interest rate is very low, around - 2%. At these levels, the normal Shiller P/E ratio would be 13 times our 10-year average earnings, which takes us below 800 on the S&P 500 Index."

Bringing down the house
09/27/11 Permlink | Markets
"In simple terms, the young and middle-aged save for old age by buying assets, often with borrowed money the old sell them to pay for retirement. As the working-age population rises - as it did, for instance, after the baby boom - asset prices rocket because of increased demand. As baby-boomers reach retirement, the reverse may happen."

The ultimate asset bubble
09/20/11 Permlink | Markets
"Gold bought for investment accounted for 38 percent of total demand in 2010, compared with about 4 percent a decade before, the World Gold Council estimates. Holdings in gold- backed ETPs are equal to more than nine years of U.S. mine production. The SPDR Gold Trust, the biggest bullion ETP, exceeded the market capitalization of the SPDR S&P 500 ETF Trust in August, beating what had been the industry's largest exchange-traded fund since 1993."

Banning market orders goes mainstream
09/14/11 Permlink | Markets
"Traders Magazing writes about how more brokers are talking about altering market orders so that they automatically get converted to a limit order (with a price a few % away from the inside market) by the receiving broker. As the article notes, this results in some risk to the broker: if they put a price cap on an order that then doesn't get filled. It's also noted that this risk is small and well worth the protection from large errors."

Headwinds for U.S. equity markets
08/22/11 Permlink | Markets
"Despite theoretical ambiguities, U.S. equity values have been closely related to demographic trends in the past half century. There has been a tight correlation between population dependency ratios, such as the M/O ratio, and the P/E ratio of the U.S. stock market. In the context of the impending retirement of baby boomers over the next two decades, this correlation portends poorly for equity values. Moreover, the demographic changes related to the retirement of the baby boom generation are well known. This suggests that market participants may anticipate that equities will perform poorly in the future, an expectation that can potentially depress current stock prices."

The $25,000 cow
08/18/11 Permlink | Markets
"What I have in mind is some sort of scheme whereby the government would restrict the supply of opinion in magazines and newspapers to some fixed number of column inches per year, with a view to propping up - er, stabilizing - salaries at a target rate. Naturally I am sensitive to the concerns of magazine readers, not to mention magazine owners, but I don't imagine it would raise the cover price of magazines by more than about 200 per cent or so. No? Foolish? Extortionary? Outrageous? Then allow me to introduce you to the world of supply management: an actual policy pursued by the governments of Canada and the provinces for the past 40 years. Only I'm not talking about comparative fripperies like magazines (we have our own indefensible support programs, though not, ahem, on the same scale). I'm talking about basic foodstuffs, the kind the typical Canadian family eats every day: dairy products (milk, cheese and butter), eggs, and poultry (chicken and turkey), whose prices are maintained, by means of a strict regime of production quotas, at two and three times their market levels."

Idiots at work: high prices only edition
08/11/11 Permlink | Markets
"France, Spain, Italy and Belgium will impose bans on short-selling from today to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis."

A better buyback strategy
08/03/11 Permlink | Markets
"It appears that stocks that had low returns following their previous buyback, but a high completion rate, see amazing returns following their next buyback."

Mr. Innovation and his buddy, Mr. Great Idea
07/09/11 Permlink | Markets
"Imagine you have $500,000 to feed, shelter and clothe your family for the next 30 years. You need to invest this money to protect your family against inflation. Now, imagine Mr. Innovation shows up on your doorstep and says, "I have a business to sell you and the price I put on it is $500,000." You reply, "As it turns out, I have that sum to invest, so tell me about your business." He responds: "All you need to know is that a bunch of PhDs have analyzed the business's historical share-price movements. Based on their super-computer algorithms, they believe its price will be higher in three months' time. So give me your money." Would you do it? My guess is no. Would it surprise you to hear that billions of dollars change hands on the stock market every day based on this approach?"

Burned by Chinese shares
06/20/11 Permlink | Markets
"The epidemic fraud affecting dozens of U.S.-listed China stocks is one of this year's big newspaper stories - after being one of last year's big stories in your favorite stock-market weekly. But the scams that have disgraced many Chinese listings on Nasdaq and the NYSE weren't unmasked by the exchanges, auditors, investment bankers or market regulators. The detective work was done by research-oriented hedge funds, who found the lies behind these multibillion dollar stock promotions, shorted the shares, and then blew the whistle. And for that public service, the shorts have been punished in an unexpected way."

Who killed the internet auction?
06/13/11 Permlink | Markets
"Then there was A. T. Stewart's most important innovation: His products came with price tags. At that time, in most stores, prices were set by haggling. The result was a frustrating dance between customer and salesperson, who parried back and forth until they managed to arrive at (in the words of one retail historian) "a price which neither party to the transaction considered robbery." Stewart saw that this experience left buyers feeling taken advantage of, and it encouraged salespeople to squeeze the most from every transaction rather than build long-term relationships with customers. So he marked each product with a fixed price. Customers embraced the new "no haggling" policy, and the Marble Palace became an enormous success."

Rebalance to control risk not boost returns
05/23/11 Permlink | Markets
"The question of portfolio rebalancing presents a significant challenge. A momentum effect has persisted in many financial markets for decades. In other words, when a financial asset rises in price in the short-term, that asset has tended to continue rising for a period of time. (The same effect has persisted on the downside.) This is called the momentum effect and it has persisted for generations. Since stock and bond markets tend to spend more time going up than falling, this momentum effect can be a significant benefit over time. Rebalance too frequently and you risk cutting off the benefits of this momentum effect. Failing to rebalance enough could result in overexposure to certain asset classes or sub-classes. The challenge, then, when faced with developing a rebalancing method is to capture as much of this momentum effect while keeping risk within a range that is suitable and reasonable."

In defence of the Shiller p/e
05/20/11 Permlink | Markets
"It wasn't actually a new idea on Shiller's part. Ben Graham, the value investor who was Warren Buffett's guru, had suggested a similar measure, involving the averaging of profits over an extended period to smooth out the effects of the economic cycle. Investors were paying little attention in the late 1990s. As the chart shows, the US market in the late 1990s was even more overvalued than it was before the crash of 1929. This was not a welcome message at the time when analysts talked of a 'new era' and even speculated that the cycle had been abolished. But even though the Shiller p/e accurately predicted that the market was overdue for a fall, there are still many critics who today refuse to accept its message."

End of Month Anomaly
04/12/11 Permlink | Markets
"Calendar effects in stock returns have been prominent in the finance literature since the 1970s. It's easy to pull in a time series and look at things like January, Monday, or beginning of month. Josef Lakonishok and Robert Haugen wrote a book, The Incredible January Effect, in 1988. Alas, most of this effect was in smaller stocks that were hard to trade, and while it may have existed, it no longer does."

The biggest urban legend in finance
04/02/11 Permlink | Markets
"Stocks ought to produce higher returns than bonds in order for the capital markets to "work." Otherwise, stockholders would not be paid for the additional risk they take for being lower down the capital structure. It comes as no surprise, therefore, that stockholders have enjoyed outsized returns for their efforts for most - but not all - long time periods."

Global Investment Returns 2011
03/02/11 Permlink | Markets
"High dividend yield strategies are a focus of this year's report."

A small hedge fund manager's lament
02/24/11 Permlink | Markets
"Running a small hedge fund, I would usually want to buy small caps on which I had done superior analysis. Alas, when I look at small caps - even medium caps I keep finding expensive, dodgy and well promoted stocks. Small caps are a land of shorts. The good stuff - and then the less good stuff left behind - has been picked over by numerous PE shops."

Why Ten Million Dollar IPOs Matter
02/20/11 Permlink | Markets
"Today only the largest of companies can go public, generally only those with over $500 million dollars of market capitalizations. In the 80s there were IPOs where the net proceeds were less than $900K."

Rethinking Stocks for the Long Haul
02/11/11 Permlink | Markets
"Put yourself in the shoes of an intrepid investor in 1900. Both the U.S. and Argentine equity markets looked extremely attractive. Yet the buy-and-hold investor would have pocketed a small fortune in U.S. equities and would have been essentially wiped out in Argentina over the course of the century. 'We don't know what the equity premium will be over the next 30 years,' says Pastor. 'And that uncertainty compounds with time.'"

Land of the free lunch
02/08/11 Permlink | Markets
"In short, America is the ultimate example of survivorship bias. Go back to 1900 and you might have picked Argentina or Russia as emerging nations with the ability to rival the US but each proved to be a huge disappointment."

Penny Stock Risk Premium Has Wrong Sign
01/07/11 Permlink | Markets
"In case you didn't know, penny stocks are lousy investments high risk, negative return."

It's When You Start And Finish
01/02/11 Permlink | Markets
"But historical averages can vary widely depending on their starting and ending points. For example, averages that start before the 1929 crash are substantially different from those that start after it, and Mr. Easterling felt that choosing a single date was arbitrary. In response, he created the chart above, which shows annualized returns based on thousands of possible combinations of market entry and exit."

BoC December 2010
12/16/10 Permlink | Markets
"The Bank of Canada has released the December 2010 Financial System Review which includes reports on: The Countercyclical Bank Capital Buffer: Insights for Canada, Strengthening the Infrastructure of Over-the-Counter Derivatives Markets, Central Counterparties and Systemic Risk, Contingent Capital and Bail-In Debt: Tools for Bank Resolution"

Stocks Acting Like Commodities
11/21/10 Permlink | Markets
"In the past few years, many investors have concluded that commodities like oil, corn and gold offer independent returns that can diversify away the risks of stocks. But the correlations between stocks and commodities - the extent to which their prices move together - are in many cases the highest they have been in nearly 30 years."

Data birth
11/21/10 Permlink | Markets
"After that there was no stopping the love affair between financial economists and number-crunching. Myron Scholes, now a Nobel laureate, became director of CRSP in 1974 and ensured the database was both kept up-to-date and made readily available to academic economists everywhere. In turn, this resource became ever more useful as computing power became more pervasive and affordable. The CRSP database has since been expanded to include bonds, property, some commodities, mutual funds and exchange-traded funds. It has been replicated across the world."

Losing the Lender of Last Resort
11/09/10 Permlink | Markets
"Now, of course, the default risk free asset is the government bond. Ultimately, the reasoning goes, a government can just print money if it needs to, so an investor can guarantee getting paid even if the value of that money is devalued. The problem is, that as Reinhart and Rogoff have shown, this ain't necessarily true."

Why are High Risk Stocks so Crappy?
11/02/10 Permlink | Markets
"The key to the dominance of low volatility equities is that high volatility stocks are bad investments on the two main dimensions of stockworthiness: volatility and return. Volatile stocks by definition have high volatility, and also high correlation with the overall market (CAPM beta) and the business cycle. They all have below average returns. So why do so many people like them?"

Are Monthly Seasonals Real?
11/02/10 Permlink | Markets
"Over 300 years of UK stock returns reveal that well-known monthly seasonals are sample specific. For instance, the January effect only emerges around 1830, which coincides with Christmas becoming a public holiday. Most months have had their 50 years of fame, showing the importance of long time series to safeguard against sample selection bias, noise, and data snooping. Only - yet undocumented - monthly July and October effects do persist over three centuries, as does the half yearly Halloween, or Sell-in-May effect. Winter returns - November through April - are consistently higher than (negative) summer returns, indicating predictably negative risk premia. A Sell-in-May trading strategy beats the market more than 80% of the time over 5 year horizons."

No Margin of Safety
10/17/10 Permlink | Markets
"This creates a terrible problem for investors here. Given that the yield on the SandP 500 is now below 2%, it is essential for investors to recognize that they now rely on the achievement and maintenance of sustained bubble valuations in the years ahead. Unless investors believe that bubble valuations can be maintained indefinitely, they can expect little but abysmal returns over the coming 5- 7 year period."

What is the Carry Trade
09/30/10 Permlink | Markets
"For the next 20 years, and many hedge funds specialized in the 'carry trade', which was as simple as it was successful: lend capital to high interest rate currencies, enjoy the high riskless rates and currency appreciation on the spot rate borrow capital at the low interest rate currency, and make money on the depreciation of this debt over time. In 2008 these strategies suffered significantly, but the net effect is still there is no clear relation between risk and return in currencies."

Classic relative value arbitrage
09/16/10 Permlink | Markets
"Classic relative value arbitrage - the elegant, sometimes dangerous investment strategy that has proved the making and undoing of more Nobel prize winners than any other - used to be compared to picking up nickels in front of a steamroller."

The NYSE from 1815 to 1925
09/16/10 Permlink | Academia Markets
"In this paper, we collect individual stock prices for NYSE stocks over the period 1815 to 1925 and individual dividend data over the period 1825 to 1870. We use monthly price and dividend information on more than 600 individual securities over the period to estimate a stock price index and total return series that extends virtually to the beginning of the New York Stock Exchange. We use this data to estimate the power of past returns and dividend yields to forecast future long-horizon returns. We find some evidence of predictabiity in sub-periods but little predictability over the long term. We estimate the time-varying volatility of the U.S. market over the period 1815 to 1925 and find evidence of a leverage effect on risk. This new database will allow future researchers to test a broad range of hypotheses about the U.S. capital markets in a rich, untouched sample."

Risk and return in general
09/12/10 Permlink | Markets
"Professors have been very successful at presenting the CAPM and its spawn as a triumph of the social sciences, in a way similar to how macroeconomists used to present Keynesian macro models before the Phillips curve started to do multiple backflips. The profs are filled with wishful thinking based on ever more obscure econometric tests that prove their big idea works, a science no less than thermodynamics. It doesn't work, not even as an approximation."

The puzzling success of trend-following
09/08/10 Permlink | Markets
"the part of his speech which I found most fascinating seemed to contradict this conclusion. This is an assessment of investment strategies which are based on momentum in asset prices, rather than long term economic fundamentals. Momentum wins the race hands down."

Patience and Finance
09/08/10 Permlink | Behaviour Markets
"Evidence from social and economic systems points to two evolutionary paths. Along one, patience becomes self-reinforcing. For example, financial liberalisation may encourage patience and improve inter-temporal choice, unlocking growth. But there is a second path, along which impatience is self-reinforcing. Financial liberalisation can also unlock impatience, generating over-trading and under-investment."

The apathy trade
09/04/10 Permlink | Markets
"Week before last, the poll of American Association of Individual Investors members showed the lowest percentage of bullish respondents since March 5, 2009, essentially at the moment of the 2009 low. The bullish percentage rebounded a bit this past week, but still lagged behind the number of bears. Ned Davis Research's "crowd sentiment poll" showed a parallel degree of pessimism, as did the Rydex/SGI Advisor Confidence Index, a measure of investment-advisor psychology that hit a 16-month low in August. Meantime, corporate insiders have all but quit selling shares of their employers."

Epidemic models of bubbles
09/04/10 Permlink | Markets
"Contagion or epidemic models of financial markets are proposed in which interest in or attention to individual stocks is spread by word of mouth. The models give alternative interpretations of the random walk character of stock prices."

Thinking outside the stocks
09/04/10 Permlink | Markets
"There is always a bull market somewhere. With the stock market continuing to whipsaw and bonds getting ever-pricier, investors are looking further afield for decent returns - and some are finding them. Self-storage buildings, anyone? How about abandoned railroad beds, cellular towers, student apartments or parking facilities? Such unglamorous niches, once shunned by the investing elite, are performing well in 2010, even as the Dow industrials limp along."

Do countries graduate from crises?
09/03/10 Permlink | Markets
"Are declarations of victory against the global crisis premature? This column argues that 'graduation' - the emergence from recurrent crisis bouts - is a long and painful process which neither developed nor developing countries look close to completing. Two centuries of evidence suggests that most countries need 50 years before the chances of further crises subside."

Graham PE and CPI
08/29/10 Permlink | Graham Markets
"Saturna Capital has an interesting take on the calculation of the Graham / Shiller PE10, otherwise known as the Cyclically Adjusted Price Earnings ratio (CAPE). Saturna argues that The Market May Be Cheaper Than It Looks because the Consumer Price Index (CPI) provided by the Bureau of Labor Statistics (BLS) understates the true rate of inflation, a key input to the CAPE calculation"

The free-marketeers strike back
08/16/10 Permlink | Markets
"'From an historical perspective, the current crisis follows a well-known pattern,' says Princeton University's Jose Scheinkman. 'It is astounding,' agrees Columbia University's Charles Calomiris, to what extent 'the current banking crisis fits into the pattern of all banking crises that we have known about since the fifteenth century': excessive leverage and a strong belief in ever-rising prices, followed by a collapse of trust in, and a run on, the banks. 'The weakness of many contemporary economists is a short memory,' Calomiris adds. It's an amnesia shared by the public, which tends to erase bad memories. After all, banks usually work pretty well, so long periods of time can pass without a crisis breaking out, making it much easier to forget."

Advertising on the handicap principle
08/15/10 Permlink | Markets
"Biologists have been long perplexed by the peacock's tail, economists by the use of advertising. In both cases the struggle has been to understand why something so self-evidently pointless and potentially damaging can survive in a vicious world of winner-takes-all, loser-goes-extinct natural selection. Meanwhile researchers from both worlds have been closeting themselves ever deeper in an arcane world of computer modelling, where truth can be validated only by mathematics. Hints of answers to these puzzles have come not from number crunching but from fuzzy human intuitions about the way the world actually works."

Meet the $69 hot dog
08/12/10 Permlink | Behaviour Markets
"Absurdly priced menu items are more than a publicity gimmick. They're an application of "anchoring," a cognitive phenomenon discovered by psychologists Amos Tversky and Daniel Kahneman in the 1970s. Whenever we try to estimate a numerical value, we are unconsciously influenced by related numbers just considered. In this case, the diner in a touristy Manhattan restaurant is trying to decide how much he or she can afford to spend. The familiar prices back home don't apply. That diner isn't going to order a $69 hot dog, but might happily opt for an $17.95 cheeseburger. The hot dog makes the cheeseburger appear reasonable in comparison (even though $17.95 would be a ridiculous price for a cheeseburger almost anywhere else). In scores of careful laboratory studies, price contrasts like that affect decisions. Restaurateurs and consultants believe it works on menus, too."

Illiquidity premium
08/04/10 Permlink | Markets
"The outperformance of value stocks was a little more consistent across the liquidity spectrum as you can see from the chart below. In this case, value stocks outperformed growth stocks by around 10% across the board. However, for high liquidity stocks, this difference represented a 4-fold increase in abnormal returns (from around 3% to around 12%)."

Trader's cocoa binge
07/26/10 Permlink | Markets
"To some, he is a real-life Willy Wonka. To others, he is a Bond-style villain bent on taking over the world.s supply of chocolate. In a stroke, a hedge fund manager here named Anthony Ward has all but cornered the market in cocoa. By one estimate, he has bought enough to make more than five billion chocolate bars."

Krugman versus Ferguson
07/21/10 Permlink | Markets
"Not since Ken Rogoff's famous attack on Joe Stiglitz has the dismal science of economics provoked such pompous, self-important, personalised squabbling. Professors Paul Krugman and Niall Ferguson, of course, have form; they've been at it on and off for nearly a year now over the efficacy of deficit spending in fighting the downturn, and today they return to the fray. The occassion was another piece that Ferguson, an eminent economic historian, has penned for the Financial Times on the dangers of attempting to spend your way to economic recovery. Foolishly - or perhaps deliberately, for it is sometimes possible to imagine that the two have secretly agreed to slag each other off for the publicity - he mentions Krugman by name. 'Those economists, like New York Times columnist Paul Krugman', he writes, 'who liken confidence to an imaginary 'fairy' have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key.'"

Don't take the bait
07/21/10 Permlink | Markets
"More sober and historically reliable measures of market valuation create a much more challenging picture. Apart from our own measures, which indicate continued overvaluation, there are several good indicators of market valuation that are not overly sensitive to year-to-year fluctuations in profit margins. One is based on the 10-year average of actual net (not operating) earnings, which is advocated by economist Robert Shiller, and another is Tobin's "q" ratio which is based on comparing market value to replacement cost, and is advocated by Andrew Smithers. Both of these measures largely agree with our own measures, both presently and on a historical basis. Based on last week's valuations, both suggest that the S&P 500 is substantially overvalued."

Untangling skill and luck
07/16/10 Permlink | Markets
"In this report, we will discuss why unraveling skill and luck is so important, provide a framework for thinking about the contribution of skill and luck, offer some methods to help sort skill and luck in various domains, and define the key features of skill in the investment business."

Relative status in practice
07/14/10 Permlink | Markets
"In Kenneth Fisher's book The Only Three Questions that Count, in the references under "Risk" he merely has 'see benchmarking'. If everyone benchmarks, risk is deviating from the consensus, and thus taking too little exposure to any popular investment is just as risky as taking on a lot of exposure. Cremers and Petajisto have a paper where the define portfolio manager risk this way. If risk is defined as a deviation from the benchmark, it becomes like idiosyncratic risk, unnecessary, so unpriced. Further, via arbitrage 'benchmark risk' can not be priced, because you can't get a risk premium from both having zero or twice the normal exposure to BP."

Preventing 2006
07/11/10 Permlink | Markets
"'The true debate in economics is - between economists who care about the productivity of resource allocation and those who only pay lip service.' That is harsh, but not wrong. I'd draw the lines a bit more mildly, and say that the core argument is between people who think we are in a financial crisis that has engendered an economic crisis, and others (like me) who think that the financial crisis is the outgrowth of longstanding and continuing economic mistakes."

Applying the equity risk premium
07/07/10 Permlink | Markets
"It's simply not true that growth outperforms value, or certain stock sectors have higher returns, even countries do not have obviously higher returns, or that more volatile stocks have higher returns than low volatility stocks. A beautiful theory killed by data, it happens all the time."

Times must charge for news
07/05/10 Permlink | Markets
"Why content creators, in particular newspapers, ever succumbed to the notion that they should forever give away their product online seems one of those odd, lemming-like phenomena akin to the 'irrational exuberance' that preceded the dot-com stock market crash. Lured by the siren song of having an infinite audience via electronic distribution, publishers forgot that it meant infinite ad inventories whose price is rapidly approaching zero."

Don't let your sons grow up to be scientists
06/14/10 Permlink | Academia Markets
"The Real Science Gap: It's not insufficient schooling or a shortage of scientists. It's a lack of job opportunities. Americans need the reasonable hope that spending their youth preparing to do science will provide a satisfactory career."

When markets go wrong
06/11/10 Permlink | Markets
"The most recent example of markets going wrong was the American housing boom which prompted both ordinary homebuyers and financial institutions to become overexposed to property prices. When the market collapsed attention focused on the shorts - those betting against subprime securities and bank shares' But subprime securities were indeed over-valued and some banks were in effect insolvent. Short-sellers simply accelerated the alignment of prices with reality. It was 'long-buying' in previous years that was the problem. Markets were unfair - unfairly optimistic. Alas, if governments keep punishing short-sellers during busts, as Nicolas Sarkozy of France and Angela Merkel of Germany want to do, there will be fewer shorts around to temper the next boom. You can bet you won't hear leaders complaining about speculators if there is another bubble in equities or property."

Go for the jugular
06/04/10 Permlink | Markets
"The collapse of Greece's economy, and its domino effect on Spain, Portugal, and other countries in the euro currency zone, is in many ways a replay of an earlier financial crisis--the break-up of the continent's Exchange Rate Mechanism in 1992. Then, as now, Europe's policymakers showed little patience with--or understanding of--markets. Then, as now, Germany often seemed contemptuous of the less competitive economies on the periphery of Europe."

Green from envy
05/29/10 Permlink | Behaviour Markets
"However, if our actions are based not on absolute wealth but relative wealth - an envy-based economy - the market would need no risk premium. Falkenstein developed the empirical case for this in his January, 2010, paper 'Risk and Return in General: Theory and Evidence.' But other researchers have pointed to similar envy-indicating results, including Cornell economist Robert Frank, whose research showed that most people would choose to live in a world where they made $100K and their peers made $85K, over a one in which they made $110K and their peers made $200K."

Complexity in financial systems
05/16/10 Permlink | Markets
"We can probably all agree that modern day financial systems are complex, but what that actually means isn't something that everyone agrees on. Typically, though, a system characterised by complexity isn't something that anyone's designed - it emerges, it adapts spontaneously and it produces stunningly unexpected outcomes when no one's expecting them. Which, let's face it, sounds a lot like modern finance. The problem is that many economists are focusing on how they manage this system when, in reality, it's impossible to do so. It's like trying to contain swine flu using a butterfly net."

Equity premium an artifact?
05/11/10 Permlink | Markets
"Before the twentieth century, stocks were in many ways an immature financial instrument; they should have carried a premium, because they were risky. As the twentieth century wore on, they matured--thanks in part to the New Deal era reforms that toughened up on disclosure and market rules for buying and selling shares in public companies. But the generation who lived through the Great Depression still thought of the stock market as speculative."

Pref's musings
05/11/10 Permlink | Markets
"I suspect that there will be a certain amount of evidence that stop-loss orders will be implicated to at least some degree. Stop loss orders are the most idiotic order type known to man (if you're willing to sell something at $45, why the hell aren't you selling at $50? It makes no sense!) but have immense popularity."

Don't lose faith in markets
05/09/10 Permlink | Markets
"One claim is that trading activity like this makes people "lose faith" in the market. Don't lose faith in the market - lose faith in market orders!"

The momentum echo
05/09/10 Permlink | Markets
"The 12-Month Echo factor does significantly better than either the 12-month or 6-month factor. And it blows a 3-month return factor out of the water. The table indicates the data at the back-end of an intermediate momentum factor is more important to returns than the near-term data."

Levin vs. Wall Street
04/28/10 Permlink | Markets
"No one on any side of this debate appreciates the casino analogy, but I think it's still the most useful way to think about this question: when you place a bet on the Super Bowl, the casino is taking the other side of that bet. In many cases, it'll balance the bets it makes on both sides of the trade, so that it's exposed to no risk and it collects the certain profit from the spread. Regardless, though, any individual bettor knows that if he wins, the casino loses, and vice versa. That is, he knows the casino is on the other side of the trade. Levin seems to be saying that this means there's a conflict of interest between the casino and the bettor, and that it's illegitimate for the casino to take the bet. But there's no conflict, because everyone knows what the deal is. And as long as the bet's honest, and as long as the price is fair, the casino is doing right by the customer, because the customer is getting exactly what he wants: a chance to speculate."

Its worst ideas
04/27/10 Permlink | Markets
"People, pundits and politicians looking for financial-crisis culprits should turn their sights to the professors who bear so much responsibility for it. To borrow a phrase from professor Burton Malkiel, a random walk down Wall Street reveals that some of its biggest disasters have come from ideas hatched in the ivory tower."

Shocked sleuths discover shorts
04/15/10 Permlink | Markets
"It's important to remember that with so many people in the world, just calling a historical event is not sufficient because there are always people predicting massive failure or success to any policy. The key is whether they right for the right reasons, as in Schiff's case, or right for the wrong reasons, as in Roubini or Taleb's cases."

Measuring investor sentiment
04/11/10 Permlink | Funds Academia Markets
"We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of "noise" in aggregate market prices induced by investor sentiment."

Collapse of complex business models
04/03/10 Permlink | Markets
"In such systems, there is no way to make things a little bit simpler - the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn't regard the sudden decoherence of these societies as either a tragedy or a mistake - '[U]nder a situation of declining marginal returns collapse may be the most appropriate response', to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites. When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification."

Reflection on a crisis
03/25/10 Permlink | Markets
"Daniel Kahnemann and Nassim Taleb discuss biases, the illusion of patterns as well as the perception of risk and denial."

The Canadian banking fallacy
03/25/10 Permlink | Markets
"Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation. The CEOs of Canada's five banks work literally within a few hundred meters of each other in downtown Toronto. This makes it easy to monitor banks. They also have smart-sounding requirements imposed by the government: if you take out a loan over 80% of a home's value, then you must take out mortgage insurance. The banks were required to keep at least 7% tier one capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited. But is it really true that such constraints necessarily make banks safer, even in Canada?"

Volatility, the last anomaly
03/20/10 Permlink | Markets
"Despite the mysterious case of the missing anomalies there's one that resolutely refuses to go away, squatting in the middle of the markets like a recalcitrant and extremely ugly toad. Rather ungraciously stocks continue to bounce around like a jitterbugger on speed. Regardless of everything else it's volatility, the last anomaly, that keeps on giving. And then taking away. And then giving back again."

Spending on clothing falls below 3%
03/20/10 Permlink | Markets
"With significantly falling prices in real terms, clothing has become more and more affordable almost every year, requiring smaller shares of our income, which has freed up disposable income that can now be spent on other consumer goods (think electronics, travel, entertainment, etc.)."

Think again about commodities
02/09/10 Permlink | Markets
"You've probably heard over and over again that commodities provide a great hedge against inflation. It sounds plausible - until you look at the evidence."

What drives long-term returns?
02/09/10 Permlink | Markets
"The MSCI World Index annualized gross index return for the total 35-year time span was 11.0%. The biggest component of this return was inflation at 4.2%, contributing more than one third of the total return. Other important components were dividend income (2.9%), emphasizing the importance of dividend reinvestment in long-term investing, and real book value growth (2.0%). Price to book growth contributed the least (1.5%)."

America's broken equity culture
02/09/10 Permlink | Markets
"Why did investors respond to a nearly 70% rally by pulling money out of domestic-equity mutual funds? The picture that is now emerging, courtesy of the latest data, is positive for the stock market over the short-term, but worrisome for the longer-term."

What is liquidity?
02/08/10 Permlink | Markets
"The great Peter Lynch would buy small cap stocks for Magellan, with strict orders on price. Then he would let them sit, while they gained in value on average. Marty Whitman buys in 'safe and cheap' small cap stocks that are illiquid and holds them until their value is recognized. If you have a strong balance sheet or patient investors, take advantage of it, and buy investments that are less liquid, where value may take a while to obtain."

Quants' risk-free ideas sink market
02/05/10 Permlink | Markets
"To become a potentially market- destroying 'it' group on Wall Street, you need some arrogance, enough brains to justify making huge financial bets, utter cluelessness about lessons learned from finance's booms and busts, and a sincere belief that your unique contributions to Wall Street will mean, ahem, that this time it really is different, so old truths can be ignored."

Reported earnings versus "owner earnings"
02/01/10 Permlink | Markets
"Importantly, the ability of companies to increase book value over time has been a critical determinant of long-term earnings growth, and is likely to be even more important in an economy where debt financing is increasingly constrained. The long-term relationship between earnings and book value is very clear, with actual reported earnings fluctuating reliably around a cyclical norm of about 13.6% of book value. Economic booms can certainly boost return on equity (earnings / book value), and recessions can depress return on equity, but over the full economic cycle, it is dangerous to assume that these temporary departures from the norm will be sustained for long."

In defense of home bias
02/01/10 Permlink | World Behaviour Markets
"Ideally, shouldn.t investors seek out the stocks that are likely to perform the best, regardless of where they are located in our world? Ideally, yes. Practically, there are difficulties."

What Toronto can teach New York and London
02/01/10 Permlink | Government World Markets
"This tendency to react to the mere mention of Canada with either yawns or guffaws may be why, as the world struggles to figure out what went wrong in 2007 and 2008, not much international attention is being devoted to figuring out what went right in Canada. Canada is the only G7 country to survive the financial crisis without a state bail-out for its financial sector. Two of the world.s 15 most highly valued financial institutions - a list dominated by China - are Canadian and a recent World Economic Forum report rated the Canadian banking system the world's soundest."

Tell me I'm wrong
01/24/10 Permlink | Markets
"One thing is indisputable: the rally in financial markets worldwide has outpaced the fundamentals. At the beginning of 2009, most onlookers expected a generally weak economy and were concerned that the behavior of consumers and banks would remain conservative. They were 100% right, and fundamentals are still tenuous. And yet, the rally has exceeded all expectations of which I'm aware."

Asset Mixer Update
01/20/10 Permlink | Stingy Investing Markets
"We've just updated the popular Stingy Investor Asset Mixer and Periodic Table of Annual Returns for Canadians to include both nominal and real (or inflation-adjusted) returns for 2009."

Hoisington Q4 letter
01/18/10 Permlink | Books Markets
"In 2009, the book This Time is Different.Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different."

Investors keep fooling themselves
01/16/10 Permlink | Zweig Markets
"Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points. So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs. Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%. All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%."

The 'other' imbalance and the financial crisis
01/12/10 Permlink | Academia Markets
"I argue instead that the root imbalance was of a different kind: The entire world had an insatiable demand for safe debt instruments that put an enormous pressure on the U.S. financial system and its incentives (and this was facilitated by regulatory mistakes). The crisis itself was the result of the negative feedback loop between the initial tremors in the financial industry created to bridge the safe - assets gap and the panic associated with the chaotic unraveling of this complex industry. Essentially, the financial sector was able to create 'safe' assets from the securitization of lower quality ones, but at the cost of exposing the economy to a systemic panic."

The hidden persuaders of fast food
01/12/10 Permlink | Behaviour Markets
"The Starbucks menu uses the "rule of three." The menu offers three sizes of coffees, given the enigmatic names of Tall, Grande, and Venti. (They're 12, 16, and 20 ounces respectively; 24 ounces for cold Venti drinks, to allow for ice.) Since Starbucks newbies won't know what they're getting, they tend to order the middle choice, Grande. In the psychology literature, this is known as "extremeness aversion" - people instinctively favor a middle choice, figuring it's safer. Guess what? You've just ordered two cups of expensive coffee. The Grande's sixteen ounces is two regular cups."

Crash in China
01/07/10 Permlink | World Markets
"James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other high-flying companies whose stories were too good to be true. Now Mr. Chanos, a wealthy hedge fund investor, is working to bust the myth of the biggest conglomerate of all: China Inc."

The lost decade
01/02/10 Permlink | Shiller Markets
"Mr. Shiller says our mass psychology is much more one of speculation and risk-taking than it was a generation or two ago. We've come to rely on rising markets to create our wealth and well-being, at the expense of savings. The result? An increasingly rapid succession of boom-and-bust markets."

Prepare for a Keynesian hangover
12/29/09 Permlink | Markets
"What's happening is that U.S. banks have been behaving exactly like developing country banks during earlier crises, such as Indonesian banks in the late 1990s - raising lending to their worst borrowers to keep them alive, lest the banks themselves collapse from their borrowers' defaults. For U.S. banks, these zombie borrowers are their affiliated financial entities set up to manage so-called off-balance-sheet activities - such as the famous SIVs (structured investment vehicles) created by Citigroup and others during the boom. Thus, the massive fiscal and monetary bailouts of the banks have served to worsen the credit misallocation that led to the general economic collapse in 2008."

Investment forecasts: known unknowns
12/27/09 Permlink | Markets
"The uselessness of these predictions was carefully explained by the Ancient Greek philosopher Socrates, two and half thousand years ago. Not letting death, the lack of Ancient Greek stockmarkets or the fact he lived in an economy based on slavery get in the way of a good analogy, Socrates noted that he, at least, knew what he didn't know. Which in investment analysis terms is about as close to an epiphany as you're likely to get."

Hot stocks for a new decade?
12/26/09 Permlink | Markets
"Much of the stock-market community is still just a marketing machine that happens to sell investments, the way, say, a drugstore like CVS sells pills. (Unfair? Just a little: CVS, after all, won't deliberately sell you bad pills.)"

Why social beats search
12/14/09 Permlink | Markets
"That's a controversial post headline and I don't mean that social will always beat search, but there's a rising chorus out there about "content farms" and search optimized content creation that is worth touching on."

Requiem for the dollar
12/05/09 Permlink | Grant Markets
"Ben S. Bernanke doesn't know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money. Was the massive printing of dollar bills to lift Wall Street (and the rest of us, too) off the rocks last year a kind of fraud? If the U.S. Senate so determines, it may send Mr. Bernanke back home to Princeton. But not even Ron Paul, the Texas Republican sponsor of a bill to subject the Fed to periodic congressional audits, is calling for the Federal Reserve chairman's head. I wonder, though, just how far we have really come in the past 200-odd years."

How little we know
11/24/09 Permlink | Government Markets
"We are what we repeatedly do. Not what we say we are. Not what we.d like to be. But what we do. What we do as a body politic is rescue rich people from the consequences of their decisions. That is bad for democracy and bad for capitalism. Until we fix that, we as citizens are playing a game of 'heads - Wall Street executives win a ridiculously enormous amount, tails - they just win a ridiculous amount, paid for by the rest of us.' Until we fix that, little else matters."

Gold can make you poor
11/19/09 Permlink | McGugan Markets
"Problem is, Winkler also reproduces a chart that shows seven-and-a-half centuries of real gold prices. At least to my eyeballs, it appears that if you had bought gold between 1415 and 1765 or so, you would have to wait until around the mid-1960s to be back to even in terms of purchasing power. Call me crazy, but I like my investments to pay off in a century or less."

Is there a method in cellphone madness?
11/16/09 Permlink | Behaviour Markets
"Here's a consolation prize to the millions who recoil in bafflement from cellphone companies' labyrinthine price plans, with their ever more intricate arrays of minutes, messages and megabytes: Economists don't understand them, either."

Paying a price for the thrill of the hunt
11/14/09 Permlink | Behaviour Markets
"The dollar auction game was invented by a pioneer of game theory, Martin Shubik of Yale, and it illustrates the concept of 'escalation of commitment.' Once people are trapped into playing, they have a hard time stopping. (Consider Vietnam.) The higher the bidding goes, and the more each bidder has invested, the harder it is to say 'uncle.' The best advice you can give anyone invited to play this particular game is to decline. Some games and battles are like that: even when you win, you lose. When you see at the start that such a dynamic is likely, you're better off just walking away."

The lost decade
11/14/09 Permlink | Markets
"we've already had our lost decade. When 2010 dawns in several weeks, it will bring down the curtain on a decade - the oughts - in which a great deal and not much at all happened, economically and financially speaking. In fact, a startling number of contemporary indicators are at or below the levels at which they stood 10 years ago."

A six thousand year-old bubble
11/13/09 Permlink | World Markets
"In a world with multiple fiat moneys, the zero value of money equilibrium lurks for each of the fiat currencies, including gold. Admittedly, as regards gold, so far so good. Gold has positive value. It has had positive value for nigh-on 6000 years. That must make it the longest-lasting bubble in human history."

What is expert advice worth?
11/13/09 Permlink | Behaviour Markets
"In the sixth century B.C.E., the Chinese philosopher and poet Lao Tzu made a timeless statement: "Those who have knowledge don't predict. Those who predict don't have knowledge." Well over 2,000 years later, it has yet to be better said. Yet the business press never tires of printing predictions by economists and other market animals. At what pace will the economy grow next year? In two years and in three? Whence stocks, up, down or nowhere special? These are common questions and the analysts generally stand tall and answer them with remarkable authority and confidence. How seriously should you take their forecasts?"

Barbarians at the discount retailer
11/12/09 Permlink | Markets
"Discount retailer Dollar General returns to the public markets on Friday, two years after it was taken private by a team of private equity firms. Its debut will be closely watched, mainly because a retailer whose sales and profits have soared while the economy has struggled is expected to prove popular. But it's also a test of whether investors will let Kohlberg Kravis Roberts and other private equity giants get away with their old tricks in this recovering economy."

The greatest trade ever
11/11/09 Permlink | Markets
"How hedge fund manager John Paulson bet against the real estate bubble and made $15 billion in a single year."

Galleon and the trouble with insider trading
11/02/09 Permlink | Markets
"It happened almost every earnings season. My hedge fund would own a million shares in some company and two weeks before it was to report quarterly earnings, its stock would start dropping. There was no news to explain it. We were in the dark, even though it was my job to know. Inevitably, the company would report a disappointing quarter, missing Wall Street's earnings expectations by a penny or two. Someone knew. A salesman's brother-in-law heard a few deals didn't close. Or maybe an insider was singing. The recent arrest of Galleon Group hedge fund's Raj Rajaratnam on insider trading charges puts a spotlight on this game. Is trading on industry knowledge widespread? Absolutely. That's how many hedge funds and mutual funds get an edge. Is insider trading also widespread? Only the Securities and Exchange Committee's wire-tappers know for sure."

Staying calm in a world of dark pools
10/26/09 Permlink | Zweig Markets
"In 1976, the great financial analyst Benjamin Graham declared that "the stock market resembles a huge laundry in which institutions take in large blocks of each other's washing ... without rhyme or reason." Mr. Graham died that year, but today he would laugh at the speed of the spin cycle. He would then ignore the momentary vibrations in a company's stock price and go right back to analyzing the value of its business. As an investor, you are free to choose your own time horizon. If other people want to try earning a few fractions of a penny a few thousand times a day, you should wish them well -- and refuse to join them."

US bank charge-off rates exceed depression
10/26/09 Permlink | Markets
"Bank charge-offs - loans written off as uncollectable - have reached $116 billion year to date, or 2.9 percent of outstanding loans on an annualized basis, Moody's said in a report. By comparison, bank charge-offs were about 2.25 percent in 1932, the third year of the Great Depression, Moody's said."

Learning to love insider trading
10/25/09 Permlink | Crime Law Markets
From the what could possibly go wrong file, "Want to keep companies honest, make the markets work more efficiently and encourage investors to diversify? Let insiders buy and sell"

Subprime mortgages: Myths and reality
10/25/09 Permlink | Real Estate Government Markets
"Subprime is just another boom and bust story; just another example of the manner in which easy money will find an outlet. Usually, of course, easy money will express itself in terms of inflation; since there was not much inflation in the period 2001-07, the Fed missed the underlying problem."

American austerity is about to begin
10/25/09 Permlink | Economy World Markets
"While all the talk at present is about economic corners turned and markets charging ahead, no one is paying much notice to an American economy deteriorating before our eyes. These myopic commentators seem to be simply moving past the now almost-universally held conclusion that before the crash of 2008, our economy was on an unsustainable course. If these imbalances had been corrected, then perhaps I too would be joining in the euphoria. But evidence abounds that we have not veered at all from that dangerous path."

Downside by Style
10/19/09 Permlink | Tipsheet Markets
"Value stocks didn't fare well in the recent downturn. Even high yield stocks, which provided downside protection in past bear markets, did just as poorly as the markets. The winners were growth stocks and dividend growth stocks. "

The view from inside a depression
10/18/09 Permlink | Markets
"In January 1931, a lawyer named Benjamin Roth, 38 years old, solidly Republican, a solo practitioner in Youngstown, Ohio, decided to start a diary. Realizing that he was 'living through an historic thing that will long be remembered' - as he put it in one early entry - he wanted to keep a record for posterity."

Exit, pursued by a bear
10/15/09 Permlink | Markets
"Private equity firms like to talk about creating value over the long term. But like all good investors, they're opportunistic. They jump at opportunities to acquire companies when owners are desperate, and they leap at opportunities to cash out when the public debt and stock markets are in a credulous phase. In the go-go credit years, private equity firms minted money by having companies they controlled issue bonds and use the proceeds to pay the owners a special dividend. The credit crisis put an end to that strategy. So they're back to extracting value by selling stock. And they can do so only when markets are comparatively forgiving and complacent, when investors have let down their guard. (There were very few IPOs and private equity exits in March and April, when tolerance for risk was extremely low.) If a slew of private-equity-backed cash-out IPOs find a rapturous reception in coming months, it could be a warning that investors are become as irrationally exuberant as they were when the Dow first crossed 10,000 in the spring of 1999."

Don't let a market crash hit you
10/11/09 Permlink | Zweig Markets
"Benjamin Graham -- Mr. Buffett's mentor -- advised splitting your money equally between stocks and bonds. Graham added that your stock proportion should never go below 25% (when you think stocks are expensive and bonds are cheap) or above 75% (when stocks seem cheap). Graham's rule remains a good starting point even today. If time turns out to be your enemy instead of your friend, you will be very glad to have some of your money elsewhere."

Gold is still a lousy investment
10/08/09 Permlink | Markets
"Gold, like other commodities, is a notoriously volatile and fickle investment. It has enjoyed periods of very high interest from investors, followed by long bouts of absolute indifference. Today, it is having one of the former, shining brightly in an otherwise tumultuous investment environment. The question for investors: Will gold remain bright or not? More long term, what role should gold play in an investor's portfolio? The answer to both questions might disappoint the growing golden horde."

There's no such thing as too big to fail
10/08/09 Permlink | Markets
"The collapse of a financial institution is not necessarily a disaster. If free markets are to thrive, we must not allow giant, state-supported banks to believe that they are indestructible, Niall Ferguson warns"

Rational irrationality
09/28/09 Permlink | Markets
"A number of explanations have been proposed for the great boom and bust, most of which focus on greed, overconfidence, and downright stupidity on the part of mortgage lenders, investment bankers, and Wall Street C.E.O.s. According to a common narrative, we have lived through a textbook instance of the madness of crowds. If this were all there was to it, we could rest more comfortably: greed can be controlled, with some difficulty, admittedly; overconfidence gets punctured; even stupid people can be educated. Unfortunately, the real causes of the crisis are much scarier and less amenable to reform: they have to do with the inner logic of an economy like ours. The root problem is what might be termed 'rational irrationality' - behavior that, on the individual level, is perfectly reasonable but that, when aggregated in the marketplace, produces calamity."

Farewell America
09/21/09 Permlink | World Taxes Markets
"Our bank is in the process of recommending our clients to exit from all direct investments in US securities. This, on the grounds of the threat of inheritance tax coupled with the uncertainty as to whether one might not, one way or another, be turned into a US person."

From bear to bull
09/21/09 Permlink | Grant Markets
"Though we can't see into the future, we can observe how people are preparing to meet it. Depleted inventories, bloated jobless rolls and rock-bottom interest rates suggest that people are preparing for to meet it from the inside of a bomb shelter."

You can't handle the truth about stocks
09/16/09 Permlink | Markets
"Conventional financial planning has it all wrong, argues economist Zvi Bodie. If you need the high return of stocks to reach your goals, he says, then you can't afford to invest in them."

Flaw in markets: humans
09/13/09 Permlink | Behaviour Markets
"Memories are short. Immediately after a severe flood, most people are reluctant to build on a flood plain. But land on flood plains is cheaper, and the prospect of short-term advantage quickly lures many to abandon their caution. That is why many jurisdictions adopt strict regulations against building on flood plains. The same logic dictates regulation to limit the damage caused by financial bubbles. The list of financial practices that merit regulatory scrutiny is long. But the most important first step is to limit leverage."

The societal risk premium
09/06/09 Permlink | Markets
"Financial economists like to talk about the risk-free rate: basically, the time value of money sitting in a perfectly safe vehicle. From an historical perspective per se, the very use of the term is fascinating. After all, it implies a society that is strong and stable enough to support a risk-free investment. Living in what is likely the most secure political, social, and economic environment ever seen on the planet, we take the existence of a "risk-free investment" for granted. But this is not always the case."

Total liabilities
09/04/09 Permlink | Markets
"Spotting a doomed bank, it seems, may only be possible once it is going to hell. Yet there was a common ingredient in most failures: an over-reliance on wholesale borrowing."

The growth illusion
09/03/09 Permlink | World Markets
"When investors pick the countries they want to back, they tend to be guided by economic growth prospects. The faster an economy grows, they reason, the faster corporate profits will grow in the country concerned, and thus the higher the returns investors will achieve. Alas, this is not the case."

Henry Paulson's longest night
09/01/09 Permlink | Government Markets
"In 2006, Goldman Sachs C.E.O. Henry Paulson reluctantly became Treasury secretary for an unpopular, lame-duck president. History will score his decisions, but the former Dartmouth offensive lineman definitely left everything on the field. In private conversations throughout his term, as crisis followed crisis.Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, A.I.G., and so forth.Paulson gave the author the inside track, from the political lunacy and bailout plans to the sleepless nights and flat-out fear, as he battled the greatest economic disruption in 80 years."

Krugman wars with Ferguson over inflation
08/24/09 Permlink | Government Markets
"Henry Kissinger, who knows a bit about fights, both political and intellectual, once observed that the reason academic tussles were so vicious was 'because the stakes are so small'. And although that is true in one sense - it doesn't matter very much whether the professor from Princeton doesn't like his rival from Harvard - it is wrong in another. The stakes in this row are pretty high."

S.E.C. floats a short proposal
08/18/09 Permlink | Markets
"The Securities and Exchange Commission, after months of considering what to do about short-selling, came up with a new idea on Monday that could make it virtually impossible to place an order to sell stock short and be sure it would be executed quickly."

Free money! Honest
08/13/09 Permlink | Markets
"The financial world's attention may be on the high frequency trading programmes employed by numerous banks and hedge funds. But there is another story. Algorithmic trading, by eliminating the human touch, presents an uncomfortably tempting proposition to the retail investor. One area where this is clearly becoming evident is in the loosely regulated spot foreign exchange market. Scores and scores of products claiming to have the ability to make you money while you sleep, with no need for financial knowledge at all, are hitting the marketplace."

Theory of games and economic misbehavior
08/11/09 Permlink | Markets
""I refuse to accept however, the stupidity of the Stock Exchange boys, as an explanation of the trend of stocks," wrote John von Neumann to Stanislaw Ulam, on December 9, 1939. "Those boys are stupid alright, but there must be an explanation of what happens, which makes no use of this fact.""

GMO Q2
07/30/09 Permlink | Markets
"A year is certainly a long time in markets, and so is a quarter. A year ago, equities globally - and everything else for that matter - were very overpriced, particularly if they were risky. A quarter ago, in mid March, prices everywhere were cheap. Now they have all - or almost all - converged for a few unusual moments at fair value. A year ago, it was very easy to know what to be: a risk avoider. It was not so easy reinvesting when terrifi ed, but most of us knew that we should have been doing more. But today? It's diffi cult to be inspired at fair value."

Computer trading is good competition
07/30/09 Permlink | Markets
"Stock specialists who consolidate retail orders to buy and sell have been ripping off customers since trading began. The first head of the SEC was Joe Kennedy, who was a master stock manipulator in the 1920's. He was a master of the stock pool (bucket shop), a then-legal stunt in which a few traders conspired to inflate a stock's price, selling out just before the bubble burst."

Rich Harvard, Poor Harvard
07/22/09 Permlink | Markets
"Only a year ago, Harvard had a $36.9 billion endowment, the largest in academia. Now that endowment has imploded, and the university faces the worst financial crisis in its 373-year history. Could the same lethal mix of uncurbed expansion, colossal debt, arrogance, and mismanagement that ravaged Wall Street bring down America's most famous university? And how much of the turmoil is the fault of former Harvard president Larry Summers, now a top economic adviser to President Obama? As students demonstrate, administrators impose Draconian cuts, and construction is halted on an over-ambitious $1.2 billion science complex, the author follows the finger-pointing."

Spending on food reaches historical low
07/17/09 Permlink | Markets
"In the entire history of the U.S., it's only been in the last eight years that the percent of income spent on food for Americans was in single digits - since 2000 it's been below 10%. In all previous years, spending on food was in double-digits, and in most years from 1929 to 1952 it was above 20%. Consider that in 1932, spending on food at home took almost 22% of disposable income, compared to the record low of only 5.6% in 2008. Food has never been more affordable than today, as a share of income."

Is the equity risk premium 0?
07/14/09 Permlink | Markets
"One of the most important constants in finance is the Equity Risk premium, that expected return on the signature risk asset, equities, over the risk free alternative (usually, long-term Treasuries). It's the one risk premium that is generally considered positive, too large even, which is a relief because in most areas the returns are decidedly negative for taking more risk. Estimates in the early 1990s were about 8%, now, around 3% annually."

Views on the economic crisis
07/11/09 Permlink | Value Investing Markets
"I do not believe that deflation would be a problem with the stimulus in place, and if necessary, there will be more stimulus put in place. The current stimulus is enough so that the economy will stabilize and start recovering. Some people say stocks are not as cheap as they were in 1974 and 1982, which is admittedly true, but at the same time, there is much less competition today from cash and treasury bonds than there was then. If I owned treasury notes or bond, I wouldn't sleep too well at night. To some extent they are an accident waiting to happen."

Does stock-market data really go back 200 years?
07/11/09 Permlink | Markets
"What, then, are the odds that stocks will continue to lag behind bonds for the long run? The sad truth is that history can't tell us the answer. The 1802-to-1870 stock indexes are rotten with methodological flaws. So we have only the period since then, or four distinct and complete 30-year stretches of stock returns, to base our long-term investment decisions on."

The man who crashed the world
07/09/09 Permlink | Markets
"Is it really possible for one man to precipitate a global economic catastrophe? In the August 2009 issue of Vanity Fair, contributing editor Michael Lewis, one of the most insightful Wall Street critics writing today, investigates the central role of A.I.G.'s Financial Products division in the subprime-mortgage and financial crises that necessitated a $182.5 billion taxpayer bailout out the insurance behemoth."

All risk is relative
07/07/09 Permlink | Markets
"He then cites research proving that portfolios of high-beta stocks have a lower Sharpe ratio than portfolios of low-beta stocks."

$70 oil, but where's the demand?
06/30/09 Permlink | Markets
"Why all the fuss over oil demand? Because it's critical to know what's behind rising oil prices. If it's demand - if nations like the U.S., China and India are consuming more oil because they're building infrastructure and powering factories - then indeed higher prices are a bullish sign for global economic growth, even if it means some grumbles at the pump. But if it's not demand at play, as the IEA's outlook seems to suggest, then rising oil prices start to look a lot more sinister - especially because higher oil prices take a chunk out of consumers' pocketbooks and companies' earnings, a scenario that unfolded to much dismay last summer, when prices topped out in July at over $145 a barrel."

Priced to sell
06/30/09 Permlink | Markets
"And there's plenty of other information out there that has chosen to run in the opposite direction from Free. The Times gives away its content on its Web site. But the Wall Street Journal has found that more than a million subscribers are quite happy to pay for the privilege of reading online. Broadcast television - the original practitioner of Free - is struggling. But premium cable, with its stiff monthly charges for specialty content, is doing just fine. Apple may soon make more money selling iPhone downloads (ideas) than it does from the iPhone itself (stuff). The company could one day give away the iPhone to boost downloads; it could give away the downloads to boost iPhone sales; or it could continue to do what it does now, and charge for both. Who knows?"

The long view
06/27/09 Permlink | Markets
"In real terms, the S&P 500 index is back to trend having been way above the line in both 2000 and 2007. In terms of profits, earnings are now well below trend, thanks to the massive write-offs from banks. But they were well above trend just two years ago. If one assumes a return to trend earnings of a little under $54 and an average price-earnings multiple of 15.3, then that puts fair value for the S&P of around 820, a bit below current levels. The problem, however, is that it looks very like we are in a secular, or long-term, bear market that started in 2000. These periods have lasted 17-20 years and have ended with p/e ratios in the single digits. So we may have a long way to go. One problem is the lack of dividend income. Over the last century, share prices have risen by around 1.6% per annum in real terms; dividends have added a further 4.4 percentage points of return. But the S&P 500 yields just 2.8% at present, pointing to below average returns from here."

BoE financial stability report
06/27/09 Permlink | World Markets
"The Bank of England has released its June Financial Stability Report filled with the usual tip-top commentary and analysis."

Praise for Peter Bernstein
06/18/09 Permlink | Books Markets
"Peter Bernstein aimed for large targets, and gave broad and convincing evidence of how markets worked. He only erred in letting Modern Portfolio Theory and Keynesianism affect him. With that, I hail Peter Bernstein, regretting his demise. He will be missed, as few of us had such global vision of markets as he had."

The dead parrot of finance
06/18/09 Permlink | Montier Markets
"Montier's charge sheet is a lengthy one. He says EMH has left us with a long list of bad ideas that have influenced the investment industry. These include an obsession with benchmarking, the capital asset pricing model, risk management etc."

Obituaries offer short-sale tip sheet
06/15/09 Permlink | Government Markets
"What they found from their worldwide study of 8,191 companies and 122 sudden deaths since 1973 was a 1.7 percent decline in geographically connected firms, meaning those companies headquartered in the town in which the politician was born or lived."

Risk-management pioneer
06/14/09 Permlink | Books Markets
"Investing has yielded a few stars so famous they are known by first name. Warren Buffett is one. Peter L. Bernstein -- the economist, investment consultant and prolific author who died on June 5 at 90 -- was another."

The Liquidity Premium
06/11/09 Permlink | Academia Value Investing Markets
"Value tends to outperform growth over time. We've shown that less-liquid stocks outperform more-liquid stocks. In this section, we examine how liquidity interacts with value and growth."

Poking holes in a theory
06/07/09 Permlink | Markets
"In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices - meaning that perhaps the market isn't quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum."

Buffett less bullish than you think
06/04/09 Permlink | Buffett Markets
"Somebody could have said: 'Your children and grandchildren will live better than you' in 1932, and that would have been reason to buy stocks, as well as reason to be nervous."

The need for failure
05/27/09 Permlink | Government Markets
"First, the very notion of "too big to fail" is dangerous. It suggests that there is an insurance policy that says, no matter how risky your behavior, we will make sure you stay in business. It encourages banks to get bigger (or more interconnected), and it subsidizes risky behavior."

The unreliability of beta
05/27/09 Permlink | Markets
"In summary, stock betas calculated from historical data vary considerably over short intervals, across calculation methods and across data sources and therefore may be of little or no value as an investment tool."

The fat tail
05/26/09 Permlink | World Government Books Markets
"In their entertaining new book, The Fat Tail, Eurasia Group investment strategists Ian Bremmer and Preston Keat observe that while banks likely spent $8 billion on credit-risk software in 2008, most spent 'far less energy on the assessment and management of political risk.' It's easy to make the argument that banks and businesses of all stripes ignore risk of the policy variety at their peril."

Capitalism and the cheating ethic
05/21/09 Permlink | Behaviour Markets
"But when real neutral observers - a book agent, an editor at a newspaper, the paper's readers - no longer blanch at outright deviousness so frankly told, society has lost the mechanism that restrains its citizens from widespread cheating. That's exactly what happened in the mortgage meltdown, when untold numbers of applicants, their brokers, real estate agents and assorted others openly discussed how to collude in obtaining mortgages through fraudulent means without stopping to consider the implications for society as a whole. And without the slightest sense of embarrassment, apparently."

U.S. gas fields go from bust to boom
05/04/09 Permlink | Markets
"Huge new fields also have been found in Texas, Arkansas and Pennsylvania. One industry-backed study estimates the U.S. has more than 2,200 trillion cubic feet of gas waiting to be pumped, enough to satisfy nearly 100 years of current U.S. natural-gas demand."

Monsters, Inc.
05/04/09 Permlink | Markets
"Amid the blizzard of economic data that the government puts out every week, last Tuesday's report analyzing G.D.P. industry by industry got little notice. But it contained one very interesting piece of data: in 2008, for the first time in sixteen years, the finance and insurance industry shrank. Since 1980, this sector's share of the economy has grown by almost half. Now, apparently, the worm has turned."

FFH AGM Slides
05/01/09 Permlink | Watsa Markets
Slides 26 to 31 and 33 are particularly interesting.

Why Harvard is bad for Wall Street
04/29/09 Permlink | Markets
"The bright young things from Harvard Business School are making their way to Wall Street in droves. Some 26 percent of the HBS class of 2004 took stock-market related jobs, up from 23 percent of the class of 2003. I guess that means it's time to sell."

2008 Harvard indicator: Sell
04/29/09 Permlink | Markets
"For many years I have been keeping track of a rather esoteric but nonetheless generally accurate long-term indicator of the US equity market: the percentage of Harvard MBA graduates choosing careers in Wall Street and related market-sensitive fields. If 10% or less of the year's class take market-sensitive jobs (which I identify, using the Business School's current reporting categories, as investment banking, investment management, hedge funds, sales & trading, venture capital, private equity or leveraged buy-outs), that's a long-term .Buy. signal. If 30% or more do so, that's a long-term .Sell. signal."

Bonds: Why Bother?
04/28/09 Permlink | Bonds Indexing Markets
"It's now well-known that stocks have produced negative returns for just over a decade. Real returns for capitalization-weighted U.S. indexes, like the S&P 500 Index, are now negative over any span starting 1997 or later. People fret about our 'lost decade' for stocks, with good reason, but they underestimate the carnage. Even this simple real return analysis ignores our opportunity cost. Starting any time we choose from 1979 through 2008, the investor in 20-year Treasuries (consistently rolling to the nearest 20-year bond and reinvesting income) beats the S&P 500 investor. In fact, from the end of February 1969 through February 2009, despite the grim bond collapse of the 1970s, our 20-year bond investors win by a nose. We're now looking at a lost 40 years!"

25 Years to Bounce Back? Try 4.5
04/27/09 Permlink | Markets
"An investor who invested a lump sum in the average stock at the market's 1929 high would have been back to a break-even by late 1936 - less than four and a half years after the mid-1932 market low."

The Markets on Flu
04/27/09 Permlink | Markets
"While the Spanish flu killed millions, it didn't seem to impact the stock markets much. Mind you, World War 1 was also winding down at the time and it's hard to separate these two major events. But take a look for yourself."

Don't blame the elite
04/24/09 Permlink | Markets
"The truth is that markets stumble upon prosperity. New ideas are constantly being tried out. Most of them are bad, but that is fine, because markets ruthlessly eliminate bad ideas. A few of them are good, and that's enough, because good ideas spread fast in a market system. In the language of biology, markets are evolutionary environments that select very powerfully for wealth-creating organizations. They attract the smart people to the right places, magnify their good qualities and smother their failures."

The panic of 1825
04/17/09 Permlink | Markets
"This was the birth of central banking as we know it. The Bank of England had accepted the role of maintaining orderly markets and financial stability in a crisis. Why? Because the prices of financial assets are too important to be left to the market when it is panicked and when letting prices reach market levels will mean unemployment for hundreds of thousands in 1825, or tens of millions today."

Why I fired my broker
04/16/09 Permlink | Markets
"With his 401(k) in ruins, our correspondent visits investment gurus, hedge fund managers, and a freakish Arizona survivalist with one question in mind: How can the ordinary investor recover?"

Goldman Sachs TARP repayment pressures rivals
04/10/09 Permlink | Markets
"A Goldman Sachs Group Inc. sale of stock to speed repayment of $10 billion in government money will pressure other banks to follow suit or risk appearing dependent on federal support"

How cheap is the market?
04/09/09 Permlink | Markets
"On February 25 I published an op-ed piece in the .Wall Street Journal' entitled, "The S&P Gets Its Earnings Wrong." In that article I said that, although the S&P weights each individual's stock by its market capitalization to compute the return on the S&P 500 Index, no such methodology is used to compute aggregate earnings of the index. As a result, the billions of dollars of losses racked up by, say, AIG, whose market value is extremely low, is added dollar for dollar to the earnings of the profitable firms, such as Exxon Mobil, whose market value is more than 20 times larger. I maintained that S&P's methodology gave far too much influence to firms with big losses and low market values, and thereby gave a distorted valuation to the S&P 500 Index."

Is it back to the Fifties?
03/28/09 Permlink | Markets
"US stocks have fallen more than 60 per cent in real terms since the market peaked in 2000. Anyone who started saving 40 years ago, when the postwar 'baby boom' generation was just joining the workforce, has found that stocks have performed no better than 20-year government bonds since then, a forthcoming article by Robert Arnott for the Journal of Indexes shows. These people want to retire soon and the 'cult of the equity' has let them down."

Portfolio and its bubble solution
03/26/09 Permlink | Markets
"Being skeptical about this project is not because I particularly embrace the efficient market; it's because I don't, and I'm not convinced that physicists or anyone else has a decent grasp of complex systems, particularly those populated not by atoms but by wayward humans out to make a buck. Indeed, there's nothing wrong with using the markets as a test bed for physicists to probe the phenomenon of complex systems. But prediction? This is the great utopian dream of the technocrats: If we only had more data, we could model anything, predict everything."

Reverse splits
03/22/09 Permlink | Markets
"According to a 2006 paper by professors at New York University, Emory University and the University of Florida, companies that entered into reverse splits between 1962 and 2001 (that.s about 1600 occurrences) underperformed the market by about 1.3% on a monthly basis for the next three years."

The next mortgage mess
03/20/09 Permlink | Markets
"Ross' American Home Mortgage Servicing claims Carrington Capital asked it to block the sale of homes to siphon money away from other investors and enrich itself."

Naked short sales
03/19/09 Permlink | Government Markets
"The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts."

Fed to buy $300 billion of longer-term treasuries
03/18/09 Permlink | Bonds Government Markets
"The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds. The announcement following the Federal Open Market Committee meeting today in Washington spurred the biggest rally in longer-dated Treasuries in decades. Officials unanimously voted to expand the Fed.s balance sheet up to $1.15 trillion, and said they may broaden a program aimed at boosting consumer loans to include other assets, today.s statement showed." [Bernanke last seen flying his 'bankruptcy or bust' helicopter to Wall Street.]

Financial journalists fail upward
03/18/09 Permlink | Markets
"This needs to be repeated every time someone pleads, "Who could have known?" Plenty of people did see the disaster coming. Most of them were marginalized, however, laboring at out-of-the-way econ departments, blogs and B-list think tanks. They were excluded and even ridiculed because their larger understanding of the economy was not one that fit well with the sort of Wall Street worship preached by the likes of CNBC." [See Tetlock's book called "Expert Political Judgment" for more details on why famous pundits tend to be the least accurate prognosticators.]

Have we already seen peak oil?
03/18/09 Permlink | Markets
"World oil production is reckoned to have peaked in 2008 at 81.73m barrels/day - .oil. here being defined as crude oil, lease condensate, oil sands and natural gas plant liquids. If natural gas plant liquids are excluded, then the production peak remains in 2008 but at 73.79 mbd. However, if oil sands are also excluded then crude oil and lease condensate production peaked in 2005 at 72.75 mbd."

Reinvesting when terrified
03/11/09 Permlink | Markets
"Finally, be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before."

Dispelling myths about the 1930s
03/08/09 Permlink | Markets
"After examining several aspects of the stock market's behavior during the 1930s, it would appear as though a replay of that decade might very well be less scary than assumed by many of those who superficially draw the analogy."

Bear market snapshots
03/06/09 Permlink | Tipsheet Markets
"Robert Shiller recently updated his S&P500 data to include prices for the month of February. With the new data, and a little update of my own to include today's closing price, I had fun creating a slew of keen graphs."

What are the odds of a depression?
03/04/09 Permlink | Markets
"In the end, we learned two things. Periods without stock-market crashes are very safe, in the sense that depressions are extremely unlikely. However, periods experiencing stock-market crashes, such as 2008-09 in the U.S., represent a serious threat. The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression. The bright side of a 20% depression probability is the 80% chance of avoiding a depression."

Investment and the crisis
03/03/09 Permlink | Markets
"So despite the complexity of today.s markets, the lessons in all this are oddly homespun. Mathematical models should not be relied on without a proper understanding of the economic conditions and behaviour that fed them. It is foolish to put blind faith in credit rating agencies. Do not invest in what you cannot understand. Shun arbitrage strategies that assume permanent access to liquidity. Avoid investment vehicles that inflict swingeing charges in exchange for what in most cases will amount to market performance or worse. Treat leverage with due care. Recognise that the conventional wisdom of the consulting fraternity is not conducive to contrarian behaviour, one of the keys to successful investing. Above all, beware what Charles Mackay, the 19th-century historian, called the madness of crowds."

Presidential Starts: 1900 - 2009
03/03/09 Permlink | Markets
"From the time President Obama was elected to his inauguration, the DJIA put in its worst performance over all election to inauguration periods since 1900, with a decline of 17.4%. And on the day President Obama was sworn in, the DJIA put in its worst ever inauguration day performance with a decline of 4%. Since then, things haven't gotten much better. Not including the inauguration day decline, the DJIA has dropped an additional 14.92% since President Obama was sworn in. Over the last two weeks, these declines have intensified with losses in ten out of the last twelve trading days."

Get A Grip
02/25/09 Permlink | Tipsheet Markets
"Sure we had a big bubble in 2000, but does a repeat of the 1929-to-1932 crash appear to be a likely scenario? Not really."

The S&P gets its earnings wrong
02/25/09 Permlink | Markets
"Standard & Poor's recently shocked investors with an announcement that reported earnings for its S&P 500 Index for the fourth quarter of 2008 are forecast to be negative for the first time since such data were calculated in 1936. S&P further reports that for all of 2008, earnings are expected to be less than $40 per share, indicating that the market now has a price/earnings ratio over 20, well above its historical average of 15. What this dismal news actually reflects is the bizarre way in which S&P (and most other index providers) calculate "aggregate" earnings and P/E ratios for their indexes. Unlike their calculation of returns, S&P adds together, dollar for dollar, the large losses of a few firms to the profits of healthy firms without any regard to the market weight of the firm in the S&P 500. If they instead weight each firm's earnings by its relative market weight, identical to how they calculate returns on the S&P 500, the earnings picture becomes far brighter."

The formula that killed Wall Street
02/24/09 Permlink | Markets
"For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels. His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched - and was making people so much money - that warnings about its limitations were largely ignored. Then the model fell apart."

Can talk of a depression lead to one?
02/22/09 Permlink | Markets
"The attention paid to the Depression story may seem a logical consequence of our economic situation. But the retelling, in fact, is a cause of the current situation - because the Great Depression serves as a model for our expectations, damping what John Maynard Keynes called our 'animal spirits,' reducing consumers' willingness to spend and businesses' willingness to hire and expand. The Depression narrative could easily end up as a self-fulfilling prophecy."

'Nationalize' the banks
02/21/09 Permlink | Markets
"How does Mr. Roubini think the media has covered the financial crisis? "The problem," he says -- after first stating to me that he intends "no offense!" -- "is that in the bubble years, everyone becomes a cheerleader, including the media. This is the time when journalists should be asking tough questions, and I think there was a failure there. The Masters of the Universe were always on the cover, or the front page -- the hedge-fund guys, the imperial CEO, private equity. I wish there had been more financial and business journalists, in the good years, who'd said, 'Wait a moment, if this man, or this firm, is making a 100% return a year, how do they do it? Is it because they're smarter than everybody else . . . or because they're taking so much risk they'll be bankrupt two years down the line?' "And I think, in the bubble years, no one asked the hard questions. A good journalist has to be one who, in good times, challenges the conventional wisdom. If you don't do that, you fail in one of your duties."" [and in the depression years?]

Double trouble
02/21/09 Permlink | Real Estate Markets
"House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we're talking sometime next year. And, possibly more important, a meaningful brightening of the current, profoundly bleak jobs picture, isn't in the cards for certainly as long, if not longer."

Why banks failed the stress test
02/19/09 Permlink | Markets
"By any historical standard, the financial crisis of the past 18 months has been extraordinary. Some have suggested it is the worst since the early 1970s; others, the worst since the Great Depression; others still, the worst in human history. Time will tell. Risk managers are of course known for their pessimistic streak. Back in August 2007, the Chief Financial Officer of Goldman Sachs, David Viniar, commented to the Financial Times: 'We are seeing things that were 25-standard deviation moves, several days in a row' To provide some context, assuming a normal distribution, a 7.26-sigma daily loss would be expected to occur once every 13.7 billion or so years. That is roughly the estimated age of the universe. A 25-sigma event would be expected to occur once every 6 x 10**124 lives of the universe. That is quite a lot of human histories. When I tried to calculate the probability of a 25-sigma event occurring on several successive days, the lights visibly dimmed over London and, in a scene reminiscent of that Little Britain sketch, the computer said 'No'. Suffice to say, time is very unlikely to tell whether Mr Viniar's empirical observation proves correct. Fortunately, there is a simpler explanation - the model was wrong."

Inside the meltdown
02/17/09 Permlink | Government Markets
"On Thursday, Sept. 18, 2008, the astonished leadership of the U.S. Congress was told in a private session by the chairman of the Federal Reserve that the American economy was in grave danger of a complete meltdown within a matter of days."

Stocks now distinctly cheap
02/16/09 Permlink | Markets
"One of the only silver linings of the current mess is that stocks are increasingly priced to deliver a compelling long-term return. Given that stocks had been overvalued for more than 15 years through last summer, this is a refreshing change. If the S&P does go to 600, which we think is possible, stocks will finally be a screaming buy."

Brother, can you spare a stock?
02/15/09 Permlink | Markets
"In the worst of times, which are the best of stocks? So many readers have emailed me to warn that we are going into another Great Depression that I decided to find out which companies and sectors did best after the Crash of 1929. With the Standard & Poor's 500-stock index down 39% last year and another 8.5% this year, it can't hurt to learn what separated the winners from the losers back then."

S&P heads to first quarter ever of negative earnings
02/13/09 Permlink | Markets
"This is the worst; after the sixth quarter of negative growth, it will be the first quarter ever of negative earnings," said Howard Silverblatt, senior index analyst, at Standard & Poor's. A sixth quarter of negative growth ties the prior record set when Harry Truman was president, running from the first quarter of 1951 to the second quarter of 1952. "Next quarter, we're expecting a new record of seven quarters of negative growth," Silverblatt added. As of the close of business Thursday, Silverblatt calculates S&P earnings per share, on a reported basis, at a loss of $10.44 for the quarter. If financials were taken out of the equation, that deficit would drop to $2.35 a share."

C.S. global yearbook 2009
02/13/09 Permlink | Markets
"An alternative approach is to delve deeper to infer what investors in each country were expecting, on average, in the past. We do this by decomposing the historical premium into three major components, namely, (i) the (geometric) mean dividend yield net of the real risk free rate, (ii) the annualized growth rate of real dividends, and (iii) the annualized change in the price/dividend ratio over time. Of these three, the dividend yield has been the dominant factor historically. This may seem surprising, since day-to-day, investors seem focused on capital gains and stock price movements. Indeed, over a single year, equities are so volatile that most of an investor.s return comes from capital gains or losses, with dividends adding a relatively modest amount. However, reinvested dividends dominate long-run returns."

Train to get in financial shape
02/11/09 Permlink | Markets
"Welcome to the Olympics of investing. Unfortunately, you are not a spectator. The S&P 500 index of large-cap stocks has lost more than 40% since November 2007, and about $2 trillion in value has disappeared from investors' 401(k)s and IRAs, according to the Center for Retirement Research. So you probably don't feel that you have much chance of taking a victory lap. But if history teaches us anything, it's that the sweetest victories are won in markets just like this one, even if it doesn't seem that way at the time."

A 10-year stretch that's worse than it looks
02/07/09 Permlink | Markets
"Over the 10 years through January, an investor holding the stocks in the S.& P.'s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation, as is shown in the accompanying chart. Until now, the worst 10-year period, by that measure, was the period that ended September 1974, with a compound annual decline of 4.3 percent."

Banker bashing gives cover to bigger culprits
02/06/09 Permlink | Markets
"The problem is this game of pin-the-blame-on-the-banker gives cover to those who deserve a far greater share of the blame for this crisis -- the people whose job it was and is to set the rules of the game and keep things from getting out of hand."

The death of equity
02/05/09 Permlink | Markets
"Global equities have returned -29% this decade, compared to 80% from government bonds. We.ve seen two 50% equity bear markets in just five years. This combination of miserable returns and extreme volatility has led some to pronounce that, after 50 years, the cult of the equity is dead."

Buffett's metric says it's time to buy
02/04/09 Permlink | Buffett Markets
"Is it time to buy U.S. stocks? According to both this 85-year chart and famed investor Warren Buffett, it just might be."

Why market forecasts keep missing the mark
01/30/09 Permlink | Markets
"Fish gotta swim, birds gotta fly and analysts and market strategists gotta try predicting what stocks will do every year. But you don't gotta act on those predictions -- at least not before you ask how likely they are to hit the bullseye."

Fear is back on Wall Street
01/14/09 Permlink | Markets
"Fears about the health of big financial firms and the overall economy have roared back into play, sending the stock market tumbling toward its lowest levels since last November. The Dow Jones Industrial Average dropped about 300 points one point Wednesday morning following the latest round of dark economic news. Retail sales fell 2.7% from a year ago in December, a decline twice as large as economists had expected."

Stingy Investor Asset Mixer 2008
01/12/09 Permlink | Indexing Stingy Investing Markets
"Check out our new and improved Asset Mixer. Now with nominal return data to the end of 2008!"

Why you can't trust your gut
01/11/09 Permlink | Behaviour Markets
"Turns out, the people who had imagined the stressful events said they could identify more patterns in the pictures than did the control group. The pictures, by the way, were completely random. The patterns didn't exist. The academics weren't finished. They showed one group a headline that read "Rough Seas Ahead for Investors" and showed another group the headline "Smooth Sailing Ahead for Investors." The two groups then received some fragmentary information about a couple of companies. You guessed it: The group that was worried about "rough seas" spun out more unwarranted theories about what was going on with the companies than the other group did."

Woefully misleading piece on VaR
01/07/09 Permlink | Markets
"The New York Times Sunday Magazine has a long piece by Joe Nocera on value at risk models, which tries to assess how much they can be held accountable for risk management failures on Wall Street. The piece so badly misses the basics about VaR that it is hard to take it seriously, although many no doubt will."

The end of the financial world
01/04/09 Permlink | Government Markets
"This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don.t know what they are doing with money, who does?"

U.S. Treasuries head toward wekly loss
12/26/08 Permlink | Bonds Markets
"Rates on one-month and three-month Treasury bills fell below zero as investors sacrificed interest-rate payments to protect their principal. Rates on one-month bills were minus 0.05 percent, and three-month rates were minus 0.01 percent."

December surprise
12/26/08 Permlink | Accounting Markets
"Before investors panic at the prospect of publicly-traded oil companies writing down hundreds of millions or billions of barrels of "proved reserves" for accounting disclosure purposes next year, they need to consider where the volumes in question will have gone. Were they merely shifted from the "proved" to "probable" category--thus not affecting the amount of oil that would ultimately be produced--by a temporary oil glut arising from a global recession, or did their existence depend on an oil-price bubble that is unlikely to reflate?"

Online shopping and the Harry Potter effect
12/23/08 Permlink | Markets
"Her findings suggest that the long tail is far from the revolution Anderson claimed. The tail is indeed getting longer, but isn't, as Anderson thought, growing fat with choice. Instead it is getting both flatter and thinner, filled with ever more products that sell few or no copies. Low overheads or no overheads, that kind of long tail is not a rich man's world, least of all for producers. Suppliers are always going to be better off concentrating on the mass-market money-spinners, says Elberse."

Should you invest in the long tail?
12/23/08 Permlink | Markets
"It was a compelling idea: In the digitized world, there.s more money to be made in niche offerings than in blockbusters. The data tell a different story."

Five things you should know about bear markets
12/22/08 Permlink | Hallett Markets
"North American stocks have been halved. Overseas stocks have lost even more. Indeed, bear markets can be frightening but they are necessary. In order to enjoy the long-term rewards of investing in stocks, investors must shoulder the associated risks. One of those risks is the occasional emergence of a bear market (a decline of 20 per cent or more). To better understand this risk, here are five things you need to know about this unwelcome beast."

US market may be past a bottom
12/21/08 Permlink | Markets
"While despair still prevails, there are finally certain hints to suggest that the US market may have bottomed, or at least, is in an advanced stage of bottoming."

Is the medicine worse than the illness?
12/20/08 Permlink | Government Grant Markets
"The world ran out of trust in 2008 -- but there is no shortage of money because the Fed is printing like mad. It's the wrong approach, with potentially dire consequences, says James Grant."

Is it all over for stocks?
12/19/08 Permlink | Markets
"Stocks look like a pretty good investment - certainly better than they were a year ago. You absolutely shouldn't get out simply because the recent return numbers are scary. The latest bad news about the economy shouldn't drive you away either. Much of that is reflected in prices now. Even for many not-especially-brave investors, it's time to consider buying, not selling."

Options expiration week
12/19/08 Permlink | Markets
"As the graph shows, for the last 21 years, the week leading up to options expiration (red) has been consistently bullish and the weeks before and after bearish in terms of both returns and percentage positive."

Federal Reserve is damned either way
12/19/08 Permlink | Government Markets
"The burden of debt increases as prices fall, creating self-feeding spiral. This is what Fisher called the "swelling dollar" effect. Real debt costs rose by 40pc from 1929 to early 1933 by his count. Debtors suffocated to death. Brian Reading from Lombard Street Research has revived this neglected thesis and come up with some disturbing figures. US household debt is now $13.9 trillion, down just 1pc from its peak last year. Meanwhile household wealth has fallen 14pc as property crashes, a loss of $6.67 trillion. The debt-to-wealth ratio is rocketing."

Fed reduces borrowing costs to zero range
12/16/08 Permlink | Government Markets
"Treasuries rose, pushing yields to record lows, after the Federal Reserve cut the main U.S. interest rate to a range of zero to 0.25 percent and said central bankers will do whatever is necessary to ease the longest recession in a quarter-century."

The unwisdom of crowds
12/16/08 Permlink | Markets
"At the very opening of the book, Bagehot illustrates with exquisite simplicity how, at least in a boom economy, traders on margin can "harass and press upon, if they do not eradicate, the old capitalist." The old capitalist in question is the poor sap who believes all this stuff about neither-a-borrower-nor-a-lender-be and is foolish enough to be using his own cash"

Finding the gaps
12/15/08 Permlink | Markets
"In short, to arbitrage, you need both access to credit and confidence that market conditions will return to normal. Both are in short supply. If we want the financial system to recover, we need the arbitrageurs to come back."

Market bottom by year-end
12/11/08 Permlink | Markets
"It is one of the ironies of stock-market timing that it is easier to forecast where the market will be in several years than where it will be in several days. And, according to a valuation model from a research firm with an excellent long-term record, the stock market is likely to be significantly higher in several years' time -- regardless of whether the final low of the last year's bear market has been seen."

Tobin's Q indicates 'horrific' market bottom
12/09/08 Permlink | Markets
"The 2008 slump in global equities has further to go if Tobin's Q ratio is any guide, according to CLSA Ltd. strategist Russell Napier. The ratio, a method of valuing U.S. companies developed by Nobel Prize laureate economist James Tobin, indicates that the Standard & Poor's 500 Index, set for its worst year since 1931, may sink by another 55 percent to 400 when the market bottoms around 2014, London-based Napier said. The ratio divides total market capitalization by the cost of replacing assets."

Contango pays most in decade
12/08/08 Permlink | Markets
"In the worst year ever for oil, investors can lock in the biggest profits in a decade by storing crude."

After crappy decade, stocks always do great?
12/08/08 Permlink | Markets
"There's a new refrain that a lot of folks keep repeating these days: When stocks do as badly as they have over the past decade, they usually do great over the following decade. Sadly, like a lot of stock market refrains, it's not really true."

When the golden eggs run out
12/07/08 Permlink | Markets
"Risky assets look more attractive now than they have in ages. Corporate-bond spreads are sufficient to compensate for the kind of default levels seen in the Depression. Stockmarkets in America and Europe now offer a dividend yield that is higher than the yield on government bonds, something that has happened only rarely in the past 50 years."

The limits of Apollo's power
12/07/08 Permlink | Markets
"Part of the allure of private-equity honchos like Mr. Black is that they made an art out of making money during the boom years. Their fist-pounding negotiations were legendary. Their corporate turnarounds became Harvard Business School case studies. Their multiple homes, black-tie parties, sports cars and yachts were alternately envied and vilified. Today, with Wall Street in tatters and the easy money long gone, the question now for Mr. Black and his peers is whether they have enough moves left to turn the bleak outlook for private equity into something rosier for themselves, their companies, their investors and the legions of workers they employ."

Where have all your savings gone?
12/07/08 Permlink | Thrift Markets
"For American and European savers it has been a lost decade. After two booms and two busts, stockmarkets have earned them nothing, or less, in the past ten years. Low interest rates have made bonds and bank deposits unrewarding too. Were it not for the tax relief they receive, contributors to personal pension plans would have been better off keeping their money under their mattresses. It will be little consolation to Westerners that savers in Japan have known this empty feeling for far longer."

Grant sees 'disastrous inflation'
12/05/08 Permlink | Grant Markets
A Bloomberg audio podcast of a conversation with James Grant

A conversation with Nassim Taleb
12/05/08 Permlink | Taleb Markets
"A conversation about economics with Nassim Taleb author of "The Black Swan""

US stock market returns
12/04/08 Permlink | Markets
"This analysis clearly shows the strong long-term relationship between real returns and the level of valuation at which the investment was made."

Wheat from chaff
12/01/08 Permlink | Markets
"The bottom line is simple. Stocks are a claim on a long-term stream of future cash flows. Even if one allows for a terrible and surprisingly deep continuation of the current recession, stocks appear reasonably priced or undervalued based on a careful analysis of long-term cash flow prospects."

10-year treasury yield lowest since 1955
12/01/08 Permlink | Markets
"At 2.81%, the yield on the 10-Year Treasury Note has fallen to its lowest level since 1955. Below we highlight two charts of 10-Year Yields from 1900-1962 (monthly) and 1962-present (daily). While 2.81% is low compared to the last 50 years, the yield was actually lower than that from about 1935 to 1955."

Fueling up the next bubble
12/01/08 Permlink | Government Markets
"The market normally dispatches the grim reaper to punish foolish entrepreneurs and credulous investors on a slay-as-you-go basis, returning talent and salvageable assets to the fertilizer heap. When played right, only the participants in the game lose their shirts. The cautious crowd gets to watch and say 'Tsk-tsk, they should have known better.' Sometimes, just sometimes, a crazy idea works. When it does, the lucky, smart and bold earn rich rewards. This rare dispensation of disproportionate wealth, along with the knowledge that failure is rarely fatal, is what motivates the thoughtful risk taking that propels genuine progress. Welcome to capitalism in its purest form. When the grim reaper's hand is staid by the twin forces of mass delusion and public policy, the game of capitalism mutates."

Stock market finally at fair value
12/01/08 Permlink | Markets
"The good news, however, is that, after 15 years of being overvalued, the S&P 500 is finally priced to deliver an average long-term return: about 9%-10% in nominal terms and 6% after adjusting for inflation. That's nothing to scream and yell about, but it's likely to be a lot better than cash."

The myths of market underperformance
11/26/08 Permlink | Dividends Markets
"Most members of the media strive for accuracy in their reporting and work very hard to get the facts right. The problem - many of the assertions that get the highest profile are based on flawed analysis of past stock market performance by pundits who distort history to get media coverage for their alarmist claims or by well meaning commentators who quite simply get the facts wrong. Among the common cautionary claims about investing in the stock market: 1. Investors made no money in the market from the mid 60s to early 80s. 2. It took 25 years for the market to recover to the level reached in 1929. 3. When inflation is taken into account, investors have lost money for long periods of time."

The wealth effect in reverse
11/25/08 Permlink | Markets
"The hyper-anxiety is not irrational pessimism, though it may prove unfounded. Every major episode of this crisis -- from Bear Stearns's failure to General Motors' possible bankruptcy -- has come as a surprise. Similarly, the crisis's three main causes have repeatedly been underestimated: the burst housing "bubble"; fragile financial institutions; and a reversal of the "wealth effect." Of these, the last is least recognized."

Fed commits $800 billion more to unfreeze lending
11/25/08 Permlink | Bonds Real Estate Government Markets
"The Federal Reserve took two new steps to unfreeze credit for homebuyers, consumers and small businesses, committing up to $800 billion. The central bank will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies. It will also set up a $200 billion program to support consumer and small-business loans, the Fed said in statements today in Washington."

Treasury traders paid to borrow
11/24/08 Permlink | Markets
"Owners of Treasuries may soon get paid to borrow as the U.S. tries to break a logjam in the $7 trillion-a-day repurchase market. Treasuries are in such high demand that investors are lending cash for next to nothing to obtain the securities as collateral through so-called repos, which dealers use to finance their holdings. The problem is many parties involved in repos aren't delivering the bonds because there is no penalty for not doing so, causing 'fails' to exceed $5 trillion, according to the Federal Reserve Bank of New York."

Does extreme stress signal a snapback?
11/24/08 Permlink | Markets
"Another encouraging sign is the shrinking value of U.S. stocks relative to nominal U.S. gross domestic product. At the market peak in 2000, stocks were valued at twice the size of the economy, but the relationship has adjusted this year to an estimated 59%, well below the long-term average of 79%. To get back to 79%, the S&P 500 would have to rise 36%, to 1,090. The relationship got as low as 40% in the late 1940s, when investors feared another depression, and in the inflationary 1970s."

And you thought 1931 was bad
11/24/08 Permlink | Markets
"Even after Friday's large stock market rally, only 10 of the stocks in the Standard & Poor's 500, the premier American stock index, are higher than they were at the end of 2007, and the index itself is down almost as far as it was in the worst year it ever experienced, at the height of the Great Depression."

The most volatile market ever
11/24/08 Permlink | Markets
"Over the last 50 trading days, the average absolute daily percentage change of the S&P 500 has been...wait for it...3.82%! That means the S&P 500 is averaging a daily move of up or down nearly 4%."

Citigroup gets guarantees
11/24/08 Permlink | Government Markets
"Citigroup Inc., facing the threat of a breakup or sale, received $306 billion of U.S. government guarantees for troubled mortgages and toxic assets to stabilize the bank after its stock fell 60 percent last week. Citigroup also will get a $20 billion cash injection from the Treasury Department, adding to the $25 billion the company received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend."

S&P 500 index: now more poor, less standard
11/21/08 Permlink | Indexing Markets
"Every once in a while the committee faces a rare situation where a large portion of the S&P 500 Index does not meet one or more requirement they have outlined. Usually the simply ignore it and hope that it just goes away on its own."

Diminishing ratios, booming yields
11/21/08 Permlink | Markets
"With all the carnage in the markets, perhaps it's no surprised P/E ratios are on the decline. What's impressive is by how much."

Individual investor stock allocations
11/21/08 Permlink | Markets
"Here's a terrific sentiment read: the amount of money individuals have exposed to equities relative to their historical average. The chart below shows equity allocations by individual investors above and below their normal 21 year mean allocation to stocks (the 21-year mean allocation to stocks is typically 60%). The present reading puts us 15% under the 21-year historical mean."

The case for buying oil stocks
11/21/08 Permlink | Markets
"Last week, the Paris-based International Energy Agency released its World Energy Outlook 2008 - a 578-page book full of future supply, demand, and price estimates which this year also included an eagerly-awaited study of 800 of the world's largest oil fields. Here's the executive summary: Buy oil stocks."

Did hated speculators lower oil prices?
11/20/08 Permlink | Markets
"Whither the speculators? They were this summer's front-page news, the subject of congressional hearings, editorials and nightly newscasts. The claimed culprits of oil's price rise, everyone fell over themselves to be tougher on them."

A sea of unwanted imports
11/20/08 Permlink | World Markets
"Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times. For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property."

The perils of efficiency
11/17/08 Permlink | Government Markets
"The logic behind these reforms was simple: the market would allocate resources more efficiently than government, leading to greater productivity. Farmers, instead of growing subsidized maize and wheat at high cost, could concentrate on cash crops, like cashews and chocolate, and use the money they made to buy staple foods. If a country couldn't compete in the global economy, production would migrate to countries that could. It was also assumed that, once governments stepped out of the way, private investment would flood into agriculture, boosting performance. And international aid seemed a more efficient way of relieving food crises than relying on countries to maintain surpluses and food-security programs, which are wasteful and costly."

Joe investor, the markets are all yours
11/16/08 Permlink | Zweig Markets
"This is a huge change for the little guys. Rob Arnott, who oversees $35 billion at Research Affiliates LLC in Newport Beach, Calif., puts it this way: "The question that hardly anyone ever thinks about is: Who's on the other side of my trade, and why are they willing to be losers if I'm going to be a winner?" Ever since the 1970s, the person on the other side of your trade has almost always been someone who manages billions of dollars and has millions of dollars to spend on gathering more information than most individuals ever could. Now, however, as Mr. Arnott says, "You can -- and probably do -- have a counterparty on the other side of your trade who absolutely has to sell, perhaps at any price." You would be very wise to give these distressed sellers a little bit of your cash, which they overvalue, in exchange for some of the stocks and bonds that they are undervaluing."

Bill Miller Q3 2008 commentary
11/14/08 Permlink | Value Investing Government Miller Markets
"There is little dispute among knowledgeable investors that U.S. (and global) equities are extraordinarily attractive on a wide variety of measures based on historical standards. The worry is they may go a lot lower before they eventually recover, as the current crisis unfolds and as the economy undoubtedly gets worse. This worry is legitimate. After all, to most of us, stocks seemed quite cheap at the end of September, and now they are a whole lot cheaper. So what to do? The data indicate there is now a mountain of cash on the sidelines, enough in money market funds to buy about half the market capitalization of the S&P 500."

Wall street lays another egg
11/14/08 Permlink | Markets
"Not so long ago, the dollar stood for a sum of gold, and bankers knew the people they lent to. The author charts the emergence of an abstract, even absurd world - call it Planet Finance - where mathematical models ignored both history and human nature, and value had no meaning."

The end
11/13/08 Permlink | Markets
"Eisman wasn't, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. 'You have to understand,' Eisman says in his defense, 'I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit what it sold.'"

A conversation with Bill Ackman
11/12/08 Permlink | Markets
"Charlie Rose: A conversation with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP."

As trouble brews, banks turn the screws
11/12/08 Permlink | Law Markets
"In Canada, Judge Morawetz, an experienced former insolvency lawyer, balked. According to affidavits and reports submitted to his court, Circuit City had landed the life-saving DIP loan by effectively allowing a cross-border raid on its profitable InterTan division. Before handing over a penny to Circuit City, a syndicate of banks led by Bank of America insisted that the Canadian subsidiary pledge as security all the assets and property owned by its chain of 772 stores, known as The Source by Circuit City. On top of that, Circuit City was given the right to demand cash advances from InterTan, while banks were given extraordinary powers to .sweep the cash. of the Canadian branch at their whim after only five days advance notice."

Everything you knew about bonds and equities
11/12/08 Permlink | Markets
"The broader picture is that this is the reversal of a 50 year relationship, one in which bond yields have been above equity yields. That trend is now about to be undone, by Edward.s estimation."

The corn isn't green
11/12/08 Permlink | Government Markets
"H.L. Mencken once remarked that there is a "well-known solution to every human problem - neat, plausible, and wrong." That quote comes to mind when considering the vocal group of neoconservatives, agribusiness lobbyists, and politicians that claims that the best way to cut American oil imports, and thereby impoverish the petrostates (and, in theory, reduce terrorism), is to require automakers to manufacture "flex-fuel" cars that can burn motor fuel containing 85 percent ethanol or methanol."

The crisis and what to do about it
11/10/08 Permlink | Government Markets
"The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact - that the defect was inherent in the system - contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work."

Shipping floored
11/10/08 Permlink | Markets
"An industry once plagued by insufficient capacity now sees ships stuck idle at port. Shipping is in crisis. The Baltic Dry Index which measures shipping costs in commodities sunk to its seventh weekly decline this week to 829 points, and is down more than 93 percent since hitting a record peak in May."

Disappointing diversification
11/08/08 Permlink | Markets
"We argue that it is no accident that the age of restrictive capital accounts also saw remarkably low equity market correlations. Cross-border diversification opportunities identified by early papers (Grubel 1968) were indeed 'too good to be true.' Once investors can take advantage of low correlations elsewhere, they will rise. Initial investors may benefit since liberalisations tend to be followed by capital gains (Henry 2000). Yet risks will not fall anywhere near as much as initially hoped, as the covariance with other stock markets inevitably increases. In this sense, the gains from international diversification are akin - at least in part - to a Fata Morgana. Investors may chase it, only to discover that it perennially disappears in the distance."

Long-term opportunities amidst the fear
11/05/08 Permlink | Markets
"This short essay covers three topics. First is a little perspective on recent events. Second are some thoughts on where we might go from here. And finally, a comment on the behavioral finance issues around what we are going through, with an emphasis on why it.s so hard to act in this type of an environment."

Challenging the crowd in whispers
11/02/08 Permlink | Real Estate Shiller Markets
"I clearly remember a taxi driver in Miami explaining to me years ago that the housing bubble there was getting crazy. With all the construction under way, which he pointed out as we drove along, he said that there would surely be a glut in the market and, eventually, a disaster. But why weren.t the experts at the Fed saying such things? And why didn.t a consensus of economists at universities and other institutions warn that a crisis was on the way?"

All bets are off
11/02/08 Permlink | Markets
"diversification has surely not offered the benefits most pension funds expected. Indeed, it may have had perverse results. In the old days, with equities trading at below-average valuations, funds would now be on a buying spree. They could afford to ignore the short-term risks because of the long-term nature of their liabilities. Pension funds thus acted as an automatic stabiliser for the market. This time round, that does not seem to be happening. One reason may be accounting changes which make pension-fund managers more focused on the short term. Another, however, may be the strategic drive to diversification. The Wall Street Journal has reported that CalPERS, America's largest public-pension fund, has been selling shares to meet commitments to put more money into private-equity firms."

Bad vibrations
11/02/08 Permlink | Markets
"The great deleveraging, as it has become known, has also had a big impact on the currency markets. Many investors have been following a version of the 'carry trade', borrowing money in a low-yielding currency. All they had to do was earn a higher return from assets than the cost of their financing. Since the two big currencies with the lowest yields over the past year have been the dollar and the yen, those were the natural ones to borrow. When asset prices fall, however, this strategy is disastrous. Investors dash to sell assets and repay their debts. Since those debts were incurred in dollars and yen, that means they have to buy back those two currencies - hence their sharp recent rises."

World is 'drowning in oil' (again)
10/30/08 Permlink | Markets
"Three months ago, the world was running out of oil. Seriously. I kid you not. Everywhere you turned, you heard whispers that the day of petroleum reckoning was at hand. Now there's too much oil, prodding OPEC to cut production targets for the first time in two years. Last week, the Organization of Petroleum Exporting Countries, confronted with the halving of oil prices since July, announced a 1.5 million barrel-a-day cut in output."

Is buy-and-hold dead and gone?
10/30/08 Permlink | Markets
"The evidence shows that most investors get it wrong over and over again. According to a study called the Quantitative Analysis of Investor Behavior by financial research firm Dalbar, over 20 years through the end of 2007, the average equity-fund investor earned an annualized return of just 4.5%, vs. the S&P 500's 11.8% return. Why? In large part because investors, chasing performance, shift money out of lagging funds and into hot ones at the wrong times. We buy high and sell low repeatedly."

Who's buying?
10/28/08 Permlink | Stingy Investing Markets
"Remember, when dealing with Mr. Market, fear is the cost of getting a good price. It looks very grim out there and it might get worse. But stock prices will reach their lowest when uncertainty reigns and expectations are at their lowest. Investors are currently very fearful and we think that it's time to get greedy."

Greasing the slide
10/27/08 Permlink | Markets
"The great paradox of the sell-off, then, is that the factors that were supposed to increase the flow of information to investors, foster long-term thinking, and encourage contrarian positions did exactly the opposite. If there's a silver lining in all this, it's that investors who can endure past the present moment now have the chance to buy what at least look like very cheap stocks. Still, it's not surprising that investors have been unwilling to step up. It's hard enough to catch a falling knife. But it's nearly impossible when hedge funds are hurling it."

Why do markets create bubbles?
10/26/08 Permlink | Markets
"Bubbles are like pornography: Everyone has his or her own opinion as to what qualifies, but it is impossible to pen a precise definition. If you wish to push the metaphor further, both are also fun for a while, if you like that sort of thing, but apt to end up making you feel deflated and embarrassed. Bubbles are also embarrassing for the economics profession. It's not that we have no idea what causes bubbles to form, it's that we have too many ideas for comfort. Some explanations are psychological. Some point out that many bubbles have been stoked not by markets but by governments. There is even a school of thought that some famous bubbles weren't bubbles at all."

Myths about the financial crisis of 2008
10/23/08 Permlink | Government Markets
"The financial press and policymakers have made four claims about the nature of the crisis. 1. Bank lending to nonfinancial corporations and individuals has declined sharply. 2. Interbank lending is essentially nonexistent. 3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels. 4. Banks play a large role in channelling funds from savers to borrowers. Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false."

Russia and the crisis
10/22/08 Permlink | World Markets
"Dmitry Medvedev dreams of turning Moscow into a global financial centre, but he has an awful long way to go. For Russia.s markets have slumped. Even after recent one-day rallies, the dollar-denominated RTS index and the rouble-denominated MICEX index have shed around two-thirds of their value since mid-May (see chart). These falls are bigger than in any other emerging markets, dealing a blow to Kremlin claims that Russia is a safe haven from global financial turmoil."

Rippling economic turbulence
10/22/08 Permlink | Taleb Markets
"As the financial sector shifts, so does the reach of the jolt to economic structures around the world. Economist Nassim Nicholas Taleb and his mentor, mathematician Benoit Mandelbrot, speak with Paul Solman about chain reactions and predicting the financial crisis."

Perspective on the bear market
10/20/08 Permlink | Hallett Markets
"The decline in stock prices triggered by the U.S. financial crisis has been frightening at times. Most shocking has been the sheer velocity of the decline, which rivals that of the crash of 1929. And despite a recent rally, there is enough bad news to push stock prices back down. But unless you believe the global economy will grind to a halt; I see five reasons why investors should be optimistic today."

The confidence game
10/19/08 Permlink | Government Grant Markets
"In the past two weeks, governments in Asia, Europe and the U.S. have effectively nationalized vast swaths of banking. Central banks have ramped up their money printing. In the past week alone, the Fed's balance sheet swelled by $179 billion, to a grand total of $1.77 trillion. In announcing such radical measures, intervening governments never fail to invoke confidence. They say they must restore it. Destroying confidence, however, is what governments do best. And the confidence they can restore is usually the kind that got us where we are today. Inflation and moral hazard led directly to the immense overvaluation of equities and residential real estate -- and of the bloating of the leverage that sustained those prices. Yet, to cure what ails us, credit creation and the public guarantee of banking liabilities are the policies today most favored."

Keep your money in the market
10/18/08 Permlink | Markets
"We will have a serious recession now, but a 1930s-style depression is highly unlikely. We will not let the money supply decline by 25 per cent, as we did in the '30s, and automatic stabilizers (like unemployment insurance) are now a significant element of fiscal policy. Don't forget that the US economy is still the most flexible in the world and our "innovation machine" is alive and well. No one has consistently made money by selling America short, and I am confident the same lesson is true today."

AIG: Europe's lethal loophole
10/17/08 Permlink | Government World Markets
"Before the financial crisis hit, AIG did a booming business in credit default swaps, complex instruments originally designed to protect lenders if borrowers fail to make debt payments. The biggest buyers were European banks, whose deals last year with AIG totaled a staggering $426 billion. But the banks didn't always buy the swaps as insurance against defaults - they often used them to skirt capital requirements."

Fear factor
10/13/08 Permlink | Markets
"There have been, and are, plenty of reasons for investors to freak out: the failure of banks; the demise of institutions like Lehman Bros.; the necessity for repeated, spastic government interventions. Nearly every economic indicator in the past few weeks, from auto sales to employment, has been negative. The stock of General Motors sunk to its lowest level since 1950. Banks are refusing to lend to one another. The traditional safe havens of investment, such as municipal bonds and money-market funds, have buckled. The trumpets of leadership are so uncertain, they sound like kazoos."

It's time to invest
10/13/08 Permlink | Whitman Markets
"Martin J. Whitman, a professional investor for more than 50 years, said that as long as economies worldwide could avoid an outright depression, stocks were amazingly cheap."

How this bear market compares
10/11/08 Permlink | Markets
"The current bear market is already among the worst in history. Here is how it lines up - in losses and length - with those of the lasy 80 years."

Lehman credit-swap auction sets payout
10/10/08 Permlink | Bonds Derivatives Markets
"Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market."

Defaults and a near-death experience
10/10/08 Permlink | Government Markets
"It is a remarkable fact that the United States, despite having the largest, strongest and richest economy in the world, has--and has always had--a banking and bank regulatory system that is an irrational mess."

We have the tools to manage the crisis
10/10/08 Permlink | Government Markets
"First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact. More important in existing circumstances is the clear determination of our Treasury, of European finance ministries, and of central banks to support and defend the stability of major international banks. That approach extends to providing fresh capital to supplement private funds if necessary."

Why the ECB can't fix Europe
10/09/08 Permlink | Government World Markets
"The European Central Bank joined the United States Federal Reserve and other major central banks in cutting key interest rates by half a point on Wednesday in a concerted move to stabilize financial markets and avert recession, but the ECB's power to stem the financial crisis in Europe is limited, economists say."

US open: happy anniversary
10/09/08 Permlink | Markets
"There is still plenty of opportunity for financials to fall. Paulson and the US Treasury are coming under increasing pressure to follow the UK.s lead and recapitalise US banks. Paulson himself has said he thinks more banks will fail. Credit markets are still showing extreme stress. Commercial paper lending still has not normalised and interbank rates continue to widen. The TED and the Libor-OIS spreads are at all-time highs today."

Iceland takes over Kaupthing
10/09/08 Permlink | World Markets
"'It's difficult to find any parallels to what's happening in Iceland in the industrialized world,' Jensen said. 'You'd have to look to emerging markets, and after the Asian crisis, for example, those economies contracted about 10 percent.' The debts of the Icelandic banking system are too big for the government to repay. 'There is no way that the Icelandic population can assume responsibility for the private debt' that the banks have built up, Haarde said yesterday."

Central banks cut rates in coordinated move
10/08/08 Permlink | Government Markets
"The Fed, ECB, Bank of England, Bank of Canada and Sweden's Riksbank each cut their benchmark rates by half a percentage point. The Bank of Japan, which didn't participate in the move, said it supported the action. Switzerland also took part. Separately, China's central bank lowered its key one-year lending rate by 0.27 percentage point. Today's decision follows a global meltdown that sent U.S. stock indexes heading for their biggest annual decline since 1937"

Fed to purchase U.S. commercial paper
10/07/08 Permlink | Government Markets
"The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations."

3% days becoming the norm
10/07/08 Permlink | Markets
"Oh what we all wouldn't give for just a week of sub-1% moves! Over the last month (23 trading days), the S&P 500 has seen 10 days where the index rose or fell (mostly fell) by more than 3%. You have to go all the way back to 1938 to find another one-month period where there were this many 3% days. As shown in the chart below, there were many multi-year periods between 1950 and 2007 where the S&P 500 didn't have even one 3% day. If you're not a regular market participant and someone that is tells you we are experiencing something that hasn't happened since the Great Depression, they're not joking!"

Warren E. Buffett braves a crisis
10/06/08 Permlink | Buffett Markets
"In the midst of a financial crisis, a towering figure of American business steps forward with his reputation and financial resources for public good and personal gain. Their times and personalities are vastly different, of course. But J. Pierpont Morgan's role in the Panic of 1907 has its echo in Warren E. Buffett's actions during the current financial troubles."

Pursuit of an edge
10/06/08 Permlink | Markets
"This particular type of market failure occurs when two conditions are met. First, people confront a gamble that offers a highly probable small gain with only a very small chance of a significant loss. Second, the rewards received by market participants depend strongly on relative performance. These conditions have caused the invisible hand to break down in multiple domains. In unregulated housing markets, for example, there are invariably too many dwellings built on flood plains and in earthquake zones. Similarly, in unregulated labor markets, workers typically face greater health and safety risks. It is no different in unregulated financial markets, where easy credit terms almost always produce an asset bubble."

Alarm led to action
10/02/08 Permlink | Government Markets
"Behind the scenes, the credit markets had almost completely frozen up. Banks were refusing to lend to other banks, and spreads on credit default swaps on financial stocks - the price of insuring against bankruptcy - veered into uncharted waters. Moreover, the drain on money funds continued. By the end of business on Wednesday, institutional investors had withdrawn more than $290 billion from money market funds. In what experts call a 'flight to safety,' investors were taking money out of stocks and bonds and even money market funds and buying the safest investments in the world: Treasury bills. As a result, yields on short-term Treasury bills dropped close to zero. That was almost unheard of."

This economy does not compute
10/01/08 Permlink | Markets
"Certainly, markets have internal dynamics. They're self-propelling systems driven in large part by what investors believe other investors believe; participants trade on rumors and gossip, on fears and expectations, and traders speak for good reason of the market's optimism or pessimism. It's these internal dynamics that make it possible for billions to evaporate from portfolios in a few short months just because people suddenly begin remembering that housing values do not always go up. Really understanding what's going on means going beyond equilibrium thinking and getting some insight into the underlying ecology of beliefs and expectations, perceptions and misperceptions, that drive market swings."

Cities are cutting back projects
10/01/08 Permlink | Bonds Government Markets
"Cities, states and other local governments have been effectively shut out of the bond markets for the last two weeks, raising the cost of day-to-day operations, threatening longer-term projects and dampening a broad source of jobs and stability at a time when other parts of the economy are weakening."

Corporate bonds worse than equities
09/29/08 Permlink | Bonds Markets
"Even though equity markets are down nearly 7% today, the corporate bond market is even worse. Below we highlight a price chart of an ETF that tracks an index of investment grade corporate bonds (LQD). As shown, the ETF is down nearly 10% today!"

The 50-100 year storm has arrived
09/29/08 Permlink | Markets
Keen slides from a Fairfax presentation.

U.S. House rejects rescue plan
09/29/08 Permlink | Government Markets
"The financial-rescue plan intended to restore confidence in the U.S. banking system collapsed in partisan wrangling as the House of Representatives voted down the proposal backed by the Bush administration and congressional leaders of both parties."

Citigroup to buy Wachovia banking assets
09/29/08 Permlink | Stocks Markets
"Citigroup will acquire Wachovia's massive deposit network, as well as over $300 billion worth of Wachovia's loan portfolio and the company's debt. Citigroup said it will absorb up to $42 billion of losses on those loans, while the Federal Deposit Insurance Corporation will be on the hook for anything beyond that."

Breakthrough on rescue plan
09/28/08 Permlink | Government Markets
"Companies that sell debt to the government will issue stock warrants to the government so that taxpayers 'can gain as companies recover' from economic difficulties, Conrad said. "

Fate of bailout plan remains uncertain
09/25/08 Permlink | Government Markets
"The talks broke up in angry recriminations, according to accounts provided by a participant and others who were briefed on the session, and were followed by dueling press conferences and interviews rife with partisan finger-pointing. In the Roosevelt Room after the session, the Treasury secretary, Henry M. Paulson Jr. literally bent down on one knee as he pleaded with Nancy Pelosi, the House Speaker, not to 'blow it up' by withdrawing her party's support for the package over what Ms. Pelosi derided as a Republican betrayal. "I didn't know you were Catholic," Ms. Pelosi said, a wry reference to Mr. Paulson's kneeling, according to someone who observed the exchange. She went on: "It's not me blowing this up, it's the Republicans." Mr. Paulson sighed. "I know. I know." It was the very outcome the White House had said it intended to avoid, with partisan presidential politics appearing to trample what had been exceedingly delicate Congressional negotiations."

Economists urge congress not to rush
09/25/08 Permlink | Markets
"More than 150 prominent U.S. economists, including three Nobel Prize winners, urged Congress to hold off on passing a $700 billion financial market rescue plan until it can be studied more closely."

Credit traders sowing seeds of destruction
09/24/08 Permlink | Derivatives Markets
"The $62 trillion market for credit- default swaps, created to protect banks from loan losses, helped fuel a near-meltdown in the financial system and now may be regulated for the first time."

Hedge fund returns money
09/22/08 Permlink | Funds Markets
"The best-performing hedge fund manager of the past two years has closed down his funds and is returning money to investors after concluding that the danger of losing money from a bank collapse is too high."

Lessons from a 'lost decade'
09/22/08 Permlink | Government Markets
"Most dismiss the idea that America could suffer the same fate as Japan, but some of the differences are overstated. For example, some claim that Japan's bubble was much bigger than America's. Yet average house prices nationwide rose by 90% in America between 2000 and 2006, compared with a gain of 51% in Japan between 1985 and early 1991, when Japanese home prices peaked"

Oil traders caught in squeeze
09/22/08 Permlink | Markets
"Crude oil climbed more than $25 a barrel, the biggest gain ever, as traders scrambled to unwind positions on the October contract's last day of trading. The more-active November contract rose $6.62."

Ban the shorts? A BIG mistake!
09/19/08 Permlink | Government Markets
"For all the talk of capitalism now being dead given the government's plan to likely assume much of the banking industry's mortgage-related illiquid assets as well as the takeovers of Fannie Mae, Freddie Mac and AIG, the SEC's action is far more ominous for those who believe in free markets."

Mathematicians predicted crash years ago
09/19/08 Permlink | Markets
"Mandelbrot, 83, contends that portfolio theory, which tries to maximize return for a given level of risk, treats extreme events (like, say, yesterday's market shockers) with 'benign neglect: it regards large market shifts as too unlikely to matter or as impossible to take into account.' The faulty assumption of modern portfolio theorists, in Mandelbrot's view, is that price changes do not drift far from the mean when observing daily ups and downs - so extreme events are exceedingly rare. 'Typhoons, in effect, are defined out of existence,' he wrote."

Paulson, Bernanke push new plan
09/19/08 Permlink | Government Markets
"U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution. "

Money markets get a lifeline
09/19/08 Permlink | Government Markets
"The Treasury Department and Federal Reserve took steps Friday to help stabilize the U.S. money market fund industry, which has come under severe strain following the dramatic events that took place across the financial system this week. The Treasury said it would guarantee up to $50 billion dollars for the next year for both retail and institutional investors."

Short sellers under fire
09/19/08 Permlink | Government Markets
"The SEC said today that it will halt short selling of U.S. banks, insurance companies and securities firms through Oct. 2, while the Financial Services Authority in the U.K. banned short sales of financial shares for the rest of the year. "

AIG booted out of the Dow
09/18/08 Permlink | Stocks Markets
"Dow Jones & Company, which oversees the 30-stock index, said that Kraft Foods (KFT) will take AIG's place."

Global equity market declines
09/17/08 Permlink | Markets
"There's no doubt about it -- it's bad everywhere" [Falling like a BRIC. China -68.34%, Russia -57.44%, India -36.36%, Brazil -33.04%.]

Money market fund says customers could lose money
09/17/08 Permlink | Funds Markets
"The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested. This is only the second time in history that a money market fund has 'broken the buck' - that is, reported a share.s value was less than a dollar."

Skimming the froth
09/15/08 Permlink | Markets
"Emerging markets have been subject to some violent downswings in the past and, with the economic health of some countries deteriorating, there is scope for some nasty shocks in terms of corporate profits and bank losses. Long-term investors may be willing to put up with the bad news in the hope of a rebound in 2009 but it seems unlikely that we will be hearing any more safe haven talk for a while."

Thinking long term about the equity premium
09/10/08 Permlink | Markets
"The equity premium has been that large because people were extremely unsure how compelling global events would play out - at the time those events were occurring. Try to appreciate the incredible uncertainty associated with two World Wars, the Great Depression and the Cold War."

American savers have drawn the short straw
09/08/08 Permlink | Government Thrift Markets
"American savers, take a bow. This is your moment of vindication. Your hour of glory. And you earned it (in a manner of speaking). You resisted the siren call of plastic teaser APRs, dutifully living within your means to store money for a rainy day. You never took out an interest-only mortgage. Never had to pawn the copper pipes from your exurban McMansion to pay the reset on your liar loan. Your credit score would have gotten you into Harvard at age 12. Good for you! Your reward: injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity."

Fannie, Freddie credit-default swaps
09/08/08 Permlink | Derivatives Bonds Government Markets
"Investors may be forced to unwind contracts protecting $1.47 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. government seized control of the companies in a bid to bolster the housing market. Thirteen 'major' dealers of credit-default swaps agreed 'unanimously' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today."

International exposure has never hurt so bad
09/07/08 Permlink | World Markets
"The declines recently in global equity markets have really been astounding. Japan, Spain, Brazil, India, Italy, South Korea, Singapore, Sweden, Taiwan, and Hong Kong all join China and Russia with equity markets off at least 30% from their 52-week highs. North American countries rank 1,2,3 as far as countries holding up the best. International exposure has never hurt so bad."

Long-Term Capital: It's a short-term memory
09/07/08 Permlink | Government Markets
"A financial firm borrows billions of dollars to make big bets on esoteric securities. Markets turn and the bets go sour. Overnight, the firm loses most of its money, and Wall Street suddenly shuns it. Fearing that its collapse could set off a full-scale market meltdown, the government intervenes and encourages private interests to bail it out. The firm isn't Bear Stearns - it was Long-Term Capital Management, the hedge fund based in Greenwich, Conn., and the rescue occurred 10 years ago this month."

U.S. takeover of Fannie, Freddie
09/07/08 Permlink | Stocks Markets
"Under the plan, the Treasury will receive $1 billion of senior preferred stock in coming days, with warrants representing ownership stakes of 79.9 percent of Fannie and Freddie. The government will receive annual interest of 10 percent on the initial investments. As a condition for the assistance, Fannie and Freddie will have to reduce their holdings of mortgages and securities backed by home loans. The portfolios 'shall not exceed $850 billion as of December 31, 2009, and shall decline by 10 percent per year until it reaches $250 billion,' the Treasury said."

A nightmare on Wall Street
08/29/08 Permlink | Markets
"Like a Hollywood monster that is impervious to bullets, the credit crisis refuses to lie down and die. The authorities have bombarded it with interest-rate reductions, tax cuts, special liquidity schemes and bank bail-outs, but still the creature lumbers forward, threatening new victims with every step. Global stockmarkets are suffering double-digit losses this year, and credit markets are once again gummed up."

September: The horror story
08/29/08 Permlink | Markets
"The Dow during the average September has lost 1.13%, which compares to an average gain among all other months over the last 112 years of 0.75%. That works out to an average spread between September and all others months of 1.88 percentage points per month -- which is impressively large. Nor is September's awful record the result of just a few years in the sample. The pattern in fact is remarkably consistent: September was among the worst performing months in all but one of the decades of the 20th century. Only between 1911 and 1920 was its performance above par, when its average performance for the decade came in second."

The Halloween effect in US sectors
08/28/08 Permlink | Academia Markets
"All US stock market sectors and industries perform better during winter than during summer in our sample from 1926-2005. In more than two-third of all sectors and industries this difference in summer and winter returns, known as the Halloween effect, is statistically significant and in half of all sectors and industries risk premia are negative during summer. However, while all sectors and industries show this effect, there are large differences across sectors and industries. The effect is almost absent in sectors related to consumer consumption but strong in production sectors."

The giant pool of money
08/23/08 Permlink | Real Estate Bonds Debt Markets
"A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s? It all comes back to the Giant Pool of Money."

Court upholds ABCP plan
08/18/08 Permlink | ABCP Law Bonds Markets
"Investors whose funds have been locked up for more than a year in frozen asset-backed commercial paper may get their money back within as little as two months after an appeal court ruled a $32-billion restructuring plan is fair and legal."

Abnormal returns from the U.S. senate
08/18/08 Permlink | Academia Government Markets
"The actions of the federal government can have a profound impact on financial markets. As prominent participants in the government decision making process, U.S. Senators are likely to have knowledge of forthcoming government actions before the information becomes public. This could provide them with an informational advantage over other investors. We test for abnormal returns from the common stock investments of members of the U.S. Senate during the period 1993--1998. We document that a portfolio that mimics the purchases of U.S. Senators beats the market by 85 basis points per month, while a portfolio that mimics the sales of Senators lags the market by 12 basis points per month. The large difference in the returns of stocks bought and sold (nearly one percentage point per month) is economically large and reliably positive."

The wisdom of crowds?
08/13/08 Permlink | Economics Behaviour Markets
"When people discover that I am an economist, they rarely ask me for my views on subjects that economists know a bit about - such as how to respond to climate change or pay less at a supermarket. Instead, they ask me what will happen to the economy. Why is it that people won't take "I don't really know" for an answer? People often chuckle about the forecasting skills of economists, but after the snickers die down, they keep demanding more forecasts. Is there any reason to believe that economists can deliver?"

Sometimes even I will go with the flow
07/31/08 Permlink | Markets
"One such process suggested itself a few months back in the ABN Amro Global Investment Returns Yearbook for 2008, written by Paul Marsh, Elroy Dimson and Mike Staunton. It contains a fascinating chapter on momentum in the stock market. The conclusion was that buying momentum stocks is a rather sensible strategy, not the work of a raving madman determined to lose all his wealth."

Sell-side analysts more accurate than buy-side
07/29/08 Permlink | Markets
"Investors rarely have access to the buy-side analyst reports of institutional investors, and according to a new study by a trio of Harvard Business School researchers, they likely aren't missing much. The study finds buy-side analysts are more optimistic and less accurate than their sell-side counterparts, who freely distribute their recommendations."

Fairfax Financial beats bad markets
07/28/08 Permlink | Value Investing Markets
"Prem Watsa, Chair of insurance conglomerate Fairfax Financial Holdings Ltd., began to worry about a credit meltdown a few years ago. So he and his investment team devised a defensive strategy. Today, Fairfax is in great shape financially, despite lousy markets. The company has even defied gravity and two weeks ago its credit was upgraded. This reflected its stellar investment performance on its US$19.8 billion investment portfolio, good operations at its underlying insurance companies and a jump in shareholders. equity from US$2.856 billion in 2006 to US$4.8 billion today."

SEC plans to broaden curbs on short sales
07/26/08 Permlink | Government Markets
"The top U.S. securities regulator remains steadfast in a plan to broaden an emergency rule to curb abusive short selling despite opposition from the hedge fund industry and other short sellers. U.S. Securities and Exchange Commission Chairman Christopher Cox told lawmakers Thursday the agency would soon propose expanding the rule covering the shares of 19 major financial firms to the entire market."

Shortsighted naked-short solution
07/26/08 Permlink | Government Markets
"The latest Wall Street cesspool is the short-selling arena, where greedy hedge funds, beleaguered investment and commercial banks and an incompetent regulator--the Securities and Exchange Commission--have made bollocks out of a crucial arena of the markets."

Fill up on pre-poll bargains
07/24/08 Permlink | Markets
"A point few fully recognise - one I've never seen mentioned anywhere - is the robust historical anomaly of US stocks outperforming non-US stocks in the few months just before presidential elections. Regardless of which election you start with, or whether stocks rise or fall through the period, or whether US stocks start off leading or lagging, US stocks overwhelmingly outperform non-US stocks in the election run-up from June through October. In non-election years the reverse has been slightly true. So overall, in all years, there is no such nation effect - only when it comes to presidential elections."

The smartest advice I ever got
07/24/08 Permlink | Markets
"I was nine years old, and I saw my father reading the financial pages. They didn't look like the sports pages or the comics, so I asked him what they were. He said, "Well, these are stocks." I said, "What's a stock?" And he said, "See this thing? This represents a company. And see this 'plus .25'? That means that if you own one share of this company today, you have 25 more than you had yesterday." And I said, "I can have this thing yesterday, I can go to sleep, wake up and have 25 more and not do any work?" And he said, "Yes." I had come in from mowing the grass for three hours to earn 25. So the lesson I took was that in the stock market you can make money without doing any work. And since I have always had an almost infinite capacity for indolence, I thought, "This is great.""

Wall Street's laughing all the way to the bank
07/24/08 Permlink | Government Markets
"The credit crisis really puts the free in free market. The freest market is supposed to be the United States, and the evidence in favour of that argument is mounting. It's just not what you think. Free, in this case, means a free ride for a select group of people. Wall Street never looked so good, or bad, depending on your perspective."

Bad news sparks a stampede
07/23/08 Permlink | Behaviour Markets
"After IndyMac Bancorp failed, customers waited in line for hours to collect their money. The police had to be called in to quell the crowd. The scenes brought to mind dire moments from the Great Depression. On the Federal Deposit Insurance Corp. Web site, IndyMac customers were told: ''If the balance in your account . . . is less than $100,000, no action is required on your part at this time.'' The money is insured. Many behavioral economists watching people herd in line at the bank -- or flush their portfolios of Fannie Mae and Freddie Mac stock -- sense a deep even primal, response at play. I suppose the only way to say this is to just say it: People are acting like frogs. When a group of frogs senses they are about to be visited by the dreaded snake, they do not hop in separate directions. They bunch up together. And they fight to get in the middle. Sheep do it. Minnows do it. It turns out that humans do, too, particularly in financial crashes."

Are P-E's past their prime?
07/22/08 Permlink | Markets
"The price-earnings ratio is a popular tool for investors. But these days, as both prices and earnings fluctuate rapidly, the p-e tool is getting extra attention because it tries to answer a key question: With the broad Standard & Poor's 500-stock index down almost 20% from its October peak, are stocks cheap enough to make them a great bargain for long-term investors?"

Why no outrage?
07/21/08 Permlink | Government Grant Markets
"Through history, outrageous financial behavior has been met with outrage. But today Wall Street's damaging recklessness has been met with near-silence, from a too-tolerant populace, argues James Grant"

SEC retrenches on new short-selling rules
07/18/08 Permlink | Government Markets
"Under the new rule, the SEC will require short-sellers to secure borrowed shares before putting on their short sales, preventing "naked" short-selling, in which a trader doesn't properly locate shares to borrow. Naked short-selling can add extra downward momentum on a stock because without being forced to borrow the shares first, traders can short a limitless amount of stock. But the emergency rule, which is in effect for 30 days, only applied to those 19 companies among Wall Street's biggest. They are companies whose shares are not typically hard to locate or scarce for shorting, a fact that angered many earlier in the week. The American Bankers Association wants the SEC to include shares of regional banks under the requirements, and no doubt hundreds of small company chief executives would also like to be covered."

S&P500 dividend yield highest since June 1995
07/16/08 Permlink | Dividends Markets
"The S&P 500 is currently yielding the most it has since June 1995 at 2.49%. After declining for about 20 years from the early 80s to the late 90s, the dividend yield has been on a steady rise this decade."

Seeing bad loans
07/16/08 Permlink | Markets
"While a fraction of the nation's banks are expected to buckle under their growing burden of bad loans, federal regulators, bank executives and analysts agree that the vast majority of institutions are sound. Bank customers are not panicking, particularly since most of their deposits are insured. But shareholders, whose investments are by no means guaranteed, are running scared. It is becoming increasingly clear that even the strongest banks will be grappling with bad loans for years - and that the outlook for the industry could worsen further if the economy and the housing market continue to weaken. The collapse of IndyMac Bancorp last week fanned long-smoldering worries that even healthy banks confront significant challenges."

Curbing short-selling abuse
07/15/08 Permlink | Government Markets
"The naked short regulations promise to have more teeth than last weekend's announcement that the SEC would police rumors on Wall Street. That was widely interpreted as a weak attempt to herd cats. Traders now won't be able to skirt borrowing rules to short shares of a rival firm. Up until now, traders were merely required to "locate" shares they'd be borrowing to short. As in: "Yeah, my cousin Vinny in Hoboken has them." The location requirement is a weaker standard that leaves plenty of room for "interpretation" if not outright abuse. Pre-borrowing is a much firmer commitment and eliminates the probability that a stock lender will lend out the same shares to several different traders."

SEC to limit short sales
07/15/08 Permlink | Government Markets
"The requirement would prohibit the practice known as naked short selling, in which traders avoid the financial burden of borrowing shares when betting they'll fall." [A long overdue move.]

Paulson seeks authority to shore up Fannie, Freddie
07/14/08 Permlink | Real Estate Government Markets
"Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages. Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank."

Mortgage giants face pressure
07/11/08 Permlink | Real Estate Government Markets
"One possible scenario if Fannie and Freddie's financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step -- known as placing it in a conservatorship -- would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear."

The $5 trillion mess
07/11/08 Permlink | Real Estate Government Markets
"They own or guarantee $5 trillion worth of mortgages- nearly half of all the country's outstanding home loan debt - and they're crashing. Big time. If Fannie Mae and Freddie Mac go under, it will wreak yet more havoc on an already wrecked housing market - making loans tougher to come by and possibly pushing hundreds of billions of dollars in cost on to U.S. taxpayers."

Why Buffett is buying
07/10/08 Permlink | Buffett Markets
"Buffett, 77, can afford to throw a little mud on his competitors in the private equity industry. Wall Street's acquisition machine has seized up, while Buffett, in the valedictory chapter of a career stretching back more than 60 years, is on a buying spree. He has $35.6 billion in cash to spend, and he's looking for companies that he can buy at a reasonable price, that have experienced managers he trusts, products with strong market positions or other competitive advantages."

Warren Buffett gets busy
07/10/08 Permlink | Buffett Markets
"But Buffett is putting things in perspective. Recession does not equal the second Great Depression or economic Armageddon. Rather, Buffett seems to be following the tried and true investing axiom that the best time to make long-term bets is when fear is at its peak. And make no mistake, this is a market ruled by fear right now."

Spending safely
07/10/08 Permlink | Retirement Markets
"If you're getting ready to retire, you may already be familiar with "the 4% solution." For more than a decade, financial advisers have warned retirees that draining over 4% of their nest eggs in their inaugural retirement year could ultimately lead to financial ruin. The 4% mantra started with Bill Bengen, 60, a soft- spoken investment adviser in El Cajon, Calif., who has written a series of landmark research papers since 1994 on safe withdrawal rates. What most people don't realize, though, is that Bengen no longer recommends the 4% rate."

Fannie Mae, Freddie losses make them 'insolvent'
07/10/08 Permlink | Real Estate Government Markets
"While leading the St. Louis Fed, Poole roiled markets in 2003 when he said the government should consider severing its implied backing of Fannie Mae and Freddie Mac and said the companies lack the capital to weather financial market disruptions. In 2006 and 2007 he called for lawmakers to strip Fannie Mae and Freddie Mac of their charters."

Bear market freak out
07/06/08 Permlink | Funds Markets
"When it comes to investing, human nature is not our friend, and will consistently lead us to do the wrong thing at the wrong time. The chart to the right shows how investor funds have flowed into stock mutual funds so far this decade. Notice how we poured money into the stock market after the great years and panicked and sold after declines. A clear pattern of buying high and selling low, something I'm pretty sure investors didn't consciously set out to do."

Roses among the wallflowers
06/30/08 Permlink | Markets
"Consider two hypothetical portfolios the researchers put together. The first owned just those stocks that traded each market day of the previous year, while the second held those stocks that had at least one no-trade day. From the beginning of 1962 through 2003, according to the researchers. calculations, the second portfolio outperformed the first by an annualized average of eight percentage points. That's a big gap. By contrast, the average small-cap stock outperformed the average large-cap issue during that period by only 2.9 percentage points, annualized, according to the researchers. And the typical value stock beat the average growth stock by 5.5 points a year."

Information diffusion based explanations
06/30/08 Permlink | Academia Markets
"In this paper we develop information based factors which outperform other popular factors used in the multifactor pricing literature such as the Fama and French size and book-to-market factors. The first factor is based on the age of an asset, measured by the number of months since the asset's IPO, while the second factor is based on the percentage of trading days an asset does not trade in a given year. Both factors attempt to capture the quality and speed of information diffusion on the market. Our information factors perform particularly well on momentum portfolios, which, Hong et al (2000) have shown to result from gradual-information diffusion. This gradual information diffusion explanation is consistent with the information argument underlying our factors, namely that, assets plagued with information problems can be miss-priced for sustained periods of time. Furthermore, our multifactor model successfully prices most industry portfolios and performs as well as the Fama and French model when pricing the 25 size/book-to-market sorted portfolios."

Eight centuries of financial crises
06/25/08 Permlink | Debt Government Academia Markets
"This paper offers a 'panoramic' analysis of the history of financial crises dating from England's fourteenth-century default to the current United States sub-prime financial crisis. Our study is based on a new dataset that spans all regions. It incorporates a number of important credit episodes seldom covered in the literature, including for example, defaults and restructurings in India and China. As the first paper employing this data, our aim is to illustrate some of the broad insights that can be gleaned from such a sweeping historical database. We find that serial default is a nearly universal phenomenon as countries struggle to transform themselves from emerging markets to advanced economies. Major default episodes are typically spaced some years (or decades) apart, creating an illusion that 'this time is different' among policymakers and investors. A recent example of the 'this time is different' syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent US sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements."

The road to revulsion
06/18/08 Permlink | Montier Markets
"Indeed, one of the lessons that should be learnt from the Japanese experience is that the banks were second round losers, a point made by Albert Edwards recently. They didn't really begin to underperform the rest of the market until the second Japanese recession of its debubbling process. They really started to suffer when their consumers (Japan Inc) started to struggle."

Long-term performance following rights issues
06/18/08 Permlink | Academia Markets
"This study finds evidence of significant long-term underperformance following rights issues made during 1986-95 in the UK. The findings are resilient to a number of methodological controls. In contrast, our results for a smaller sample of open offers made during 1991-95 show strong positive performance over a 5-year post-issue period, implying that firms making open offers had better growth prospects than firms making rights issues. During 1986-90, a period when open offers were rarely used, firms appeared to be making rights issues to exploit overvaluation. However, this was not evident for rights issues made during 1991-95, a period when open offers were more commonly used."

We ain't got to show you no stinking credibility
06/16/08 Permlink | Real Estate Markets
"In short, mortgage foreclosures and defaults are just now hitting their stride, and we are likely to observe a second round of credit fears as those losses mount. The U.S. dollar has enjoyed a brief rebound on tightening talk from the Fed, which is likely to quickly dissipate as soon as those credit concerns revive. Meanwhile, commodity price pressure is likely to diminish by the end of summer as the result of a continuing economic downturn coupled with a flight-to-safety which will reduce monetary velocity."

Odd numbers
06/06/08 Permlink | Markets
"Now in a new paper, M.I.T.'s Mozaffar Khan and Hai Lu of the University of Toronto show some compelling evidence that significant front-running does exist. Khan and Lu looked at the level of short sales between 2005 and 2007 surrounding days when a chief executive sold stock."

Taleb: the prophet of boom and doom
06/03/08 Permlink | Taleb Markets
"For the non-mathematician, probability is an indecipherably complex field. But Taleb makes it easy by proving all the mathematics wrong. Let me introduce you to Brooklyn-born Fat Tony and academically inclined Dr John, two of Taleb.s creations. You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time? Dr John gives the answer drummed into the heads of every statistic student: 50/50. Fat Tony shakes his head and says the chances are no more than 1%. 'You are either full of crap,' he says, 'or a pure sucker to buy that 50% business. The coin gotta be loaded.' The chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe. It is far, far more likely that somebody is cheating. Fat Tony wins. Dr John is the sucker. And the one thing that drives Taleb more than anything else is the determination not to be a sucker. Dr John is the economist or banker who thinks he can manage risk through mathematics. Fat Tony relies only on what happens in the real world."

Buffett sees U.S. in recession
05/25/08 Permlink | Economy Buffett Markets
"Warren Buffett, whose business and investment acumen has made him one of the world's wealthiest men, was quoted in an interview published Sunday as saying the U.S. economy is already in a recession. Asked by Germany's Der Spiegel weekly whether he thinks the U.S. could still avoid a recession, he said that as far as the average person is concerned, it is already here."

How the finance gurus get risk all wrong
05/24/08 Permlink | Indexing Risk Markets
"Your money is at risk. No matter what you've put it in - stocks, bonds, derivatives, hedge funds, houses, annuities, even mattresses - there's always the chance that you could lose it or miss out on a bigger opportunity somewhere else. Anyone who would tell you otherwise is either a fool or a huckster. Then there are those who do warn of risk but package it into a simple numerical measure that seems to put it within manageable bounds. They're even more dangerous."

Bernanke's bubble laboratory
05/21/08 Permlink | Markets
"First came the tech-stock bubble. Then there were bubbles in housing and credit. Chinese stocks took off like a rocket. Now, as prices soar on every material from oil to corn, some suggest there's a bubble in commodities. But how and why do bubbles form? Economists traditionally haven't offered much insight. From World War II till the mid-1990s, there weren't many U.S. investing manias for them to look at. The study of bubbles was left to economic historians sifting through musty records of 17th-century Dutch tulip-bulb prices and the like. The dot-com boom began to change that."

Banks keep $35 billion markdown off income statements
05/19/08 Permlink | Stocks Accounting Markets
"Banks and securities firms, reeling from record losses resulting from the collapse of the mortgage securities market, are failing to acknowledge in their income statements at least $35 billion of additional writedowns included in their balance sheets, regulatory filings show."

2008 Wesco notes
05/16/08 Permlink | Buffett Munger Markets
"Most assets are priced to a level where it is hard to get excited. It is hard to get 4% yield on a nice apartment, and it doesn't include replacing the carpets. Bonds of strong corporations are 4% yield. Corporate equities are paying 2% pa, growing 4% per year. Such a world isn't the one that made all of you able to come to the meeting. Last generation has been in hog heaven - some bumps, but it had easiest time getting ahead. In the eighteen years that preceded hog heaven, the purchasing power of Yale's endowment went down 60%. They were getting real investment return of 0%, negative. It is not at all impossible that brilliant investors like Yale get bad results in the future."

Beer may not be recession-proof
05/14/08 Permlink | Markets
"Miller CEO says cash-strapped beer drinkers are trading down to economy beers due to a slumping economy."

Has equity always earned a premium?
05/12/08 Permlink | World Markets
"Past performance is no guarantee, but history tells us that the equity risk premium has been persistent. This column shows that British investors enjoyed relatively high returns in the nineteenth century, though today.s UK market differs greatly from its formative ancestor."

Subprime in sheep's clothing
05/08/08 Permlink | Debt Real Estate Markets
"Unlike subprime folk with expired teasers who have been putting capital into their homes for months and perhaps years, many Alt-A borrowers with years left on their payment-lite teaser periods are going to wake up one day to homes that have hugely deteriorated in price and have little if any equity in them. That is the exact recipe for foreclosure that bank insiders and credit analysts are warning about. Mark Zandi of Moody's Economy.com estimates that, by the end of June, 21.0% of all first-mortgage holders in the United States, or 10.6 million homeowners, will have zero or negative equity in their homes. For now, Alt-A loans are performing better than subprime mortgages. The risk, however, is that generally well-heeled Alt-A borrowers will adopt the same flippant attitude to paying their debts as lenders did in evaluating them. An additional pressure: 23.7% of Alt-A loans were not taken out for primary residences are often considered investments and have a higher rate of foreclosure. Only 8.7% of subprime mortgages were for absentee landlords, according to the New York Federal Reserve Bank."

Foreclosure woes require action
05/06/08 Permlink | Government Real Estate Markets
"Unemployment statistics, according to Bernanke, do not explain the increased delinquencies of many areas, including California, Florida and parts of Colorado, where foreclosure filings have increased even when unemployment generally have fallen. More revealing was the close correlation between declining home prices and high delinquency rates. On the home price decline map, states like California and Florida were drenched in red, indicating the worst losses. On the map revealing the highest foreclosure rates, the same states were also covered in red."

Bear Stearns second brush with bankruptcy
05/05/08 Permlink | Derivatives Stocks Markets
"Bear believed that if it failed to get a new agreement that reaffirmed JPMorgan's guarantee of Bear Stearns' obligations, Bear could have been cut off from JPMorgan's Fed-backed funding and forced into bankruptcy - an outcome that many investors assumed had been forestalled by the March 16 merger agreement. The dispute that nearly brought Bear down a second time turned on whether JPMorgan would stand behind Bear Stearns' massive credit default swap book and other liabilities. The firm's lack of access to other funding had Bear lawyers preparing for a possible bankruptcy the weekend before the revised merger agreement was unveiled."

House prices decline
04/29/08 Permlink | Economy Real Estate Markets
"House prices dropped 2.6 percent in February from a month earlier, after a 2.4 percent decline in January, the S&P/Case- Shiller report showed. The figures aren't adjusted for seasonal effects, so economists prefer to focus on year-over-year changes instead of month-to-month. The group's 10-city composite index, with a history back to 1987, fell 13.6 percent in the 12 months ended in February, also the most on record. Nineteen of the 20 cities in the index showed a year-over- year decrease in prices for February, led by a 23 percent slump in Las Vegas and a 22 percent decline in Miami. Charlotte was the only area showing a gain with a 1.5 percent increase. Compared with January, homes in all 20 areas covered dropped in value."

Economy in a recession, will be worse than feared
04/29/08 Permlink | Economy Buffett Markets
"'This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think,' Buffett said. 'This will not be short and shallow.' 'I think consumers are feeling gas and food prices,' he added, 'and not feeling they've got a lot of money for other things.'"

One guy who has seen it all
04/28/08 Permlink | Markets
"Today's trouble, the 89-year-old Mr. Bernstein says, is worse than he has seen since the Depression and threatens to roil markets into 2009 and beyond -- longer than many people expect."

Immoral hazard
04/27/08 Permlink | Markets
"The idea that occasional economic setbacks might benefit the system in the long run was one of the early ideas to disappear. Yet if you prop up weak sisters who would otherwise fail and in failing present their more efficient competitors with extra growth, you must surely weaken the system. Desperation pricing from weak firms who simply should not exist can weaken the profitability of a whole industry, as it has for the airlines. The average efficiency of most industries is reduced with at least some effects on our global competitiveness. With a slightly lower average return on equity, the ability to reinvest drops so that, in this world of moral hazard where recessions are few and mild, GDP growth is a little less than it might have been."

Hoisington letter
04/22/08 Permlink | Markets
"Growth recessions, like full scale recessions, produce falling inflation, a margin squeeze on corporate profits, eroding stock prices, and declining interest rates. Thus, the difference is really one of semantics. The point for investors is not what type of recession we are experiencing, but rather how long the downturn will last. Our conclusion is that our present economic difficulties will persist for at least two years."

Triple-A failure
04/22/08 Permlink | Bonds Government Derivatives Markets
"Structured finance, of which this deal is typical, is both clever and useful; in the housing industry it has greatly expanded the pool of credit. But in extreme conditions, it can fail. The old-fashioned corner banker used his instincts, as well as his pencil, to apportion credit; modern finance is formulaic. However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. 'Everyone assumed the credit agencies knew what they were doing,' says Joseph Mason, a credit expert at Drexel University. 'A structural engineer can predict what load a steel support will bear; in financial engineering we can't predict as well.'"

The economic skies might be falling
04/19/08 Permlink | Value Investing Watsa Markets
"Investors around world saw sunny skies yesterday, but Prem Watsa is still prepared for a hard rain. The chair of Fairfax Financial Holdings Ltd. boasts that Canada's top-performing financial-services company of the past year is sitting on a billion-dollar life raft of cash and marketable securities - in case North America has the perfect economic storm."

Here comes the next mortgage crisis
04/17/08 Permlink | Debt Real Estate Markets
"California should be the poster child for a mortgage-loan bailout. In few other places have so many taken on such onerous debts with so little equity. Unfortunately, the crisis in California is going to get much worse, and there is no bailout that will solve it. Why? Because if the first stage of the foreclosure crisis was about people who could not afford their mortgages, the next stage will be about people who have every reason not even to try to pay their mortgages."

Looking beyond the bailout
04/17/08 Permlink | Value Investing Dreman Markets
"The government rescue of overleveraged financiers and underwater homeowners is still only beginning, and the signs that it will get bigger are manifold. The Federal Housing Administration has spent $21 billion since September staving off foreclosures. The House Financial Services Committee has proposed letting the FHA underwrite up to $300 billion in loans to borrowers. The last time the federal government stepped so directly into the mortgage business was at the bottom of the Great Depression. Congressmen from both parties are working on legislation to provide tax breaks and other help to much of the stressed homeowner population. The Administration has been reluctant to get involved in anything it would consider a bailout, but the rapidly darkening credit situation may leave it with no choice."

What Warren thinks...
04/14/08 Permlink | Buffett Markets
"You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that."

A blunt former Fed chairman takes on Bernanke
04/12/08 Permlink | Government Markets
"A few days ago an unusual event took place: Paul Volcker, the mythical U.S. Federal Reserve Board chairman from the Reagan years, criticized the policy of the current Fed chairman, Ben Bernanke, in a speech to the Economic Club of New York. Just so you grasp how extraordinary this was, you should first understand that normally a past Fed chairman scrupulously avoids saying anything at all about current Fed policy - for the simple reason that the current Fed chairman's words are one of his most important tools: They can sway markets. This ability does not fade entirely when a Fed chairman leaves. So when a past Fed chairman speaks, his words can clash with those of the present one and make that one's job difficult. Out of professional courtesy, past Fed chairmen therefore keep quiet; Mr. Volcker especially - the man who hiked interest rates to 20 per cent to kill inflation, at the cost of a deep recession. But last week Mr. Volcker spoke his mind bluntly. He said, in effect, that the current Fed is not doing its job."

Paul Volcker speaks in New York
04/12/08 Permlink | Government Markets
"Former U.S. Federal Reserve Chairman Paul Volcker speaks in New York about practices leading to the current financial market crisis, the role of the Federal Reserve in preventing and dealing with such crises and the need for changes in market regulation."

Sell in May and go away
04/09/08 Permlink | Academia Markets
"We document the existence of a strong seasonal effect in stock returns based on the popular market saying 'Sell in May and go away', also known as the 'Halloween indicator'. According to these words of market wisdom, stock market returns should be higher in the November-April period than those in the May-October period. Surprisingly, we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The 'Sell in May' effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle."

Whither Black-Scholes?
04/08/08 Permlink | Taleb Academia Derivatives Markets
"In fact, Black-Scholes may not be used that much in the markets to begin with. New research by veteran traders and best-selling authors Nassim Taleb and Espen Haug points in that direction. Clearly, a formula that isn't used can't have much of an effect on markets, let alone cause the massacre that began last summer."

Asleep at the wheel
04/08/08 Permlink | Behaviour Montier Markets
"However, more importantly once earnings have peaked they often return to the low edge of the growth bands. This represents a 45%- 50% decline in earnings. This number holds for the US, Europe and the UK. So if you want to have a worse case scenario then a figure like this should be used."

Crossing the rubicon
04/04/08 Permlink | Value Investing Markets
"In light of the above comments, the partners of FPA came to a unanimous conclusion that the recent Federal Reserve actions and the potential new Congressional policies under consideration are likely to lead to a significantly higher level of long-term inflation in the U.S. We are more than disappointed in the substandard decision making that has taken place within the Federal Reserve and other governmental entities these last several years. The misguided monetary policies of the former Chairman of the Federal Reserve, Alan Greenspan, created an era of 'too big to fail' that has led to two major asset bubbles. With each successive bubble, the policy actions available to the Federal Reserve to reduce financial system risk have been systematically reduced. The extraordinary actions taken by the Bernanke Federal Reserve reflect acts of desperation rather than long-term policy solutions. The rapidly changing events within the capital markets are forcing the Fed to adopt policies that have the potential of long-term negative consequences."

Spanish property auction flop
04/04/08 Permlink | Real Estate World Markets
"House prices began their surge in 1998 spurred by falling interest rates as Spain prepared for euro membership. Spain has built about 5 million new homes since then, attracting immigrant labor from Eastern Europe and Latin America to fuel a boom that peaked in 2006. Now the turmoil in global credit markets is cutting demand. The world's biggest financial companies have reported about $232 billion in credit losses and writedowns since the start of 2007 and the credit shortage is filtering through to Spain."

Student lenders stifled
04/04/08 Permlink | Debt Bonds Markets
"The collapse of the $330 billion auction-rate securities market has brought debt sales by U.S. public student-loan agencies to a halt. No municipal bonds backed by student loans were sold in the first quarter, the first time that happened in almost 40 years, according to Thomson Financial. The inability to obtain financing differs from states, cities, schools and hospitals, which sold $82 billion of bonds to fund public works and replace failed auction debt that stuck them with penalty rates as high as 20 percent."

How fund manager didn't lose a bundle
04/03/08 Permlink | Funds Value Investing Markets
"As for where Mr. Rodriguez is betting now? He's still bearish. He's on a "buyer's strike." But he is considering his next moves. He views the recent partial bailout of Bear Stearns as "a short term positive but a long term negative . for the dollar and for inflation." The reason? Once again those who behaved irresponsibly or worse are sticking everyone else with the tab. "This has expedited the socialization of risk and moral hazard, exponentially," he says. Stay tuned."

Dan on BNN
04/02/08 Permlink | Behaviour Hallett Markets
Dan cautions against Ticker Temptation. Read his articles over here.

When I'm sixty-four
04/02/08 Permlink | Real Estate Bonds Gross Markets
Mr. Gross advocates government measures that attempt to stop the slide in housing prices. Oh, and he's turning 64.

Taleb outsells Greenspan
03/30/08 Permlink | Derivatives Disaster Books Markets
"On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley's Manhattan offices on 47th Street and Broadway to address a group of the firm's risk managers. His message: Your models don't work. Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests -- Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said. 'Past shortfall doesn't predict future shortfall,' the options trader turned best-selling author recalls telling the assembled group of about 40. The risk managers, part of a tribe of mathematical model makers known in the finance world as quants, stared back at him blankly, and a debate ensued, according to people who were there. Only six months later, Morgan Stanley experienced its own rout. The world's second-biggest mergers adviser announced in December that it had written down its subprime-related holdings by $9.4 billion after the firm's traders misjudged how fast and far prices of the debt would fall. Their risk management had failed."

Berkshire's free money beats LBO model
03/26/08 Permlink | Buffett Markets
"Credit-market gridlock has trapped Stephen Schwarzman, who relies on lenders to fund acquisitions, while leaving Warren Buffett free to pursue the debt-free deals that have helped make him the world's richest person. Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., has $59 billion in cost-free money from insurance premiums to invest. Schwarzman's New York-based Blackstone Group LP, manager of the biggest private-equity fund, is being forced to bypass Wall Street banks after they stopped financing most leveraged buyouts. Buffett and Schwarzman each takes a different approach to the same goal: finding companies they consider undervalued. Investors are betting Buffett's model will prevail, at least for now."

Partying like it's 1929
03/24/08 Permlink | History Government Markets
"Normally, banks satisfy both desires: depositors have access to their funds whenever they want, yet most of the money placed in a bank's care is used to make long-term loans. The reason this works is that withdrawals are usually more or less matched by new deposits, so that a bank only needs a modest cash reserve to make good on its promises. But sometimes - often based on nothing more than a rumor - banks face runs, in which many people try to withdraw their money at the same time. And a bank that faces a run by depositors, lacking the cash to meet their demands, may go bust even if the rumor was false. Worse yet, bank runs can be contagious. If depositors at one bank lose their money, depositors at other banks are likely to get nervous, too, setting off a chain reaction. And there can be wider economic effects: as the surviving banks try to raise cash by calling in loans, there can be a vicious circle in which bank runs cause a credit crunch, which leads to more business failures, which leads to more financial troubles at banks, and so on. That, in brief, is what happened in 1930-1931, making the Great Depression the disaster it was."

Too dumb to fail
03/24/08 Permlink | History Government Markets
"In 1984, Continental Illinois, then one of the country's largest banks, found itself on the verge of collapse, after billions of dollars. worth of its loans went bad. To avert a crisis, the government stepped in, purchasing $3.5 billion of the soured loans and effectively taking over the bank. Later that year, at a congressional subcommittee hearing, Representative Stewart McKinney summed up the lesson of the rescue effort: 'Let us not bandy words. We have a new kind of bank. It is called too big to fail. T.B.T.F., and it is a wonderful bank.'"

Panic of 1907 or not, trading stops on good friday
03/21/08 Permlink | History Markets
"The New York Stock Exchange is closed today, as it has been every Good Friday for almost 150 years, except 1898, 1906 and 1907. That last one was the same year as the infamous Panic of 1907, when the aggregate value of all U.S. stocks plunged by more than a third. Hence, a legend that persists 101 years later: Traders get to stay home the Friday before Easter not just because it's a Christian holy day but because of its association with one of history's great bear markets."

JPMorgan buys Bear Stearns for $2 a share
03/16/08 Permlink | Stocks Markets
"JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $2 a share after a run on the company ended 85 years of independence for Wall Street's fifth- largest securities firm and prompted a bailout by the Federal Reserve."

Wall Street fears a big US bank is in trouble
03/12/08 Permlink | Markets
"Global stock markets may have cheered the US Federal Reserve yesterday, but on Wall Street the Fed's unprecedented move to pump $280 billion into global markets was seen as a sure sign that at least one financial institution was struggling to survive."

Try, try again
03/11/08 Permlink | Government Markets
"The U.S. Federal Reserve has come up with yet another way to kick-start the credit markets, if only its innovations would start working already. On Tuesday, the central bank said it is expanding its securities lending operations, allowing big Wall Street firms to borrow for longer periods and, for the first time, exchange triple-A mortgages not backed by Fannie Mae or Freddie Mac for Treasury bonds. That is to say, the Fed will let the big brokerages offload their hard-to-sell mortgage holdings for easy-to-sell Treasury bonds."

Hedge Funds reel from margin calls on treasuries
03/10/08 Permlink | Funds Markets
"The hedge-fund industry is reeling from its worst crisis in a decade as banks are now demanding more money pledged to support outstanding loans even when the investment is backed by the full faith and credit of the United States."

Gates no longer world's richest man
03/05/08 Permlink | Buffett Markets
"Warren Buffett is the richest man on the planet. Riding the surging price of Berkshire Hathaway stock, America's most beloved investor has seen his fortune swell to an estimated $62 billion, up $10 billion from a year ago. That massive pile of scratch puts him ahead of Microsoft co-founder Bill Gates, who was the richest man in the world for 13 straight years."

How a bubble stayed under the radar
03/01/08 Permlink | Markets
"The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks. Were all these people stupid? It can't be. We have to consider the possibility that perfectly rational people can get caught up in a bubble. In this connection, it is helpful to refer to an important bit of economic theory about herd behavior."

Global investment returns yearbook 2008
02/25/08 Permlink | Markets
"This year's thematic studies are about momentum, a subject of importance to all investors, whether their investment style favours it or not. We show that momentum profits in equities have been large and pervasive across time and markets, and present findings from the longest momentum study ever undertaken. We also discuss how supply and demand as well as financing mechanisms can work as important multipliers of momentum for real estate and for commodity prices. Our focus throughout is on the practical implications for investors."

Fat tails and nonlinearity
02/04/08 Permlink | Markets
"If you are involved in financial markets, you have gotten the memo about fat tails by now. But awareness of extreme events is not enough. Thoughtful investors must understand two interrelated aspects of the market. The first is the statistical properties of price movements, including important deviations from the bell-shaped distribution. Academics, risk managers, and quantitative investors have explored this aspect extensively. Researchers recognized decades ago that the distribution of price changes includes fat tails. The second aspect, and one often overlooked or misunderstood, is the mechanism that leads to the statistical imprint. Much of the work on the market's statistical properties is divorced from the propagating mechanism, while traditional theories of market efficiency assume the mechanisms. Crucially, understanding the mechanism provides insight into how and why markets fail."

The worst market crisis in 60 years
01/25/08 Permlink | Markets
"The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years."

Ambac cut to AA
01/19/08 Permlink | Bonds Markets
"Ambac Financial Group Inc., the second-largest bond insurer, was stripped of its AAA credit rating by Fitch Ratings after the company abandoned plans to raise new equity. Ambac Assurance Corp. was lowered two levels to AA and may be reduced further, New York-based Fitch said yesterday in a statement."

Upside/downside calculator now with 2007 data
01/03/08 Permlink | Stingy Investing Markets
"Select a portfolio composed of up to 11 major asset types, then pick start and end dates. The calculator tells you how much you would have made or lost."

The subprime in the schoolhouse
12/20/07 Permlink | Government Markets
"Nobody knows how much more pain is coming. State funds could lose hundreds of millions of dollars, says Lynn Turner, chief accountant of the U.S. Securities and Exchange Commission from 1998 to 2001. "If you're dealing with short-term money market funds, people expect those to have low risk and not be invested in these SIVs and other very high-risk instruments," Turner says. If public funds lose money, towns and local agencies could raise taxes, sell more debt or, more likely, trim budgets, Turner says. "Cutting spending usually means people losing jobs because someone else didn't do their job," he says."

After the money's gone
12/15/07 Permlink | Markets
"On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it's the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn't count on it. In past financial crises - the stock market crash of 1987, the aftermath of Russia's default in 1998 - the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working. Why not? Because the problem with the markets isn't just a lack of liquidity - there's also a fundamental problem of solvency."

Freddie, Fannie seek a few billion
11/20/07 Permlink | Markets
"Fannie and Freddie are seen to be an important source of demand for mortgages, so any problems at these companies could end up reducing the amount of mortgage lending that gets done by the banks that sell mortgages to Fannie and Freddie. Because of their integral role, it would be no surprise if OFHEO, as well as other financial regulators like the Federal Reserve, were keen to see a ramp up in capital at both companies. Such capital increases will have to be very large. Neither Fannie nor Freddie is close to having sufficient capital to weather a full-blown recession."

David Einhorn's Graham & Dodd breakfast speech
10/30/07 Permlink | Markets
"Without much fanfare the ratings agencies abandoned this practice of AAA meaning AAA and BBB meaning BBB. Instead for each type of bond, they use a different rating scale with different so-called 'idealized default rates' for each rating. The idealized default rate for a municipal bond at a given rating is less than the idealized default rate for a corporate bond, which is less than the idealized default rate for an asset backed security which is less than the idealized default rate for a CDO. As an example of the soundness in this system, Nomura securities pointed out that hypothetically, if you took a AA+ rated asset backed security and repackaged it all by itself and called the repackaged instrument a CDO, it becomes AAA, because the CDO has a higher idealized default rate than the asset backed security."

The catastrophist view
10/29/07 Permlink | Markets
"Their bearish arguments come in many shapes and sizes, but here's the basic one: The past five or six years have been deceptively fortunate ones for the U.S. economy. That's because any troublesome developments - the surge in oil prices from $28 per barrel in 2003 to about $87 today, for example - have been papered over by rising home prices. Home equity has been used to buy flat-screen TVs, SUVs, and more homes. Wall Street bought up all this debt from lenders, thereby allowing them to lend more. The softening of real-estate prices in most parts of the United States put a crimp in this system, but it hasn't stopped it. The question is, what, if anything, will? What will bring on the apocalypse that Schiff and others believe is inevitable?" [Scary Halloween stories for adults]

A super-duper bad-loan bailout scam
10/22/07 Permlink | Markets
"When I first heard about this, I was outraged, disgusted and slightly depressed. I thought, here we go, another bailout. Barney Frank and friends are trying to bail out the homeowners. Wall Street, the Treasury Department and the Bank of England appear determined to do whatever it takes so that we have absolutely no price discovery on any mortgage-related assets that may have gone bad -- thereby giving a pass to the folks who've made obscene amounts of money conceiving and marketing them. Whether you call this crony capitalism or socialism, the worst of it is what we have become."

Credit crunch taking a toll, Bank of Canada says
10/18/07 Permlink | Markets
"The global credit crunch is taking a toll on Canadian banks' balance sheets, and has prompted lenders to curtail their credit, the Bank of Canada says. 'Canadian financial institutions are facing substantially increased funding needs,' the central bank said in its first full tally of the damage done by the recent financial turmoil. Canadian banks have been forced to hold high amounts of commercial paper of questionable value in their inventories, the central bank pointed out. Plus, corporate borrowers are calling on their banks to come through with funding arranged under pre-committed lines of credit, now that some market sources of funding are not as accessible. The Canadian banks are solvent enough to handle it, the central bank said, but they are reacting by tightening up credit conditions."

Views on the Canadian dollar
10/18/07 Permlink | Markets
"Over the past year the Canadian dollar has appreciated from $0.85 to $1.02US or 20%. Admittedly, the Canadian dollar was undervalued at $0.70-$0.80 and at $0.85, in our opinion, it was fairly valued."

1929 Redux: Heading for a crash?
10/08/07 Permlink | Markets
"Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets. Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials - excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence."

Unsafe havens
09/27/07 Permlink | Markets
"Money market funds were invented 37 years ago to offer investors better returns than bank savings accounts while providing a high degree of safety. Most of the $2.5 trillion sitting in these funds is invested in such assets as U.S. Treasury bills, certificates of deposit and short-term commercial debt. Unlike bank accounts, money market funds aren't insured by the federal government. They almost never fail. Unbeknownst to most investors, some of the largest money market funds today are putting part of their cash into one of the riskiest debt investments in the world: collateralized debt obligations backed by subprime mortgage loans."

Too clever by 50 basis points
09/21/07 Permlink | Markets
"The past few weeks have shown that financiers did not fully understand what they were trading. The boom in derivatives was one of those moments when financial engineering raced ahead of back offices and risk-management departments, leaving them struggling to value or account for their holdings. Pierre Pourquery, of Boston Consulting Group, says it is not uncommon for investors to break their exotic purchases into smaller pieces in order to feed them into their risk-management systems. This brings new risks, particularly that the parts will behave differently from the whole under stress. Steven Schwarcz, a professor at Duke University and writer on securitisation, has come across contracts which are so convoluted that it would be impractical for investors to try to understand them: they would have to spend more money hiring experts to deconstruct them than they could ever hope to earn in extra returns."

How bad debt infected the world
09/16/07 Permlink | Markets
"Cathy Busby has never met Mick Mayor. The 47-year-old hospital administrator from Colorado had no idea that when she fell behind with the mortgage payments on her three-bedroom home in the suburbs of Denver, it would stop Barclays extending the overdraft limit on Mayor's business four months later. But this is the true story of the global credit crunch. What seemed initially to be a problem in the US housing market is now forcing up the cost of borrowing in Britain, having swept from Denver to Darlington."

Bear bonanza
08/31/07 Permlink | Markets
"Earlier this year Prem Watsa, the gunslinging chief of Fairfax Financial, had $341 million riding on a hunch that dozens of brokers, banks and insurers could struggle paying their debts. Watsa has a history of making a killing on bearish bets. He sold half the company's stock holdings before the 1987 crash and bought puts against the S&P 500 before the index fell in 2000. But as summer began, his latest wager had produced nothing but losses. Then the credit markets seized up, and investors began clamoring for the Toronto insurer's collection of credit default swaps, basically insurance against bond defaults. Prices climbed. By the end of July Fairfax's swaps were worth $537 million, up 170% in a month."

In nature's casino
08/26/07 Permlink | Markets
"From Miami to San Francisco, the nation's priciest real estate now faced beaches and straddled fault lines; its most vibrant cities occupied its most hazardous land. If, after World War II, you had set out to redistribute wealth to maximize the sums that might be lost to nature, you couldn't have done much better than Americans had done. And virtually no one - not even the weather bookies - fully understood the true odds."

Fed bends rules to help two big banks
08/25/07 Permlink | Markets
"The regulations in question effectively limit a bank's funding exposure to an affiliate to 10% of the bank's capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, "that represents about 30% of Citibank's total regulatory capital, which is no small exemption," says Charlie Peabody, banks analyst at Portales Partners. The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in "the most rapid and cost-effective manner possible." So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle."

Crisis counsel
08/18/07 Permlink | Markets
"In one way, I'm sympathetic to the institutional reluctance to face the music. I'd give a lot to mark my weight to "model" rather than to "market.""

'Uptick' rule change an opportunity
08/15/07 Permlink | Markets
"The old SEC rule said that short selling could only be done at a price higher than the last traded price. It was instituted to eliminate the "bear raids" of the roaring 1920s, when well-financed stock operators would come out with wave after wave of short selling at ever lower prices. This spiralling price fall would give the raiders the chance to buy back their shorted shares from panicked sellers, and go home richer at the expense of the uninformed masses. The "sell on uptick" rule eliminated such bear raids, with some exceptions. One was in commodities, where you can short at any price, and another was for some brokers, in some cases. The last one is important because it helped cause the 1987 crash, through "portfolio insurance," which gave investors dyspepsia and a buying opportunity, same as it might in the near future."

Another pounding
07/15/07 Permlink | Markets
"The current fear is not so much that the housing market could drive America into recession, although that could still happen. The worry is more that credit conditions may get tighter. The spread paid by higher-risk European firms has increased by almost a percentage point since mid-June. Investors are shying away from some loans being offered to finance leveraged buy-outs. A slowdown in such private equity-driven bids would hit the stockmarket."

Bear Stearns' collateral damage
07/13/07 Permlink | Markets
"The implosion of a hedge fund often sheds some unwanted attention on the wealthy investors who chose to sink money into the venture. That's certainly the case with an 11-month-old Bear Stearns hedge fund that bet heavily on risky bonds backed by subprime mortgages and is teetering on the verge of collapse"

Blowing up
06/27/07 Permlink | Taleb Markets
"How Nassim Taleb turned the inevitability of disaster into an investment strategy."

Nassim Taleb Lecture: The Black Swan
06/24/07 Permlink | Taleb Markets
"Nassim Nicholas Taleb has devoted his life to immersing himself in problems of luck, uncertainty, probability, and knowledge. Part literary essayist, part empiricist, part no-nonsense mathematical trader, he is currently the Dean's Professor in the Sciences of Uncertainty at the University of Massachusetts at Amherst. His last book, the international bestseller Fooled by Randomness, has been published in eighteen languages."

Why bubbles are great for the economy
05/23/07 Permlink | Markets
"If you blew the kids' college fund on Pets.com stock back in 2000, or dropped $800,000 last year on that spec house in Phoenix that you knew you could flip for $1.4 million, you probably won't believe me when I say: Investment bubbles are great for the economy. Yes, those periodic outbursts of investor insanity, which inevitably degenerate into venality, corruption, and searing losses - America needs them!"

Big profits = danger ahead
04/05/07 Permlink | Markets
"To gauge how much you're really paying for a dollar of profits, it's more revealing to compare today's prices with average earnings over the past ten years. That formula takes out the big swings in earnings that can make stocks look artificially undervalued or overvalued. By smoothing earnings, Asness gets an adjusted P/E of around 25 for the S&P 500. That's well above the historical average of 14 or 15. That's expensive, and buying in at high prices has always been the ticket to low future returns."

Ponzi nation
03/27/07 Permlink | Markets
"Two contrasting hypotheses can explain recent developments in the financial world. The Great Moderation holds that owing to better policymaking and structural improvements to the financial system, both the economy and markets are more stable than in the past. The newfound stability is viewed as a secular development. In other words, it's here to stay. Therefore lower credit spreads and higher levels of leverage are justified. Investors persuaded by this view will have few qualms about buying risky assets despite their historically low yields. Hyman Minsky, on the other hand, suggests that people's response to stability engenders instability. Such behavior is not necessarily irrational, as there are profits to be earned and bonuses to collect as long as the good times last. In fact, the cycle may extend as long as credit flows and people are hungry for risk. Yet Minsky's credit cycle heads inexorably toward a bust. Investors who accept this analysis will probably conclude that risk and reward are currently out of whack. They will position their portfolios defensively, keeping cash on hand to spend when the rewards for taking risk appear more compelling."

'Suspicious' trades precede mergers
03/22/07 Permlink | Markets
"Lingerie suddenly became very popular on the Toronto Stock Exchange in October. Daily trading for La Senza Corp., Canada's biggest retailer of women's undergarments, more than doubled compared with its 12- month average, and the stock price arced toward a record high. On Nov. 15, Limited Brands Inc. announced it would buy Toronto-based La Senza and pay shareholders a 48 percent premium. That unusual trading wasn't so unusual for the Canadian market. Aberrant trading patterns preceded 33 of the 52 Canadian mergers valued at more than C$200 million ($172.6 million) last year, says a study by Measuredmarkets Inc. for Bloomberg News. Those patterns could indicate insider trading."

Explaining the Wisdom of Crowds
03/22/07 Permlink | Markets
"Debate about the wisdom of crowds - the idea a collective can solve problems better than most individuals within the group, including experts - has percolated in recent years. While enthusiasts and detractors have made their case, much of the marshaled evidence is anecdotal. Even when the idea's supporters specify the necessary conditions for the wisdom of crowds to succeed, there is rarely discussion of how it works. In an approving 2006 New York Times article, columnist Joe Nocera explained collective accuracy by plucking a Hollywood movie line: 'It's a mystery'. Fortunately, Scott Page.s important new book, The Difference, introduces some much-needed rigor into why collectives do well and why they fail, why experts are often inferior to the crowd, and why diversity is important. Page not only carefully defines his terms, he also uses mathematical models to develop and apply theorems. These theorems illustrate the logic of diversity, removing a good deal of mystery from the wisdom of crowds. In this discussion, we apply Page's models to three types of problems and provide real-world examples and data for a pair of them."

What keeps bankers awake at night?
02/02/07 Permlink | Markets
"Nowadays, the banks have parcelled out the risk to hedge funds, pension funds and insurers. But has risk gone out the front door, only to come in the back, because of the banks' trading and financial relations with those same counterparties?"

Irrational optimism
12/30/06 Permlink | Markets
"Elroy Dimson discusses: * Observations on investor expectations in relation to historical returns. * A long-term analysis of stock market returns around the globe. * A warning against expecting safety in equities, even over long holding periods."

Down on the street
11/23/06 Permlink | Markets
"No longer can America take for granted its global superiority as a market for capital. Regulatory reform might let it keep up with the pack"

Short sellers want to crash the Tupperware party
11/14/06 Permlink | Markets
"When the Federal Trade Commission proposed new rules this spring for multilevel marketers - businesses best known for commercials that promise riches selling herbal supplements and beauty supplies - it drew howls of protest. Tupperware party-givers, diet pill vendors and knife salesmen sent the agency more than 15,000 letters complaining that the proposed rules would undo a $30-billion-a-year industry. Now the regulator has gained an unusual ally: short sellers."

Buy? sell? hold? delete!
11/07/06 Permlink | Markets
"This is breath-taking - but it also begs more questions than it answers. Nearly 20,000 analysts' recommendations sitting on the IBES research database, owned by Thomson Financial, were somehow doctored between September 2002 and May 2004, according to an academic paper due to be delivered in January to the American Finance Association's annual meeting in Chicago."

Gluttons at the gate
10/20/06 Permlink | Markets
"Buyout firms have always been aggressive. But an ethos of instant gratification has started to spread through the business in ways that are only now coming into view. Firms are extracting record dividends within months of buying companies, often financed by loading them up with huge amounts of debt. Some are quietly going back to the till over and over to collect an array of dubious fees. Some are trying to flip their holdings back onto the public markets faster than they've ever dared before. A few are using financial engineering and bankruptcy proceedings to wrest control of companies. At the extremes, the quick-money mindset is manifesting itself in possibly illegal activity: Some private equity executives are being investigated for outright fraud. Taken together, these trends serve as a warning that the private-equity business has entered a historic period of excess. "It feels a lot like 1999 in venture capital," says Steven N. Kaplan, finance professor at the University of Chicago. Indeed, it shares elements of both the late-1990s VC craze, in which too much money flooded into investment managers' hands, as well as the 1980s buyout binge, in which swaggering dealmakers hunted bigger and bigger prey. But the fast money--and the increasingly creative ways of getting it--set this era apart."

Oil: Will the Malthusian View Carry the Day?
09/26/06 Permlink | Markets
"In his article, "Oil: Will the Malthusian View Carry the Day?" Charles postulates that the price of oil could fall over the next several years. He defends his position with some teaching on the dynamics of energy, a review of historical cycles, and some thoughts on alternatives."

Naked fines
09/13/06 Permlink | Markets
"Brad Niswonger, a senior vice president for brokerage firm Robert W. Baird Co., complained in a July letter to the SEC, "It seems like every day the SEC fines someone for fraudulent stock transactions, but they walk away after collecting their fee without completing the transaction by making these players buy in the illegal short positions." A Canadian brokerage firm also complained to the SEC about its experience trying to settle its purchases of shares in Overstock.com. The broker, Research Capital of Toronto, says it tried to buy shares of Overstock to satisfy customer orders but has never received the actual shares it bought, even after 39 attempts to force the brokers who sold it the stock to produce the shares. Research Capital says this has been going on since February 2006. "The failed deliver has simply been replaced with another delivery commitment which also fails," the brokerage says."

City forecasts are for suckers
09/10/06 Permlink | Markets
"Errors in the way fund managers make decisions are caused by a number of behavioural traits, chiefly over-confidence and over-optimism (in a survey 75 per cent of fund managers said they were above-average at their jobs). The love of forecasting is also driven by a tendency known as 'anchoring' - fixating on irrelevant numbers for support. Montier suggests we anchor share values on something we can measure, like dividends. These errors are deeply ingrained, he says : 'It's hard to go to fund managers and say "you are wasting your time", but really analysts need to get back to analysing and forget about forecasting. And as for knowledge, it really is a case of less is more.'"

Yield curve as a predictor of recessions
09/02/06 Permlink | Markets
"The yield curve - specifically, the spread between the interest rates on the ten-year Treasury note and the three-month Treasury bill - is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead." [Currently, based on these findings, the probably of a U.S. recession in 4 quarters is almost 30%.]

Gold rush or fool's gold? Leith Wheeler's view
08/31/06 Permlink | Markets
"Conventional wisdom suggests that the price of gold (denominated in US dollars) moves up when the US inflation rate increases. We tested this relationship over the past 25 years and found no meaningful correlation between the price of gold and the US inflation rate. Some would argue that the price of gold is a leading indicator of the future US inflation rate and that the recent rise in the price of gold is anticipating a future rise in the US inflation rate. This is possible, however we found no statistical evidence of such a relationship over the past 25 years."

Buying into crisis
08/29/06 Permlink | Markets
"For anyone hunting a market opportunity in the terror madness, the episode was instructive. A lucky few may have bought and sold at exactly the right moments, earning themselves a bunch of cash and bragging rights at their next barbecue. But the more likely result for an investment in such a stock was a lot less glamorous. And that is the peril for those who seek opportunity in calamity. Crisis investing may seem savvy, but for most individual investors it's a slightly ghoulish version of stock market gambling."

Naked horror
08/25/06 Permlink | Markets
"Suspicious trading last year in shares of Global Links, a small Nevada real estate holding company, was far more intense than previously thought. New data from the U.S. Securities and Exchange Commission reveals trade settlement fails in early February 2005 that were 27 times greater than the total number of shares Global Links had issued at the time. The data show suspicious trading in Global Links far earlier and to a far larger degree than any previously released by the SEC."

Pump and dump
08/24/06 Permlink | Markets
"Penny stocks are considered ideal for spammers because they trade in low volumes, allowing a small amount of investment activity to generate wild swings in value. This gives tipsters the greatest opportunity to make a profit. Generally, they create excitement about a stock that they also invest in, only to sell it after they successfully push up the price. That can set off a wave of selling which eventually depresses the share price."

Value trumps growth
08/18/06 Permlink | Markets
"Internally, the stock market exhibits two disparate faces, as in tragedy and comedy. The performance difference between growth and value stocks widens sharply in favor of value--by some 12 percentage points year-to-date. Growth managers cry themselves to sleep, while value players smirk irrepressibly."

Naked short sellers hurt companies
08/08/06 Permlink | Markets
"In naked shorting, traders who hope to profit from falling prices sell shares without borrowing stock. Using that strategy, naked short sellers can drive down prices by flooding the market with orders to sell shares they don't have."

Companies still cling to big hits
08/07/06 Permlink | Markets
"As companies watch the Web grow, and hear promises of greatly expanded niche sales, it's tempting for them to expand inventory to get in on the supposed land rush. But Matthew P. Reilly, with George Group Consulting of Dallas, says doing so could be a "recipe for disaster" at companies that make tangible, as opposed to purely digital, products -- if only because of the inevitable increase in execution risks they face in expanding their inventories. "The iTunes model doesn't work for most companies," he adds. While inventories should be expanded only with the greatest care, such prudence might be difficult these days, considering the current popularity of Web utopian fantasies about the way sales of niche products can rival those of hits."

The story of Soros
07/24/06 Permlink | Markets
"I try to avoid pure chance. I'd like to be, have a better understanding of the situation than the market and then I bet on my judgment that I know I can anticipate the future better. So that's not gambling. Now you can't avoid taking risk and very often, my judgment is wrong and then I take a loss. But I only take a risk when I think that I have a better perspective and a different perspective from the market."

Big merger wins point to investor losses
07/02/06 Permlink | Markets
"The backdrop for the mega-merger announced this week in the mining industry is a slagheap of similarly grandiose deal making that has often disappointed or, worse, crushed the small investor."

Short-term performance is a meaningless metric
06/23/06 Permlink | Markets
"The market is chock-full of short-term performance chasers. These are investors who steer their capital toward investment managers who have generated recent hot performance. By the way, I consider anything less than five years to be short-term. Short-term performance chasers tend to be emotional and impulsive. When an investment strategy is not working investors get frustrated. Switching to a different strategy (or manager) is seen as a fix. The problem is that short-term performance-chasing leads to underperformance, not outperformance."

The merchants of red ink
06/07/06 Permlink | Markets
"In recent years, with interest rates low and credit easy, U.S. companies have gorged on high-yield debt. There was more than $1 trillion worth of high-yield issues in the U.S. last year, up from $750 billion in 2002. That has attracted the attention of a flock of private-equity investors and hedge funds, who are looking for investment opportunities as these debt-laden companies run into trouble. They're looking for companies with distressed debt, typically companies that have either filed for bankruptcy or are headed in that direction. The hedge fund and private-equity investors are looking for fundamentally sound companies that have taken on too much debt, so they can restructure them and sell them to another buyer for a profit. But will these opportunities of ill fortune materialize?"

Simple sounds make for sound investments
05/31/06 Permlink | Markets
"For those of you struggling to pick a winner in the complex world of stocks and shares, help is at hand. A psychology study has found that, at least in the short-term, stocks with names that are easier to pronounce consistently outperform those with more confusing monikers."

The disappearing mid-market
05/19/06 Permlink | Markets
"Each of these companies is trying to profit from what are arguably now the two most noteworthy trends among the swelling ranks of middle-class consumers around the world - trends that appear to be, at first glance, at odds with each other. These are the tendencies for consumers to be more cost-conscious; but simultaneously more willing to splurge money on luxury items."

Don't hedge your bets after all
05/10/06 Permlink | Markets
"Pinkernell and Bernstein analyzed rolling five-year correlation data and found that the only asset classes less in sync with the S&P 500 today than they were in 2000 are T-bills and Treasury bonds. Commodities like oil, grains, and metals have gone from being negatively correlated in 2000 - a good thing for diversification - to a modest "positive correlation" today. Real estate has gone from a correlation low of negative 60 percent in 2003 to a positive 77 percent today. But perhaps their most surprising findings involve investments most often recommended for sound diversification: small-cap stocks, foreign stocks, and hedge funds. Over the past five years, these one-time loners walked almost hand in hand with the S&P 500, with correlation rates of 94 percent, 96 percent, and 96 percent, respectively. Pinkernell's worry: They might not provide much of a buffer should large U.S. stocks tank."

Rising gasoline = trouble for retailers
04/29/06 Permlink | Markets
"Some people can cope by skipping a cup of Starbucks coffee or a movie. But the recent increases have been so dramatic that they'll probably take an even bigger bite out of discretionary spending. "Last year consumers on average spent $500 more for the year on gas. This year it could go up to $1,000. This is what Lee Scott is worried about," Cohen said. "The average American has $2,400 in discretionary spending. A Wal-Mart shopper probably has $1,500. Now take out the $1,000 extra and what does that leave them?" If gas prices don't retreat, Cohen said, he'd be worried about retail sales for the rest of the year, and possibly even during the holiday shopping season, which typically accounts for as much as 50 percent of retailers' annual profits and sales."

1Q 2006 Bill Miller commentary
04/25/06 Permlink | Markets
"The reason to own commodities may be that one believes they provide equity-like returns with little correlation with equities. The time to own commodities is (or at least has been) when they are down, when everybody has lost money in them, and when they trade below the cost of production. That time is not now. The data showing the returns of commodities will look very different if you start measuring just after prices have tripled. Every commodity we can get data on trades significantly above both the average and the marginal cost of production. Copper, for example, has an average cost of production of around 90 cents per pound, and a marginal cost of about $1.30 per pound. The marginal cost should approximate the equilibrium price over time. The current price is around $3.25 per pound. It is not a question of if copper prices are going down, it is a question of when."

We're just entering the silly time
04/24/06 Permlink | Markets
"Trouble is, outside of mini-booms (such as we are now experiencing), the long-term trend for commodity prices is down. All commodities, without exception. Is the party nearly over for commodities? We have no way of knowing, but we are just entering the silly time. In the silly time, your friends and relatives will be telling you about this great gold or mining stock they own and how you have to own it, too. Don't bother asking them where the mine is located or its current level of production. They won't know or care and it probably doesn't have any production anyway. Sound like the technology bubble? It is difficult to predict when the good times will end. Remember, they always go further and last longer than anyone predicts. And they always end ugly."

Old school stocks teach new lessons
04/09/06 Permlink | Markets
"One of the most common pieces of advice stock investors hear is the importance of "updating" their equity portfolios to keep in step with the ever-changing economy. As older industries shrink, the conventional wisdom goes, one should weed out those stocks in declining industries like steel manufacturers, chemical firms, paper producers, and railroads and add new firms in industries that are expanding. Advocates of updating point out that all the popular stocks indices, from the Dow-Jones Industrials through the S&P 500 Index, routinely add new companies and delete old ones to keep their index representative of the changing economy. Despite the ubiquity of this advice, I had seen little empirical evidencing documenting this claim."

There's a sucker born every IPO
04/08/06 Permlink | Markets
"It took me several years to fully understand the sagacity of this insight, which really restates the famous poker adage: When you play poker, look around the table and try to identify the sucker. If you can't, then you are it. Now, why am I mentioning this? Because the past two weeks provided two wonderful examples of suckers at the market table, when panicky buyers threw money at some stocks without regard to price."

The little book's little flaw
03/29/06 Permlink | Markets
"Bottling the formula isn't easy. Greenblatt's book gives some details on how he defined his screening factors and how he formed portfolios, but it stops short of offering a complete recipe. When he calculates return on capital, for example, Greenblatt counts only cash in excess of what's needed to run the business. ClariFI analyst David S. Whitaker says that the way Greenblatt determines what is "excess" remains a mystery."

Comparative analysis of ranking methodologies
03/29/06 Permlink | Markets
"We find that Greenblatt's ranking procedure leads him into stocks that are, at the same time, relatively cheap and relatively profitable. In the investment business, this style of investing is known as Growth At a Reasonable Price or GARP. For reasons stated below in our concluding section, GARP investors usually out-perform the broad market indexes. However, there are many ranking procedures that will take you to GARP. Our results show that there is nothing special about the Greenblatt formula or his exclusion of finance and utility stocks from the investable population."

Is six years the long term?
03/29/06 Permlink | Markets
"26% of the time over the last two centuries, stocks held for five years have produced returns that are lower than the risk-free rate of return. Assuming that the future is like the past - a big "if," as I will discuss in a minute - then that means that what has happened so far this decade happens about one out of four times. Using standard tests of statistical significance, therefore, one is not justified in betting that the stock market will beat a savings account even when investing for a five-year holding period."

Naked shorts seeking cover
03/29/06 Permlink | Markets
"Case in point, says Byrne, is his own company. In a statement last week, he said DTCC reported 8,970,394 Overstock.com shares on deposit, while Nasdaq reported short interest in Overstock.com of 9,578,481 shares for the same week. That means the total number of shares sold short exceeded the actual number of shares available, suggesting that some shares have been sold "naked.""

Is the market mad?
03/27/06 Permlink | Markets
"We document market inefficiency in the in the days following the buy recommendations of Jim Cramer, host of the popular CNBC show Mad Money. The average cumulative abnormal overnight return for the smallest quartile of recommended stocks is 5.19%, and these returns completely disappear within 12 trading days. We also find that trading volume, buy-sell imbalance, and short sales volume are all significantly higher than normal on the day following Cramer's recommendations. These findings allow us to test hypotheses about the behavior of different types of traders. Finally, our GMM estimates of the components of the bid-ask spread suggest that market makers are aware of Cramer's recommendations and anticipate the order flow imbalance following Cramer's recommendations."

Corporate voting charade
03/27/06 Permlink | Markets
"In a little-known quirk of Wall Street bookkeeping, when brokerages loan out a customer's stock to short sellers and those traders sell the stock to someone else, both investors are often able to vote in corporate elections. With the growth of short sales, which involve the resale of borrowed securities, stocks can be lent repeatedly, allowing three or four owners to cast votes based on holdings of the same shares."

A focus on the exceptions that prove the rule
03/25/06 Permlink | Markets
"Despite the shortcomings of the bell curve, reliance on it is accelerating, and widening the gap between reality and standard tools of measurement. The consensus seems to be that any number is better than no number - even if it is wrong."

The marketplace of perceptions
03/19/06 Permlink | Markets
"Like all revolutions in thought, this one began with anomalies, strange facts, odd observations that the prevailing wisdom could not explain. Casino gamblers, for instance, are willing to keep betting even while expecting to lose. People say they want to save for retirement, eat better, start exercising, quit smoking - and they mean it - but they do no such things. Victims who feel they've been treated poorly exact their revenge, though doing so hurts their own interests."

The asset of choice for the long run
03/14/06 Permlink | Markets
"Where should you invest your hard earned money? Using history as a guide, the answer overwhelmingly is in stocks."

What firms do vs. what they say
03/08/06 Permlink | Markets
"a number of investors over the years have been troubled by the assumptions that must be made when investing in companies that have established buyback programs. One such assumption: The companies will actually follow through with their repurchase programs. This is a bigger and more crucial assumption than you might think. When companies announce a share buyback program, they almost always indicate that their boards have simply authorized the repurchase of up to a certain maximum number of shares over a several-year period. The decisions on when to buy their shares, how many shares to acquire, and even whether to repurchase any shares, are dependent on market conditions and any of a host of other factors that the company's management must take into account."

Brain scans show link between lust for sex & money
02/01/06 Permlink | Markets
"The pleasure of orgasm, the high from cocaine, the rush of buying Google Inc. at $450 a share --- the same neural network governs all three, Knutson, 38, concluded. What's more, our primal pleasure circuits can, and often do, override our seat of reason, the brain's frontal cortex, the professor says. In other words, stocks, like sex, sometimes drive us crazy."

Numbers don't tell full story of a stock
01/28/06 Permlink | Markets
"This theory (further elaborated by Bill Merton, Harry Markowitz, Eugene Fama, and others who won Nobel prizes) was described in math, and so was accepted by all business schools worldwide; and if you have an MBA or CFA, chances are you had to study it also. What I didn't know then was that EMT would soon be proven bunk, nor did I know that Warren Buffett had mocked EMT mercilessly, offering to endow chairs to teach it, so that more "investors" would sell what he buys and buy what he sells. Although I didn't know any of this, I knew math well enough (my first degree was in aeronautical engineering) to pick my way through EMT's Greek letters and see that the entire logical edifice hung on a few assumptions that were utterly and clearly foolish."

Earnings warnings start to disappear
01/27/06 Permlink | Markets
"U.S. companies have also tried to rebel from Wall Street's focus on short-term profits this year, and some have stopped making quarterly forecasts altogether. That trend could eliminate the need for pre-announcements, and also throw market expectations off course, analysts said."

High drama on the TSE
01/18/06 Permlink | Markets
"With Japanese stock price-earning ratios hovering around 29 based on forecasted 2006 earnings, vs. 18 or so for S&P 500-stock index shares, some brokerages started warning their clients the party wouldn't last much longer. In early December, Credit Suisse First Boston warned clients to cut their investment weighting in Japan. Another sign of nervousness: The popular iShares Japan Index Fund, a $10 billion exchange-traded fund run by Barclays Global Fund Advisors was heavily shorted on the American Stock Exchange in November."

Go for momentum or recovery?
01/04/06 Permlink | Markets
"Should investor's stick with last year's star performers -- or bet that loser sectors will rally? Let's see what history tells us"

The yield curve
01/01/06 Permlink | Markets
"The paper that they published used the spread between the 90 day T-bill and the ten year bond. For the record, the average ten year bond since 1982 has yielded 7.31%, the average 90 day T-bill was 5.49% and the average spread was 1.82%. For the record, today we have the 90 day at 4.08%, the ten year at 4.39% for a difference of 0.31%. They used the 90 day average of the spread rather than the actual one day spread. This is important. There are several times where the yield curve inverted for a few days but did not stay that way for long. Recessions did not follow. So, the fact that the two year and the ten year inverted this week does not mean we will see a recession next year. In fact, it may not mean anything other than it was a slow week in the bond pits. We saw the spread on the yield curve roughly where it is today in 1996. It was four years later that we had a recession. Hear is a graph of the 90 day-ten year yield curve spread."

Mean reversion, forecasting and market timing
12/25/05 Permlink | Markets
"Long horizon stock investing appears to be much riskier than most people believe. Predicting future stock returns and timing the market appear to be much harder than most people think."

We're still too exuberant
12/18/05 Permlink | Markets
"So he uses a ten-year earnings average, an approach advocated by Graham and Dodd in Security Analysis, the value investor's bible. And while prices are clearly above the long-term trend any way you cut it, by that measure they are still mountainously beyond normal."

Investing logically
12/04/05 Permlink | Markets
"In looking at the polls, the strategists try to stay one step ahead. "Think of the investor polls as a crowded theater," Johnson said. "If the polls are telling us everyone is in the market, then, if the smallest thing happens, everyone tries to run though one door.""

A world of trouble
11/30/05 Permlink | Markets
"I have found three things in life to be generally true: Never play poker with a man named Doc. Never eat at a place called Mom's. And--most important--never, never invest in anything with "emerging markets" in its title."

Our elected insider traders
11/28/05 Permlink | Markets
"It turns out that our senior legislators somehow are very astute stock pickers, whose transactions, when evaluated at published market prices, delivered an overall performance twice as good as that of all the corporate insiders themselves, who must report their every trade in their respective stocks within hours of making them so that they can be published promptly. Could the senators (those who reported trading, anyway) know something the rest of us don't know? While we think about that question, consider that US households overall underperformed the stock market in the same period by 1.4 percent, while their elected representatives in the senate outperformed the market by 12 percent (those corporate insiders outperformed by 6 percent). A rising tide like the 1995r boats."

Stock turkeys of 2005
11/22/05 Permlink | Markets
"But with the holidays and the end of the year fast approaching, investors are also bound to be pondering turkeys other than the birds Americans will be eating Thursday -- i.e., those of the stock variety. And there are plenty of them."

U.S. portfolio disclosures offer imperfect view
11/14/05 Permlink | Markets
"In addition to excluding short positions, the rules also allow filers wide discretion to exclude their long positions as well. The filers of 13-F's can apply to the SEC to keep certain stakes confidential. Even if unsuccessful, the lengthy SEC review process can result in months of secrecy."

Guys, step aside - women are better investors
11/14/05 Permlink | Markets
"The logical conclusion is that men should be cleared off the trading floors. Hedge funds should be installing day nurseries. Investment banks should be getting rid of all that black granite and redecorating their offices in some nice pastel shades. The men have been in charge of the money for long enough. It's time to give the women a chance. It may not be that simple. The markets are competitive and ruthless. If women were better at investing than men, wouldn't more of them be running the big funds? Gender discrimination may be one reason. Yet it is also possible that the truth is more subtle than someone such as Horlick makes out. While a 'feminine' touch may well be the key to putting together a winning portfolio, it probably doesn't matter much whether such an approach appears in the office in trousers or a skirt."

When lobster was fertiliser
10/28/05 Permlink | Markets
"Demand for lobsters, for example, has evolved in a curious way. The armour-plated delicacy used to be super-abundant and dirt cheap, he says - so cheap that it was fed to inmates in prison and children in orphanages. Farmers even fertilised their fields with it, and servants would bargain with their employers to be given it no more than twice or thrice a week. As the crustaceans became harder to find, canned lobster ceased to be profitable. Live lobsters, by contrast, grew in status as they became dearer. A meal that cost $4 (in today's money) in the 1870s cost $30 or more a century later. What was once a manure substitute is now a prized delicacy. What the lowliest servant once refused, the swankiest restaurateur now offers with pride. Mr Jones's menus may reveal something about the historical fate of fish, crustaceans and molluscs. But there is no accounting for that peculiar land-based mammal that eats them."

The flu of 1918: Dow data
10/26/05 Permlink | Markets
The data shows that the big influenza epidemic of 1918 had little impact on the markets.

Profiting from the unexpected
10/24/05 Permlink | Taleb Markets
"Using options, he can keep betting for years on unlikely events, losing a small amount of money on his many bets that turn out wrong. But in the rare instances when he's right, he makes a fortune. It sounds impossible, but he is proof it works. "People see me lose money all the time," says Taleb, who shared his tax returns to show that he still makes a seven-figure income from trading even while only doing it part-time. "I reduced my trading out of love for philosophy," he says. "Not out of a desire to make money out of books.""

Your six biggest money fears
09/18/05 Permlink | Markets
"We all worry about money. Problem is, we're scared of the wrong things. Find out why your biggest money worries may be misplaced -- and start building an action plan for the events that should really concern you."

Is this a lifetime selling opportunity?
09/13/05 Permlink | Markets
"Today, on the other hand, it seems as if investors had thrown any caution into the wind. Cash returns are so low - courtesy of Greenspan's ultra easy monetary policies that the entire world is 'investment mad'. Investors all over the world are hunting for investment opportunities the way gold diggers were rushing to California during the great gold rush of the late 19th century."

Who's really to blame for $4-a-gallon gas?
09/07/05 Permlink | Markets
"It's easy to get mad at the big oil companies, but the real story is far more complex. Here's the story behind the story, plus four energy sector picks."

The perfect storm
09/07/05 Permlink | Markets
"There is arguably a drift towards greater risk-taking overall, especially when interest rates are low, so the system has not become any safer and may in fact be less safe. Banks now securitise and flog to third parties their plain vanilla mortgages, keeping on their books the more complicated and less liquid assets that are harder to sell. When interest rates spike upwards, asset prices crash or for any other reason lots of investments have to be unwound in a hurry, banks may be looking for liquidity rather than supplying it to others to keep markets orderly."

Price gouging saves lives
09/02/05 Permlink | Markets
""Price gouging" is nothing more than charging what the market will bear. If that's immoral, then all market adjustment to changing circumstances is "immoral," and markets per se are immoral. But that is not the case. And I don't think a store owner who makes money by satisfying the urgent needs of his customers is immoral either. It is called making a living."

The inevitable crisis
08/17/05 Permlink | Markets
"I am not a pessimist by nature and I have a low opinion of doomsayers who regularly predict the next Great Depression. But there is clearly a crisis looming on the horizon, the only unknown being its magnitude. This crisis will come from the south - the US - and we know why."

What they won't tell you about capitalism
08/16/05 Permlink | Markets
"Thomas DiLorenzo has written a masterpiece. This book should be required reading for every college freshman to immunize him against the anticapitalist drivel he will get in his history and economics classes. It should be required reading for every college graduate to destroy the myths of capitalism that he was exposed to while a student. But this is not just a book for students, for every teacher, politician, and minister needs this book as well. For those of us who are already true free.market capitalists, we have not only a great reference source, but a great weapon in our arsenal against all varieties of socialism, interventionism, and anticapitalism."

Big jobs that pay badly
08/16/05 Permlink | Markets
"Most of us work hard for a living. And if we're lucky, we're well compensated for the effort. But there are some jobs you should take only if you really love the work because the investment you make to get the job and the hours you keep aren't necessarily commensurate with what you earn."

Naked shorts' long shelf life
08/15/05 Permlink | Markets
"What if they passed a law and no one followed it? Not one of those bizarre, outdated laws you hear about -- like in Maine, where people are required to bring shotguns to church -- but a brand new law with an entirely sensible goal, like keeping people from selling equities that don't exist."

Perils at the pump
08/10/05 Permlink | Markets
"Oil prices hit yet another record this week, on fears of political instability in the Middle East and refining problems in America. So far, the world economy has managed to chug along without much ill effect. But how long can consumers go on paying ever more at the pump without cutting back elsewhere? And why aren't high prices bringing new supplies to market?"

Beer war
08/06/05 Permlink | Markets
"It used to be that if you brought a case of cheap beer like Lakeshore Creek to a party, you were considered, well, cheap. Not so anymore. The value beer market is booming--consumers these days seem less concerned about image, and more about value."

Back to Basics Q&R
07/19/05 Permlink | Markets
"If you want something to monitor, then I suggest that you monitor the following: How many of your kids believe that they have an honest shot, should they choose to do so, of getting rich in this country?"

Dig a moat for your investments
07/15/05 Permlink | Markets
"But what are we to make of the procession of successful investors who openly, and for reasons other than personal profit, explain their methods? Warren Buffett, via his shareholder letters, may be the most famous example, but many others have followed suit. George Soros, Joel Greenblatt, Seth Klarman, John Neff, Marty Whitman, David Dremen, Bill Gross and Ben Graham have each authored how-to investment books outlining many of their insights. Savvy investors aren't in the business of aiding competitors, and we think its wise to conclude that each of these businessmen believes their investment moats originate elsewhere. But we'll defer to the master (15th quote) to reveal the secret; "The most important quality for an investor is temperament, not intellect.""

In at the top
07/13/05 Permlink | Markets
"Public pensions are rushing into real estate the way they rushed into tech in the late 1990s. Maybe it's a good time to get out."

The creditors' ball?
07/05/05 Permlink | Markets
"Welcome to Wall Street's latest conflict-of-interest problem. Regardless of the outcome, the FiberMark case highlights a growing practice--hedge funds that join a bankrupt company's creditors' committee but continue to trade the company's securities. At issue is whether, as members of a creditors' committee, hedge funds are misusing the private information they receive. Federal regulators are sniffing around: Last year, the U.S. Securities and Exchange Commission reportedly dispatched a team to investigate how Wall Street trades the distressed debt of financially troubled companies."

Threatening eBay's dominance
06/23/05 Permlink | Markets
"In 2002, John Wieber started worrying about his business, which sold refurbished computers through Internet auctioneer eBay Inc. Although he was earning $1 million a year in revenue, profits had started to slip as competitors flocked to the site. EBay also raised its fees, further cutting margins, and fraud was becoming a problem. So Mr. Wieber revamped his Web site and began selling through other online companies, such as Amazon.com Inc. and Yahoo Inc. Last year, his sales neared $5 million, but his eBay revenue grew at a much slower pace, making up only a quarter of the total. It will likely fall still lower. Of the auction site, where he got his start, Mr. Wieber says: "Too many sellers, not enough buyers.""

Tackling the bears-with no bull
06/03/05 Permlink | Markets
"The wonderful thing about being old and rich and respected is that you get to say pretty much anything to anyone. And if you're really fortunate, like legendary investment guru Stephen Jarislowsky, the 79-year old founder of Montreal-based Jarislowsky Fraser, you even get to write a book airing your blunt opinions."

Scaling the depths of our 'lizard' investment brains
05/17/05 Permlink | Markets
"Money begets primal urges. We become irrational, do stupid things. We buy high and sell low. We panic, become guilt ridden. Sometimes we just want to slither away from our money foibles. That's because we are all lizards inside, and once in awhile -- or all too often -- that scaly inner self comes out. This isn't crazy talk. Neuroscientists and economists have teamed up to posit we revert to hot-blooded mania when making certain financial decisions because of unconscious core patterns our brain exerts on our behavior."

What cost "noise"?
05/15/05 Permlink | Markets
"the magnitude of underperformance by the largest-cap stock is huge; the average shortfall over the subsequent year is 7.1 percent, expanding to a startling 5.0 percent a year at 10 years, which compounds to a 40 percent performance shortfall relative to the average stock in the S&P 500 in 10 years."

Asset class correlations
05/11/05 Permlink | Markets
"Asset Class Correlations illustrate a series of rolling 36-month correlation coefficients and 36-month rolling return comparisons between various asset classes, styles, and categories. Rolling correlations are more insightful than the typical long-term correlation matrices found in textbooks. Rolling correlations illustrate the changes that occur between asset classes over time rather than a flat measure covering a long-term period."

Bill Miller's Q1
05/01/05 Permlink | Markets
"At an investment conference in London in early February I said that not only was I bullish on the market for 2005, but that I was the most bullish person I know. I guess that means now I am the most bullish and wrong person I know."

A valuable alternative to empire-building
04/24/05 Permlink | Markets
"Companies are buying back their own shares in record quantities. In many cases, their shareholders should thank them for it"

Cracking the street's new math
04/14/05 Permlink | Markets
"Algorithmic trades are sweeping the stock market. But how secure are they?"

Venture capital: aftershock
04/01/05 Permlink | Markets
"Meanwhile, many veteran venture capitalists are fretting, especially now that pension funds and endowments are racing to place money in venture capital (partly because they cannot get decent returns elsewhere)."

Buy the numbers
03/26/05 Permlink | Markets
"Over the long run, a majority of a portfolio's performance is driven by its strategic allocation between stocks, bonds, real estate, cash, and other asset classes. As such, the greater understanding an investor has about asset class selection and how different investments blend together in an efficient portfolio, the better prepared they will be to allocate capital today and in the future to match their financial needs."

Finding value in spin-offs
03/23/05 Permlink | Markets
"The relative dearth of slam-dunk ideas led me to recently revisit a long-standing interest of mine--corporate spin-offs, which I regard as one of the few market inefficiencies still out there."

Piercing the stereotypes -- hard work but worth it
02/26/05 Permlink | Markets
"To keep up your credentials as a hard-nosed value investor nowadays, you're almost obliged to say bad things about the stock market. Prices too high! Bargains too few! Low returns, at best, as far as the eye can see! The only prudent choice is to let cash reserves build up to 30 or 40 percent of the portfolio. The most interesting things about this stereotype, as with most stereotypes, are the exceptions -- the people, in this case some very prominent people, who don't fit the formula."

Why many can't stay on rich list
02/26/05 Permlink | Markets
"The downfall of the rich is caused by erratic stock markets, heavy taxes and and the irresistible urge to 'shop till you drop', reported The Times of London recently."

Legg Mason Value Trust Q4
02/15/05 Permlink | Markets
"Who would park their money in cash at 2% and pay taxes when you could get 3.7% in tax-advantaged dividends in Citigroup stock, and own a piece of the world's largest financial services firm, one that is perfectly well-positioned to be the banker to the developing world's burgeoning consumers, at 11x earnings?"

That jobs report was no reason to celebrate
02/15/05 Permlink | Markets
"Combine a price decline in real-estate assets with maniacal lending -- where anyone can buy a house for zero-percent down and, with a little effort, get their loan up to 120% of value. Now you can see why we have a recipe for a financial calamity."

The Economist's commodity-price index
02/11/05 Permlink | Markets
"First published in 1864, with figures stretching back to 1845, The Economist's commodity-price index is probably the world's oldest regularly published price index."

The acquirer's albatross
02/09/05 Permlink | Markets
"the results were unambiguous: according to the historical data, acquiring banks have tended to underperform the market almost from the moment their deals close. And the longer time goes by, the worse the relative performance is."

Growth stocks, stunted gains?
01/26/05 Permlink | Markets
"In the first part of his book, titled, "Uncovering the Growth Trap," Siegel painstakingly shows, using reams of data, that a negative correlation exists between growth and investment results. Exhibit No. 1: He found that anyone who had bought and held the original 500 stocks comprising the Standard & Poor's 500 Index when it was created in 1957 would have made more money than someone who owned the updated index over that time. (The S&P 500 is reformulated by committee periodically to make sure it encompasses the 500 leading companies.)"

The Shiller interview
01/25/05 Permlink | Markets
"Robert Shiller argues that housing in many cities is undergoing the same irrational exuberance as stocks did in their bubble days."

Don't dismiss short side on commodities
01/20/05 Permlink | Markets
"Unlike other assets, such as debt or equity, he says commodities have no "long bias" that would make an index a buy-and-hold asset. While stocks move up and down, the overall long-term trend is higher. Investors can always hold a bond for its coupon."

The costly myth of dollar-cost averaging
01/04/05 Permlink | Markets
"Popular wisdom says scheduling your investments is the best way to make money. But it's actually a sales gimmick to wheedle over time what you won't commit up front."

Wall on the Street
01/04/05 Permlink | Markets
"Many investors think they are buy-and-holders, but in fact they use a form of active management that one of my compatriots, Paul Merriman, calls the ICSIA, or "I can't stand it anymore" timing system. Too often this leads to buying at market tops and selling at the market's low. True buy-and-hold investing is the careful selection of an appropriate balance of assets for your portfolio, with the intent to hold those assets until either you need the money or your investment needs change. Securities are never sold to lock in gains or to cut losses. Instead, on a regular basis, the portfolio is rebalanced."

Learn the lesson of Poseidon
12/26/04 Permlink | Markets
"I serve as the chairman of trustees of a medium-sized pension plan and when listening to various investment managers pitching to look after the fund's assets, the phrase "We only invest in things we understand" is repeated often. Legendary investors such as Warren Buffett apparently hold this philosophy. I can see how it might work for him, since Berkshire Hathaway has tended to stick to a few specialist sectors such as insurance and media, but most fund managers diversify their holdings widely across many dozens of industries. Are these professional investors really bright enough to understand so many businesses?"

Born suckers
12/14/04 Permlink | Markets
"Human beings, it turns out, are wired to make dumb investing mistakes. What's more, we are wired not to learn from them, but to make them again and again. If there is consolation, it is that it's not our fault. We are born suckers." - Consider the source...

The dividend rediscovered
12/06/04 Permlink | Markets
"After years in the doghouse, dividends have investor appeal again"

The new kings of capitalism
12/01/04 Permlink | Markets
"In two decades, private-equity firms have moved from the outer fringe to the centre of the capitalist system. But, asks Matthew Bishop, can they keep it up?"

All that glisters
12/01/04 Permlink | Markets
"Perhaps a better argument can be made for other scarce metals: platinum, say, or silver. Silver, after all, not only spent centuries vying with gold as a form of money, but also has many industrial uses and is not held by central banks; annual demand is much higher than annual production. Along with many other metals, the price of silver fell sharply in April, but unlike gold it has not even regained the ground it lost."

Origins of the crash still present?
11/18/04 Permlink | Markets
"Lowenstein places special emphasis on the insidious effects of excessive executive compensation, largely in the form of stock options, which in the end led to massive speculation and widespread corruption of corporate America and the institutions designed to regulate it. Lowenstein clearly doesn't believe that those excesses have been washed away."

Searching for an explanation
11/17/04 Permlink | Markets
"Once again, investors are rushing to buy internet stocks. Will they never learn?"

A new kind of risk, and it's your fault
11/15/04 Permlink | Markets
"To company risk and market risk, add 'career risk' -- the danger that career-minded money managers take too many chances to satisfy the public's unrealistic expectations."

Sometimes they do ring a bell
11/13/04 Permlink | Markets
"Why does this "chasing the hot stock" happen? Dreman and Lufkin tell us it is because investors become overconfident that the trends of the fundamentals in the first 10 years will repeat forever, "thereby carrying the prices of stocks that appear to have the 'best' and 'worst' prospects. Investors are likely to forecast a future not very different from the recent past, i.e., continuing improving fundamentals for favorites and deteriorating fundamentals for out-of-favor issues. Such forecasts result in favorites being overpriced, while out-of-favor issues are priced at a substantial discount to the real worth. The extrapolation of past results well into the future and the high confidence in the precise forecast is one of the most common errors made in finance.""

Growth and value data
11/05/04 Permlink | Markets
"Further analysis of the complete set of style indices shows an interesting Sharpe Ratio pattern. It seems that not only do the value series outperform growth series on average, but their Sharpe Ratio is much higher. Sharpe Ratio is a measure of reward to variability. Basically, it measures the level of return per level of risk for an asset class. The specific measure is asset class return minus the risk-free rate (U.S. 30-day T Bills), divided by the standard deviation of the asset class. Every one of the Ibbotson value series has a higher Sharpe Ratio than its corresponding growth series. The traditional risk-return tradeoff does not seem to hold with regard to the split between growth and value. The value indices are offering more return and less risk."

A watched pot makes me boil
10/28/04 Permlink | Markets
"I have several bad investing habits. The worst, clearly, is that I sometimes buy stocks that go down. But a close second is my propensity to watch my portfolio a little too closely, occasionally wasting time staring at real-time changes in the fortunes of my 55 stocks. In my defense, I only do so on three occasions: when I'm up a lot on the market, when I'm down considerably or when I'm close to even."

The day the '20s died
10/28/04 Permlink | Markets
"It was not the first great crash in Wall Street history. Far from it. Major sellers' panics had swept the Street in 1837, 1857, 1873, 1893 and 1907, all except the last marking the start of a severe depression. Nor was it the greatest one-day decline in the market's history. Regardless, the stock market crash of 1929 has entered into the folk memory of the American people. Like 1492 and 1776, it is one of those dates that every schoolchild knows. Like the Alamo, the sinking of the Titanic and Custer's last stand, it has served as the historical backdrop of innumerable novels, plays, movies and songs."

Still blowing bubbles
10/25/04 Permlink | Markets
"On this day in 1929, America's stock market was hit by a selling wave of more than 12 million shares. Five days later, on October 29, the daily selling total soared to 16 million shares. The market lost 47% of its value in 26 days, and 89% by the time it finally bottomed on July 8, 1932. Within two years 12 million Americans were out of work, hundreds of banks and 20,000 companies had gone bust. It took 25 years for the market to recover."

Peter Bernstein interview
10/15/04 Permlink | Markets
"In 1995 I said, "Dividends don't matter." I've been eating those words ever since. I assumed that reinvestments [the cash that companies put back into the business instead of paying out as dividends] would earn the same rate of return. I was wrong. Managements are more careful when they're not floating in cash."

Money trends
10/15/04 Permlink | Markets
"The investment business is constantly evolving; one of its eternal questions is how closely today's and the future's patterns will resemble the past. One of the most important developments in recent years is the burgeoning interest in hedge funds and the growing role they're playing in the markets. But innovations continue along a broad front."

The disastrous history of money
10/14/04 Permlink | Markets
"Charles II was king of England from 1660 - 1685, when wooden sticks were being used as a form of money until the system collapsed. The story has obvious parallels to the modern world."

The taming of the shrewd
10/09/04 Permlink | Markets
"With returns at hedge funds falling sharply, it is easy to see why their owners want to sell, but much less clear why big investment banks are so keen to buy"

Insuring for the future?
09/16/04 Permlink | Markets
"Lloyd's is trying to make its business practices as sleek as its building. But will that be at the expense of the characteristics that make the market so distinctive?"

The 'recovery' is living on borrowed time
09/13/04 Permlink | Markets
"The Fed thinks the economy is growing on its own. I think people are using their homes as ATMs. What I don't know is when the bubble will burst."

An alternative inflation index
09/09/04 Permlink | Markets
"Browse the Index components and if you are old enough to remember, ponder how prices have evolved over 36 years."

Of course investors can beat the market
09/08/04 Permlink | Markets
"EMH also has a great paradox. In order for their scenario to occur then people will have to believe there are profit opportunities, but what EMH in effect says is that there are no profit opportunities! But if people believed there were no profit opportunities then there would be no one who would act to correct the discrepancy between fundamental value and current price. So a necessary -but not sufficient- condition for EMH to be true is if investors believe it is not true. The more people believe in it, the less true it will be. EMH must assume that people are completely irrational."

Value will out, but not by a lot
09/03/04 Permlink | Markets
"Laurence B. Siegel, director of investment policy research at the Ford Foundation, has great investment instincts. But he knows too much to follow them blindly, preferring instead to temper instinct with disciplines developed over a lifetime of experience in delving deeply into the best investment research available."

Pop goes the bubble?
08/26/04 Permlink | Markets
"Other economists aren't so sure. For one thing, the economy's recent health has been supported by a hot housing market. Refinancing put a ton of cash in consumers' pockets, and high home values made people wealthier. And several industries, from construction to furniture to finance, rely heavily on the housing market. And prices don't have to plunge to make a noticeable impact on these sectors of the economy."

Epic struggle looms as science tackles the market
08/24/04 Permlink | Markets
"Not everybody is so enthusiastic. ''Academics are stock market technician/chartists whose fields of study are prices, markets and market price histories, not corporate nitty-gritty and the underlying characteristics of securities,'' says Martin Whitman, chairman of money manager Third Avenue Management LLC in New York. ''That does not seem to have much to do with what Third Avenue is, and what Third Avenue is trying to do,'' Whitman wrote in a recent shareholder report."

Realistic rewards
08/20/04 Permlink | Markets
"The return on equities over the next decade is likely to be much lower than most investors expect"

Is investing in stocks worth the risk?
08/08/04 Permlink | Markets
"Compared to cash, bonds and even the canned goods in your pantry, stocks come out on top -- until you consider the risk."

An eerie calm
07/23/04 Permlink | Markets
"Many financial catastrophes have been caused by selling options. The most famous came in 1995, when a rising star at a British bank sold 34,000 options on Japan's Nikkei 225, driving implied volatility on the world's second-biggest stockmarket from 22% to 11%. But share prices plummeted after the Kobe earthquake, volatility soared, and the bank went bust. The man's name was Nick Leeson and the bank was called Barings."

Inflated expectations
07/03/04 Permlink | Markets
"If money is too cheap, then rates of return will fall, companies will tend to use capital rather than labour, and people will spend money on riskier assets; on things that have little to do with underlying economic growth; and on things that are in short supply. As it happens, this is a decent description of America in the past few years. Companies have been slow to hire workers even as the economy has bounded along; and workers' share of national income is very low. The low cost of capital has, moreover, encouraged speculation in risky assets, such as emerging markets, or - closer to home, as it were - property."

Waterloo, Waterloo
06/27/04 Permlink | Markets
"Why is volatility so low in financial markets?"

Please give me a housing bubble
06/19/04 Permlink | Markets
"Today, we begin a series on housing. I have found the research to be fascinating and often surprising and contradictory. I trust you will find it useful, and it is almost guaranteed to be debated, as I will depart from the Conventional Wisdom of both housing bull and bears."

Curve balls
06/12/04 Permlink | Markets
"A year ago, the Federal Reserve was worried about the spectre of deflation. Now it is concerned about the opposite"

Why all market bubbles end with a bang
06/02/04 Permlink | Markets
"Who'll pay the piper for three years of easy money? We're about to find out, because the debt bubble has grown ominously large."

T.O. condos' foundation gets shaky
06/02/04 Permlink | Markets
"So why do housing prices in Toronto and other parts of the country keep rising at unusually high rates? It's certainly not lack of supply, nor an extraordinary rise in household incomes. Low mortgage rates and the herd mentality are the more likely causes. Buyers seem to be buying because they think the price this month will be cheaper than next month. Speculators have piled in, and are thought to own up to 40 per cent of new condos. We know interest rates are going up. We know the supply of unsold condos is at a near record high. We know herds can reverse direction in an instant. Looks like a bubble ready to burst."

Detour on easy street
05/31/04 Permlink | Markets
"Random-walk theory is based on a highly sophisticated series of mathematical, statistical, and historical studies, all with a simple conclusion: "No one can consistently beat any investment market if the market is large and allows open entry." This conclusion comforts academic economists, who find in it solace for the fact that they, despite their Ph.D.'s, cannot beat the stock market or the bond market. The unstated corollary of random walk theory is this: "Warren Buffett is a myth.""

Think you're a smart investor?
05/27/04 Permlink | Markets
"In the late 1970s, academics researching the psychology of decision making often turned to finance types. After all, the record of their decision making--historical market data--was widely available and neatly sorted. Eventually, that early work came full circle as it got picked up by finance professors who created a new field of study, behavioural finance, which explores the impact of human psychology on financial decision making. Ostensibly, markets are rational creatures, where prices track the fundamentals of an asset. But behavioural finance soundly overturned that belief by documenting all the ways in which humans fail to follow a logical course."

Empty mansions
05/25/04 Permlink | Markets
"The Cromer family's mistakes are elementary. You don't finance a long term asset, like a house, with 5 year money. You don't finance an asset with a fixed money yield with floating rate debt. You don't enter into commitments that leave you substantially under water on an operating basis month by month, with the expectation that an ever rising real estate market will bail you out. Investors who make these mistakes on a single property, or on a portfolio of properties that is modest in terms of their overall assets, may survive the downturn by investing more cash, derived from other areas. Investors like the Cromers, who make these mistakes on such a large scale in relation to their finances are bound eventually to find out the hard way what sound financing means."

The echoes of history
05/11/04 Permlink | Markets
"As the Fed prepares to raise interest rates, the financial markets are bracing themselves for a reversal of fortune every bit as painful as the one they suffered ten years ago"

Investors finally may be waking up
05/03/04 Permlink | Markets
"The harsh reality of how overvalued stocks really are -- and how the Fed's overvalued reputation has led them astray -- is setting in at last."

There goes the neighborhood
04/30/04 Permlink | Markets
"Only in about 20 metro areas, mostly located in eight states, does the relationship of home price to income defy logic. The bad news is that those areas contain roughly half the housing wealth of the country. In California, the price of a home stands at 8.3 times the annual family income of its occupants; in Massachusetts, the ratio is 5.9:1; in Hawaii, a stunning, 10.1:1. To some extent, there are sound and basic economic reasons for this anomaly: supply and demand. Salaries in these areas have been going up faster than in the nation as a whole. The other is supply: These metro areas are "built out," with zoning ordinances that limit the ability of developers to add new homes. But at some point, incomes simply can't sustain the prices. That point has now been reached. In California, a middle-class family with two earners each making $50,000 a year now owns, on average, an $830,000 home. In the late 80s, the last time these eight states saw price-to-income ratios this high, the real estate market collapsed."

Interest-only mortgages gain popularity in U.S.
04/29/04 Permlink | Markets
"Another risk with IO loans is that a drop in the value of a home during the initial period of interest only payments could prompt some owners to walk away without paying off the mortgage because no equity is at stake."

Warnings to be ignored
04/20/04 Permlink | Markets
"American banks continue to make vast profits. Will the good times end when the Fed raises interest rates?"

Rules still shield insiders who bail out
04/14/04 Permlink | Markets
"Sales by higher-ups are a reliable indicator of trouble ahead. But many execs are pocketing profits without tipping off investors -- and the SEC doesn't care."

The naked truth
04/12/04 Permlink | Markets
"Few controversies produce as much bile as that surrounding manipulative short-selling. In angry (and sometimes exaggerated) rants to securities regulators, irate investors have labelled it "thievery" and even "the largest fraud ever perpetrated in world history." Its practitioners have been dubbed "slimeballs" and "rapists." Years of strenuous protest have encouraged U.S. regulators to introduce new rules curbing the practice--the first of which was introduced this month."

Be braced for a bust as the bubble bursts
04/10/04 Permlink | Markets
"The least desirable asset in the world is US dollar cash. The investment community can take everything in stride - even a 70 per cent decline in Nasdaq stocks. But interest rates, as low as they are now, compel people to speculate on everything from commodities to homes and bonds to equities."

A rite of spring
04/03/04 Permlink | Markets
"In the spring of each leap year, we have a predictableif tiresomedog-and-pony show: the candidates for President of the United States denounce the newest gasoline price increases. We lived through this political purgatory four years ago, and it looks as though we will experience it again."

Crude arguments
03/23/04 Permlink | Markets
"Goldman Sachs now thinks the American economy will grow by only 2.75% (on an annual basis) in the second half of this year and the first half of nexta forecast it has revised down by three-quarters of a percentage point. It might, Buttonwood thinks, even turn out lower than that. Slower economic growth in turn bodes ill for stockmarkets and corporate-bond markets. And if markets tumble, consumer confidence will surely follow. The rise in the oil price, in other words, may leave nerves not so much frayed as in tatters."

Creative mortgages fuel home sales
03/22/04 Permlink | Markets
"With home prices surging, lenders are coming up with increasingly creative mortgages aimed at homeowners whose budgets are stretched thin."

A question of perspective
03/18/04 Permlink | Markets
"A storm in a teacup, or a prelude of worse to come? By historic measures few equity or corporate-bond markets are cheap; many are very expensive indeed. This makes it all the more possible that a virtuous cycle of rising growth and appetite for risk can turn into a vicious cycle of falling growth and aversion to riskwhatever the Fed does."

The jobs picture is even worse than it seems
03/15/04 Permlink | Markets
"The closer you look at the numbers, the more you realize unemployment is higher than the headlines tell you. And despite what the experts say, inflation is out there, and we're feeling it already."

The secret power behind America's top companies
03/09/04 Permlink | Markets
"Investors' appetite for passive funds has quietly transferred ownership -- and shareholder rights -- in a good chunk of Corporate America to just four index-fund managers."

A risky world
03/09/04 Permlink | Markets
"There is little room to maneuver after last year's big gains, when anything priced under $5 per share soared on the false assumption that cheap means good value, and companies could dump triple-C bonds on the market with impunity. In a telling sign of overconfidence, the 10-year U.S. Treasury bond is at 4 percent, the lowest since the late 1960s. If something were to go wrongthe Fed accidentally ignited inflation by keeping rates too low for too long, sayrates could jump. Investors would take a hit on yield before they had a chance to sell, says James Grant, editor of Grant's Interest Rate Observer: "Now the financial markets are left with very little margin for error, or for safety.""

Bubble, bubble, trouble, trouble
03/04/04 Permlink | Markets
"Disney CEO Michael Eisner is in the news again - but it's useful to recall that his record of shareholder abuse didn't start yesterday. Nor was Eisner by any means the only corporate chief who found a way to milk his shareholders during the great stock market bubble of the late 1990s. The story of the Great Milking, and how it came to pass, is the subject of Roger Lowenstein's highly readable chronicle of the era, Origins of the Crash: The Great Bubble and its Undoing. It is terrific."

A recovery built on retirees' backs
03/02/04 Permlink | Markets
"Every time Washington juggles numbers to keep the recovery going and make deficits less shocking, your golden years get a little more difficult."

Bearish options strategies
02/21/04 Permlink | Markets
"Longtime readers might wonder why a patient, long-biased, fundamental value investor like me would adopt such a strategy, given the high cost and limited life of options. My answer is that I view these investments as insurance policies, hedging my mostly long portfolio."

Are stock prices reflecting greed (again)?
02/17/04 Permlink | Markets
"At the end of 2003, the S&P 500 stocks were trading for an average 28 times the past 12 months per-share earnings, while the Nasdaq, dominated by technology stocks like Cisco, Yahoo and Intel, had a whopping P/E of 118."

An insider's take on insider selling
02/02/04 Permlink | Markets
"Investors may see trouble in recent sales at Newmont Mining, but remember that insiders sell for a lot of reasons. Also: where gold and metals prices might be headed."

Greenspan blasted
01/29/04 Permlink | Markets
"Greenspan was upset, O'Neill contends, because corporate executives weren't playing fair. They weren't reporting what was actually happening at their companies, and the Federal Reserve chairman seemed to think the whole system upon which this nation's economy is built was crumbling."

Irrational optimism
01/27/04 Permlink | Markets
"Since 1900, the worldwide real return on equities averaged close to 5 percent a year (before costs, fees, and taxes). This is appreciably lower than is frequently quoted from historical averages, a difference that arises because we use a longer time frame than other studies and adopt a global focus. Prior views on the long-run safety of equities have been overly influenced by the experience of the United States. Furthermore, the US evidence that, over the long haul, stocks have beaten inflation over all 20-year periods is based on relatively few nonoverlapping observations and is hence subject to large sampling error."

Paying with plastic
01/27/04 Permlink | Markets
"While Korean credit card lenders were reckless and far less experienced than their Western counterparts their recent travails shows the vulnerability of the industry to the bursting of a credit bubble. Shareholders in JP Morgan Chase should start praying that they haven't been passed yet another wooden nickel."

A pipsqueak swinging at the big board
01/20/04 Permlink | Markets
"Seth Merrin's Liquidnet is a peer-to-peer swap market geared solely to big traders -- and it's growing rapidly"

Are bonds once again 'certificates of confiscation'?
01/20/04 Permlink | Markets
"With yields so low, fixed-income investments offer little except the chance to give money away. Meanwhile, the correction in gold offers a chance to benefit from a bounceback."

Suspicious trading preceded bank megamerger
01/16/04 Permlink | Markets
"Exchanges saw a huge spike in the purchase of Bank One options even before news of the huge J.P. Morgan acquisition broke. The transactions were enormously profitable for a fortunate few."

If 2004 goes bad, it will go really bad
01/12/04 Permlink | Markets
"The dollar's decline is going to cause huge problems, and the economy is artificially pumped up. When the deluge finally hits, I see stocks falling 50%."

Nightmare after Christmas
12/26/03 Permlink | Markets
"Christmas Day may be about ripping open gifts, but the day after Christmas is about returning the reindeer sweater, the second digital camera, or the DVDs and CDs that you won't watch or listen to -- ever."

Losing by instinct
12/24/03 Permlink | Markets
"The late Benjamin Graham -- erudite classicist, mentor to Warren Buffett, highly successful investor and probably the greatest financial mind of the 20th century -- said it best: "The investor's chief problem -- and even his worst enemy -- is likely to be himself.""

Dow 10,000 is irrelevant
11/30/03 Permlink | Markets
"The index tells very little about stocks and not nearly enough about value. Dow stocks and stocks in general are priced for a perfect world -- in a world that's far from perfect."

Of sacrificial lambs, quacking ducks, and pigs
11/28/03 Permlink | Markets
"This is most unusual. Sure, in a bear market, one expects scandals of accounting, corporate governance, and fiduciary duty. But in the midst of a bull market, when everybody is suppose to get happy again, the scandals are coming thicker and faster."

Beating expectations is the same old con
11/24/03 Permlink | Markets
"Tech companies and analysts still are distorting numbers to make a rough period look like a recovery. It's just more of the kind of rot that almost no one, including the SEC, seems to mind."

The oh-oh 00s
11/18/03 Permlink | Markets
"Bull and bear, terror and war--we're living through some spooky times"

All roads now lead to inflation
11/17/03 Permlink | Markets
"The Fed's espresso-strength intervention is going to reignite prices and may endanger the recovery. What's unknown: how big the next bust will be and who will get hurt."

5 market shockers lurking in the shadows
10/31/03 Permlink | Markets
"Boo! Next time some ghost or goblin jumps out of the shadows at you, think about what Halloween teaches us about investing. Nothing is truly scary unless it's unexpected."

Templeton feeling bearish
10/19/03 Permlink | Markets
"The legendary investor predicts the U.S. dollar will lose 40 percent of its value."

They should call it revenue season
10/09/03 Permlink | Markets
"After watching earnings climb over the last two quarters thanks to cost-cutting, Wall Street wants to see top-line growth to indicate that business has turned around."

Wall Street's dirty secret?
10/02/03 Permlink | Markets
"If we shape our expectations based on past returns, we are counting on rising P/E ratios and falling yields, almost exclusively, for our presumed "risk premium" for equities in the decades ahead."

How soon we forget
10/02/03 Permlink | Markets
"According to Bridgewater Associates in the United States, the combined market cap of the top 20 Internet stocks was already more than US$122 billion in mid-July. Combined earnings over the previous 12 months, on the other hand, came to about US$25 million, which means the group's aggregate price-earnings multiple is somewhere around 4,880."

Look to the big picture to avoid history's pitfalls
09/30/03 Permlink | Markets
"A recent study, based on data produced by the North American Venture Capital Association, paints a more interesting and complex picture. It shows that while private equity is capable of producing some hugely impressive returns, the returns are asymmetric. For instance, while one in five of surviving private equity funds produced a remarkable average return of 722 per cent over the period 1985 to 2002, the average annual rate of return on these funds was just 10 per cent. Two out of five funds lost investors money, and one in five lost an average of 85 per cent of the investors' starting capital."

No reason for Nasdaq exuberance
09/26/03 Permlink | Markets
"So, while the fundamental outlook isn't getting any worse, it's not getting much better. But you wouldn't know that to look at the valuations of most tech stocks. Using Wall Street consensus estimates for 2003, the average price/earnings ratio of the tech stocks in the Nasdaq 100 is 45. (Interestingly, only about half the Nasdaq 100 is tech and telecom.) That's not a stratospheric level, but it's hardly one that screams "bargain" to me. Moreover, it's been proven over and over again in academic studies that Wall Street estimates are consistently too optimistic, which means that P/E of 45 could be closer to 50 or 60 if the "E" comes down."

We can't speculate our way to prosperity
09/20/03 Permlink | Markets
"Soaring margin debt. $100 million paydays. Dead-fish analysts cheering no-earnings techs. All signs that the mania that made the bubble is alive and well."

A battle royal is brewing in Chicago
09/19/03 Permlink | Markets
"Upstart electronic derivatives exchange Eurex is getting set to challenge the sacred turf of the Board of Trade and the Merc"

The myth of a self-sustaining recovery
09/15/03 Permlink | Markets
"When it dawns on people that demand isn.t improving, the rebound has no legs and there.s no rescue party on the way, the market is in for trouble."

Fame vs fortune: micropayments and free content
09/14/03 Permlink | Markets
"The people pushing micropayments believe that the dollar cost of goods is the thing most responsible for deflecting readers from buying content, and that a reduction in price to micropayment levels will allow creators to begin charging for their work without deflecting readers. This strategy doesn't work, because the act of buying anything, even if the price is very small, creates what Nick Szabo calls mental transaction costs, the energy required to decide whether something is worth buying or not, regardless of price."

Spitzer's mutual-fund fight deserves an A
09/08/03 Permlink | Markets
"The New York attorney general's investigation of mutual funds is welcome news. Most investors had assumed this industry is squeaky-clean. It's about time the truth was exposed."

The excessive 80s
09/04/03 Permlink | Markets
"Recession set in. Interest rates maxed out. Fortunes were made and lost"

To have and to hold
08/28/03 Permlink | Markets
"Some recent work should at least help. It explores the .endowment effect., one of the chief tenets of prospect theory. Put simply, this means that people place an extra value on things they already own. Think of a favourite sweater, or your house: would you swap either for something of equal market value? Over the past decade, prospect theorists have found support for the endowment effect in scores of experiments."

Like 1987, only worse
08/25/03 Permlink | Markets
"As a crisis of confidence looms for bonds and the dollar and the markets play out their recovery fantasy, the chance of a crash grows every day -- as does the depth of its consequences."

Wall Street plays dirty despite cleanup effort
08/21/03 Permlink | Markets
"A review of recent takeovers shows price spikes and surging volume ahead of news that only an insider would know."

Will debt weigh down the recovery?
08/13/03 Permlink | Markets
"Far from being models of health, most corporate balance sheets are groaning under debt loads. And that could crimp any rebound."

Net worth steady despite stock fall
08/11/03 Permlink | Markets
"A peculiar thing happened during the latest slowdown in the economy: The net worth of Canadians -- on average -- remained unchanged through a big decline in the stock market and two years of weak growth. And for some, notably homeowners, financial conditions actually improved, though they may not notice the difference in their bank accounts."

Pensions 'black hole' doubles
08/09/03 Permlink | Markets
"Some of the companies are starting to look like giant investment trusts which just happens to make a few engines on the side - or own aircraft or whatever the business is."

The stagnant 70s
07/25/03 Permlink | Markets
"Stagflation. Separation. Americanization. It was a tough time for Canada."

The swinging 60s
07/25/03 Permlink | Markets
"Scandal. Hippies. Flower power. Strangely, it was all good for business."

Stocks are cheap!
07/24/03 Permlink | Markets
"Professional investors think stocks are a great buy now. How worrisome."

Of manias, panics and crashes
07/18/03 Permlink | Markets
"Mr Kindleberger believed that "markets work well on the whole", but occasionally "will be overwhelmed and need help" from a lender of last resort. He understood both the danger of inaction by such a lender and the "moral hazard" that its mere existence can create, by encouraging investors to be reckless in the belief that they will be bailed out if all goes wrong. Thus, he argued, a "lender of last resort should exist, but its presence should be doubted." It should always come to the rescue, but "always leave it uncertain whether the rescue will arrive in time or at all, so as to instil caution." Pulling this off is, he noted, a "neat trick"."

The great stock market swindle
07/17/03 Permlink | Markets
"History teaches that virtually every major multi-year advance during the last two centuries ended with a lengthy period of under-performance."

Should pensions invest in equities?
07/15/03 Permlink | Markets
"The pension industry's fascination with the idea that the stock market is a sure thing over the long term remains intact, even as financial economics suggests the contrary. The stock market, say financial economists such as Nobelist Robert C. Merton, is not less risky over the long run. It is, in fact, riskier. However, backed by the belief that the markets will generate higher returns over the long-term, pension managers continue to pour billions into the markets every year."

Attack of the zombie stocks
07/15/03 Permlink | Markets
"Some of the best performers in the recent bull market are stocks no one wanted just 3 months ago."

How hidden risks fostered a crash
07/11/03 Permlink | Markets
"As Bader-Gold put it: "Financial economics does not recognize equity risk premiums not yet earned for risk not yet weathered." But that is exactly what pension plans, both corporate and public sector operations such as the Ontario Teachers' Pension Plan, have been doing. The result has been a devastating crash in pension values, with fund after fund reporting losses and warning that either contributions will have to increase or benefits will have to be cut. They counted on long-run equity returns that are not guaranteed."

How actuaries missed stock risks
07/10/03 Permlink | Markets
"Their models for long-run pension performance assume, wrongly, that over the long run investments in the stock market will rise fast enough to overcome essentially underfunded pension structures. For years, pension funds operated under the assumption that equities are on a long-term growth track that can be counted on to cover pension liabilities. The market meltdown of the last two years blew the model away, leaving pension plans and corporations facing massive losses that wiped out billions in pension assets across the world."

How to avoid another risk trap
07/10/03 Permlink | Markets
"Over the long run, the risks in the stock market are not lower. The longer the time horizon, in fact, the higher the risk. This startling conclusion is not new. Some economists, including Nobelist Robert Merton and Paul A. Samuelson, raised the issue years ago. More recently, financial economist Zvi Bodie, of Boston University, among others, has written numerous papers warning long-term dependence on the stock market is a high-risk strategy that could go wrong."

Longtime bear not changing his negative attitude
06/24/03 Permlink | Markets
"Bubbles disappear completely. Showing graphs of different bubbles versus their trend lines, Grantham points out that every bubble is symmetrical. If prices rise 100 percent, 200 percent or 300 percent over their trend, bursting the bubble ends with a retreat that goes back to the trend line. Then it continues and goes below the trend line."

Peer pressure keeps the pros gambling
06/23/03 Permlink | Markets
"Worried about missing the rally? Worry instead about the money managers who risk your savings to keep up with the pack."

Nobody wants you when you're down and out
06/23/03 Permlink | Markets
"As big a drop as that was, a Standard & Poor's study of the S&P 500 found that stocks lose an average of 11.7% in the days leading up to removal from the index (see chart). Canadian stocks weren't included in that study. But as S&P cut more than 70 companies from the Toronto index over the past year for failing to meet minimum listing requirements, it wasn't unusual to see prices drop between 15% and 20% in the two weeks around the time of deletion. A short time later, many recouped some of their losses."

Insider selling hits 2-year high
06/04/03 Permlink | Markets
"Stock sales by corporate officers hit a 24-month high in May, according to Thomson Financial, during a month when the U.S. stock market rose to its best level in nearly a year."

Getting stretched
06/03/03 Permlink | Markets
"If you look at earnings under generally accepted accounting principles, the S&P 500 is trading a price-to-earnings (P/E) ratio of 31.4, up from 27.5 at the end of March. Before 1998, it had never been above 30. If you are a kind and forgiving person, you can use pro forma earnings -- the numbers that companies post before charges for stuff like plant closings, layoffs, and the like. On that basis, the S&P's P/E is 19.7, a level rarely seen before the gaga years of the late 1990s."

Can stocks defy gravity?
06/03/03 Permlink | Markets
"That's what Wall Street wants you to believe. Don't buy it. The best minds say the market will rise, but it won't soar."

Seriously, why buy stocks?
04/20/03 Permlink | Markets
"After years of wall-to-wall, solid-red stock returns, why do financial advisers still tout stocks?"

SEDI to improve access to insider trades
04/12/03 Permlink | Markets
"Starting June 9, insider trade reports to all Canadian securities jurisdictions will be made via the System for Electronic Disclosure by Insiders, eliminating paper-based reporting systems for virtually all insider trades."

Fraud? No, it was good policy
04/04/03 Permlink | Markets
"So there was no fraud or permit violation by Powerex. And if by "megawatt laundering" those criticizing us mean purchasing unwanted megawatts in southern California and delivering a large amount of power when and where it was needed in Northern California, I'm proud to say that's what we did."

National economic planning: will it fly?
04/02/03 Permlink | Markets
"As Ludwig von Mises and Friedrich Hayek have argued, one intervention would generate unintended consequences that would require further intervention. Since we each see directly into our own minds alone, politicians and bureaucrats cannot predict the complex myriad of reactions that their plans for intervention will instigate. As people react and adjust to government policies, and these policies become more complex and comprehensive, we would move towards comprehensive economic planning, socialism, and tyranny."

Reverse stock splits
03/25/03 Permlink | Markets
"Consolidations are being done by legitimate companies, but there are still people who quote you chapter and verse that "consolidations never work, they are usually companies that were bad companies in the first place"."

In search of those elusive returns
03/24/03 Permlink | Markets
"Despite this week's stockmarket rally, tumbling equity prices and bond yields have sparked a fierce debate over asset allocation."

The perfect storm
02/18/03 Permlink | Markets
"British financial advisers have never had it so bad. Nothing is selling and commissions are scarce. Mark Dampier, fund analyst with Hargreaves Lansdown, a brokerage firm, wonders how much longer he will have a job."

The Foresight saga, continued
01/17/03 Permlink | Markets
"Whatever happens this year, Felicity will strike lucky again. But sooner or later her run of double-digit returns may come to an end. In a world of near-zero inflation, where stockmarkets in different countries are moving ever closer in step and where risk and uncertainty are on the rise, the returns that Felicity is accustomed to will be elusive. She would be wise to recall 1931, when the best performing asset was cash, offering 1% interest."

The physics of financial catastrophe
01/16/03 Permlink | Markets
"Sornette's fractal model suggests that the current rally will stall shortly and that prices will subsequently retreat much lower over the next 12 months to 18 months, punctuated from time to time by strong countertrend rallies. After the S&P 500 Index ($INX) reaches the low- to mid-600s from its current perch around 925, his model predicts a multiyear period of convalescence for U.S. stocks before a new bull phase pushes prices back toward and beyond their 2000 highs."

Are top investors' brains wired for wealth?
01/13/03 Permlink | Markets
"You've done your market research and listened to the financial experts. But why isn't your portfolio growing? According to some neuroscientists, the brain and its affinity for patterns may reveal how people handle investments more so than other factors."

Hocus pocus
01/08/03 Permlink | Markets
"Given the strong public demand for predictions, it would be too much to ask financial journalists and brokerage analysts to stop issuing annual forecasts. But they could conceivably fulfill the demand by emphasizing particular stocks, where academic research has uncovered several predictive factors, such as average volume turnover, earnings momentum, valuation ratios, sales growth rates, as well as the level of accruals and capital spending in relation to assets. Otherwise, leave the annual predictions about the general market to the psychics."

Only at the right price
01/07/03 Permlink | Markets
"What investors have to decide, today and into 2003, is this: After the turbulence of the past 20 years, are stock prices now low? Or are they still high?"

Going against the crowd really paid in 2002
12/24/02 Permlink | Markets
"The best SuperModels ideas were those that discounted so-called expert opinions like those from Standard & Poor's. The worst: an early-year play on a rally and a misfire on defense."

Bill & Bill's excellent bull signal
12/18/02 Permlink | Markets
"The stars of 2002's financial news programs aren't the slick CEOs of the boom years -- they're the more circumspect money managers shepherding their flock away from the bear's grasp."

Look out! Insiders are bailing
12/10/02 Permlink | Markets
"Want one more reason why this rally might not be for real? Insiders sold in droves in November."

Corporate America's crunched numbers
10/24/02 Permlink | Markets
"S&P's "core earnings" calculation accounts for stock options and pension costs -- revealing profits that are far lower than reported."

Dive right in, Siegel says, the P-Es are fine
10/22/02 Permlink | Markets
"Siegel is just as bullish now as he ever was, insisting that investors can confidently expect to make an average of 5% a year after inflation over the next 20 to 30 years. The main reason? Today's buyers are getting in at prices more than 40% lower than in March, 2000. That matters because the five big market busts of 40% or more over the last century were followed by above-average annual real returns of 8.6% over the next five years. "You're starting from a much lower base," says Siegel. "I don't consider this market to be dirt-cheap, but it is a good, if not better-than-average, time to buy equities.""

Through the past, darkly
10/22/02 Permlink | Markets
"In fact, markets typically fall five years in a row, and they would have recently, except for those two extenuating circumstances. The S & P (or its reconstructed equivalent) fell five years in a row from 1825-29 (inclusive). It fell seven years in a row from 1836-42, five years in a row from 1853-57, and five years in a row from 1873-77. Look at the charts. The S & P fell four years in a row from 1881-84, five years in a row from 1892-96, and five years in a row from 1910-1914, and every one of these declines was part of a longer bear cycle."

Bear diaries
10/12/02 Permlink | Markets
"Some investors are in denial and simply refuse to open their monthly or quarterly statements. Others live in hope the bull will soon return, while those who foresaw the carnage and sold at the top sit complacently on their cash and bonds."

Foul play among the UAL shorts?
10/09/02 Permlink | Markets
"According to the NYSE regulations, a person short-selling shares has to "deliver" the shares to the buyer three days after the trade date. Extensions are usually allowed by the clearinghouses. But investors who are long on UAL say in this case, the many of the shorts haven't been able to deliver."

When bull returns, most won't believe it
10/08/02 Permlink | Markets
"Major bear markets such as the one we're in come along rarely. The current bear market is the worst since 1973-74, and that one was the worst since the great crash of 1929-32. The experience of being through one of these bears helps gauge another."

Female investors losing faith
10/04/02 Permlink | Markets
"More than half of female Canadian investors -- 55% -- have lost confidence in the stock market, a bank survey released yesterday finds. Four in five say their investment behaviour has changed over the past year because of the bear market's volatility, according to the second annual TD Wealth Management female investor poll."

Bracing for October
10/01/02 Permlink | Markets
"While September wins for worst historical performance overall, October is a scary month."

Betrayed by the business press
09/25/02 Permlink | Markets
"Before Congress finishes its grilling, it ought to drag a few business editors and TV stock jocks before some committee or another to explain just how in hell they and their flunkies got this story so wrong."

When it comes to investing, we're dummies
09/21/02 Permlink | Markets
"An investment literacy test taken recently by 4,083 people across Canada has found a depressing lack of knowledge about wide-ranging financial matters. How bad? Just one-third of those who took the test answered 50 per cent or more of the questions right, while a single living soul managed a perfect mark."

Unfinished business
09/10/02 Permlink | Markets
"Certainly we are witnessing bubble deflation in the equity markets. After one of the most incredible equity bull markets in our financial history, set against the backdrop of possibly the greatest credit boom this country has ever seen, a period of significant reconciliation is only to be expected. Where are we in the process?"

A reply to Bill Gross
09/10/02 Permlink | Markets
"Bill Gross, the brilliant portfolio manager of PIMCO (Pacific Investment Management Co.) just put out an investment outlook entitled, "Dow 5,000" (can be found at www.pimco.com). In his commentary, he analyzes major works that have been written in the field of stock returns, including my Stocks for the Long Run. His conclusions about stocks are very pessimistic."

Think stocks are great? Think again
09/08/02 Permlink | Markets
"Mutual funds come with all sorts of warnings, the most prominent being that usually ignored bit about how past performance is no guarantee of future results. But you're not likely to read the following cautionary note in a prospectus: "This fund is precluded from investing in the best companies the economy has to offer.""

Dow 5,000
09/06/02 Permlink | Markets
"As Warren Buffett has said, in the short run the stock market is a voting machine but in the long run it's a weighing machine. Despite being down nearly 50% from its highs, this market remains overweight."

Why Japan-style malaise could happen here
09/02/02 Permlink | Markets
"Not so long ago, Japan was deemed so all-powerful that people believed it, too, could ward off any problems. Further, it had one big advantage going for it that we do not: Japan was a nation of savers and a net creditor, while we are a nation of spenders and a net debtor."

Public Participation
09/02/02 Permlink | Markets
"The problem now is that public participation in the stock market through investments in equity mutual funds are at the highest levels ever, and that participation has actually increased since the market peak. This solidifies our conviction that the market has not bottomed and that massive capitulation is still ahead."

Tweedy on the markets
07/25/02 Permlink | Tweedy Markets
"The current stream of negative news and declining stock prices will eventually run its course. In the meantime, a lot of good companies are getting to be quite cheap. This is presenting opportunities we have not seen in a long time."

Markets in crisis
07/19/02 Permlink | Markets
"The Dow Jones industrial average plummeted Friday, losing almost 400 points after component Johnson & Johnson said it is the latest company being investigated by U.S. regulators for potential improper record-keeping."

Panic of 1819--and 2002
07/16/02 Permlink | Markets
"The economic cycle of boom and bust is fascinating stuff. Its essential elements are repeated endlessly throughout the dusty pages of financial history. All of this makes Murray Rothbard's book, The Panic of 1819, particularly interesting, timely, and enlightening. This was Rothbard's doctoral dissertation, published originally in 1962 but very hard to come by until the new edition made available online through the Mises Institute."

Anatomy of a bubble
07/13/02 Permlink | Markets
Skip the text but take a look at the historical P/E charts. Btw, the S&P500 is now at 921

The TSE has a new site
05/04/02 Permlink | Markets
Check out the TSE's slick new website. It's well done and keen data is easy to find.

New cause for caution on stocks
05/04/02 Permlink | Markets
"Now Dimson's team has created the first full, global picture of how equities performed over the past century. Among the 16 nations the team studied, stocks beat bonds and cash by an average of 4 to 6 points a year. From this, the scholars draw a startling conclusion: putting all your money in stocks is a bad idea. Why? First, most previous research showed stocks beating bonds and cash by a much wider 6 1/2 to 8 1/2 points a year. Second, a big chunk of the rise in stock returns came from the democratization of investing, starting in the 1970s. With mutual funds offering instant diversification, stocks suddenly became safer. "That can't happen again," says Dimson."

The marvel that is capitalism
04/09/02 Permlink | Markets
"This speech by the president of the Mises Institute was given before students, professors, trustees, and others at an awards dinner sponsored by the Adam Smith Club, Campbell University, Buies Creek, North Carolina, April 4, 2002. Rockwell and entrepreneur Lewis Fetterman received the club's Free Enterprise Award."

The Stingy News Weekly

Article Archive

Submit a Story

 
About Legal Contact Us
Disclaimers: Consult with a qualified investment advisor before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...