The Unknown Wife and Daughter are going to a neighbor's house for a little New Year's cheer (the non-alcoholic kind, since Unknown Wife is expecting), and then home by about 10.
Here's hoping 2009 finds you healthy, prosperous, and happy.
First off, let's start with Credit Default Swaps (CDS). A CDS has a lot of similarities to an insurance policy on a bond (it's different in that the holder of the CDS needn't own the underlying bond or even suffer a loss if the bond goes into default).
The buyer (holder) of a CDS will make yearly payments (called the "premium"), which is stated in terms of basis points (a basis point is 1/100 of one percent of the notional amount of the underlying bond). The holder of the CDS gets paid if the bond underlying the CDS goes into default or if other stated events occur (like bankruptcy or a restructuring).
So, how do you use a CDS to create a synthetic bond? here's the example from Salmon's column:
Let's assume that IBM 5-year bonds were yielding 150 basis points over treasuries. In addition, Let' s assume an individual (or portfolio manager) wanted to get exposure to these bonds, but didn't think it was a feasible to buy the bonds in the open market (either there weren't any available, or the market was so thin that he's have to pay too high a bid-ask spread). Here's how he could use CDS to accomplish the same thing:
- First, buy $100,000 of 5-year treasuries and hold them as collateral
- Next, write a 5-year, $100,000 CDS contract
- he's receive the interest on the treasuries, and would get a 150 basis point annual premium on the CDS
So why go through all this trouble? One reason might be that there's not enough liquidity in the market for the preferred security (and you'd get beaten up on the bid-ask spread). Another is that there might not be any bonds available in the maturity you want. The CDS market, on the other hand, is very flexible and extremely liquid.
One thing that's interesting about CDS is that (as I mentioned above), you don't have to hold the underlying asset to either buy or write a CDS. As a result, the notional value of CDS written on a particular security can be multiple times the actual amount of the security available.
I know of at least one hedge fund group that bought CDS as a way of betting against housing-sector stocks (particularly home builders). From what i know, they made a ton of money. But CDS can also be used to hedge default risk on securities you already hold in a portfolio.
To read Salmon's column, click here, and to read more about CDS, click here.
In 2002 he was diagnosed with Neuroblastoma, a particularly nasty and resistant childhood cancer. After a great deal of chemotherapy, surgery, radiation, more chemotherapy, and experimental treatments (including an autologous (i.e. "self") stem-cell transplant, he went into remission in 2005.
In January of 2008, he was diagnosed with a Wilms' tumor (a kidney tumor), which resulted in the removal of his right kidney and, after more chemo, he was given another clean bill of health this summer.
Now it looks like he has another tumor - in the lower part of his right lung. We just found out about it two days ago as a result of routing follow-up scans. He's scheduled for more surgery this coming Monday (the 29th). He'll get the tumor removed, which will give us the best information as to what exactly it is. He'll probably have about a week-long hospital stay, and we'll then know if this is a recurrence of the Wilms, tumor or something else (it could be a recurrence of his neuroblastoma, but that's unlikely because there was no indication on his latest MIBG scan a couple of weeks back).
So, please keep us in your prayers.
If you're one of my "non-blogosphere" friends (or a regular reader who knows me by my real name) and you want to keep up with what's going on, we maintain a website that we use to keep family and friends abreast of the little guy's treatment. Drop me an email and I'll send it to you in case you want the url.
- Window Dressing
- Painting The Tape/Banging The Close
- Comparison Shopping
- Window dressing happens when the portfolio manager sells off securities just before the end of the reporting period so that they don't show up in the annual (or quarterly) listing o the portfolio's securities.
- Painting the Tape (also called Banging the Close) occurs when a portfolio manager holding a security buys a few additional shares right at the close of business at an inflated price. For example, if he held shares in XYZ Corp on the last day of the reporting period (and it's selling at, say $50), he might put in small orders at a higher price to inflate the the closing price (which is what's reported). Do this for a couple dozen stocks in the portfolio, and the reported performance goes up. Of course, it goes back down the next day, but it looks good on the annual report.
- Comparison Shopping could also be called "benchmark shopping". This refers to the idea that if a fund manager can't beat his benchmark, he just switches to a new benchmark that he can beat.
For much of the past seven years, President Bush and Vice Prresident Dick Cheney have waged a clandestine operation inside the For much of the past seven years, President Bush and Vice President Dick Cheney White House. It has involved thousands of military personnel, private presidential letters and meetings that were kept off their public calendars or sometimes left the news media in the dark.Read the whole thing here.
Their mission: to comfort the families of soldiers who died fighting in Afghanistan and Iraq since the Sept. 11 terrorist attacks and to lift the spirits of those wounded in the service of their country.
Regardless what else you think about President Bush, he clearly appreciates and honors the role the military plays and the sacrifices those soldiers have made for their country.
Now that's what I call an information-rich slide.
Section 13(f) of the Securities Exchange Act of 1934 requires all institutional fund managers with more than $100 million in assets to report their holdings each quarter to the SEC *(within 45 days of the end of the quarter). The hard copies of these filings go back 30 years, but they've been available for free online through the SEC's EDGAR database since 1999. The form name is (not surprisingly) "13F" or "13F-HR". Like many academics, I've used the electronic database of 13F filings put out by Thomson Financial (which has information back to the early 80s on electronic media, runs 5-10 gigabytes, and requires you to have some programming chops to access) in my research. But you can access a fund's data one filing at a time through the Edgar site.
It won't show things like derivatives holdings (at least usually not) or short sales. But if will give you an interesting look at the holding of the big boys. However, you might be looking at a portfolio as much as 45 days old. So, it's best for funds with a long-term (usually value-oriented) approach. As one example, here's the latest filing from Seth Klarman's Baupost Group.
And in case you're interested, here's one for Bernard L. Madoff Investment Securities LLC (I hear the founder has been in the news lately).
HT: World Beta who uses this information in an investment screening tool.
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- My favorite student got the Terry Pratchett/Discworld references sprinkled on the exam, and one of my others caught a couple of 1980s movie references.
- In between walking up and down the aisles, I wrote about a hundred lines of SAS code
- One of my students already has sent an email asking if we can meet "to discuss his grade." Anyone want to guess how that'll play out?
Oh wait - I already got one of those...
Then I heard about Swoopo.com. It's been called "pure distilled evil in a business plan". Here's their setup:
- Bidding for an item starts at $0.15
- Each bid raises the price by $0.15
- Bids cost $0.75 to make.
- Here's the kicker - a bid in the final seconds extends the auction for 15 seconds. So, auctions can go on and on.
They also hold "penny auctions" on their front page - a bid only increments the price by a penny. I recently saw a TomTom GPS sold for about $12. That means 1200 bids at $0.75 per bid, for revenue of $900, on something that costs them between $300 and $500. Not too shabby.
This is a behavioral economist's dream - it has bidders focusing on sunk costs (I have to make back my bids, and if I win, I get the savings), hubris, and endowment effects (the bidders start viewing the item as "theirs", and therefore value it more highly). And if I thought about it a bit, I could probably come up with other behavioral biases.
It has some similarities to a "dollar auction". In this setting, individuals bid on a dollar. But the catch is that the second highest bidder must also pay their bid, but without getting the dollar in exchange. So, the second place bidder continues to escalate to cut their losses. In Swoopo's setup, the 2nd place bidder isn't obligate to pay, but once they're in the game, they continue bidding to recoup their already-paid bids (that is, if they can get the item at a discount).
It's not a scam per se, because everything is disclosed up front - the rules are clearly stated. But the only advice I can give you about using Swoopo comes from War Games (the 1983 movie starring a very young Matthew Broderick):
UPDATE: Here's a perfect example of how the irrational bidding that can take place - a person "won" an auction for a Sharp 42 inch LCD TV. According to the website, it was "worth up to" $1,199. The "winning" bidder paid $3,360. Assuming that this was a "normal" auction with bid increments of $0.15, this means that Swoopo received total bids of (3,360/0.15) x $0.75 = $16,800 in total bids (including $1,512 from the "winner" alone), in addition to the winning bid of $3,360, for a total of $20,160 -- all for an item worth at most $1200.
UPDATE2: as pointed out by a reader, the auction above was a "fixed price" one where the "winner" got to purchase the item for $119. So, the buyer could have potentially gotten it for a very nice proice. However, they ended up spending over $1500 in bids, plus the $119 winning price, all for a TV that was worth at most $1200. So, the winner endend up overpaying by at least $400, and Swoopo made total revenue of almost $17,000 for the cost of a $1200 TV.
One part of me wishes I'd thought of this - in about a couple of days time I'd have made back all the money my retirement accounts lost this past year. But I'd feel a little bad getting that money from stupid people. Not to say I wouldn;t do it, but I'd feel a little bad.
Michelle Harner over at the Conglomerate posted a very nice piece with some links about distressed debt investing. She highlights the difference between "vulture investing" and "investing for control" (basically traders vs. longer-term investors). She gives a couple of pretty good references. One, from Knowledge@QWharton lays out the basics of "distressed for control" investing:
Simply put, their line of work is to make a profit from companies that have failed to do so and are on the brink of bankruptcy. Unlike traditional hedge funds, however, their investment doesn't stop at buying significant portions of these companies' debt for pennies on the dollar, tidying up the balance sheet and then selling at a higher price. Instead, KPS and Matlin Patterson get in and stay in -- bringing in new managers, installing a new strategy, renegotiating labor and supplier contracts, and so on. (That's the 'control' part.) It's not an easy task, especially given the state of these companies when they step in.Read the whole thing here.
She also cites some of her own research: a survey titled "Trends In Distressed Debt Investing: An Empirical Study of Investors' Objectives" (available on SSRN here).
Finally, Marketwatch gives us a look into the world of "vulture investors." It's a bit dated (April), but it shows how busy the world of distressed debt has become. One of the guys at my church's men's group is an analyst at a local distressed-debt hedge fund. He said he hasn't had this many good choices to buy since he can remember (luckily his firm is sitting on some cash).
I'm teaching the Level 1 Fixed Income material for CFA this spring, and will be teaching Unknown University's Fixed Income class in the fall. So, I'll probably be posting more on the credit market topics as time goes on (I tend to use this blog as a handy place to keep class-related stuff I want to remember).
If they do, I'll probably give them extra credit.
The Wall Street Journal has a great interview of Miller, and here's the best line:
This meltdown has provided a lesson for Mr. Miller and other "value" investors: A stock may look tantalizingly cheap, but sometimes that's for good reason.It's a very good piece for discussing in class, since it touches on a lot of issues related to market efficiency. Read the whole thing here.
I just came across a paper by a group known as the Brandeis Institute titled "Value vs. Glamour: A Global Phenomenon" that seems to rule out the data diving story. They examine the evidence for the value premium both across time (the mid 1960's to the present) and internationally. They found that
While the degree of outperformance of value stocks vs. glamour stocks varied across data sets, what strikes us as most significant was the consistency the value premium exhibited:The paper has a lot of nice graphs that could be useful in class. You can read the whole thing here.
- across valuation metrics, such as price-to-book, price-to-cash flow, price-to-earnings,and sales growth
- across time, which in this study applies to the 1968-2008 period for U.S. stocks,and the 1980-2008 period for non-U.S. stocks
- across regions, as the results indicated a value premium in developed markets in North America, Europe, and Asia
- across market capitalizations, as the relative outperformance of value stocks to glamour stocks was evident among both large- and small-cap stock universes.
HT: CXO Advisory Group
- Only one meeting left for each of my classes.
- My student-managed fund survive their end-of semester presentation to the advisory board
- I've graded and handed back all assignments except for final exams
- I've even given out and collected my evaluations
The crop is almost in. And man, oh man is it about time.
One of the things I like about this career is that it has a rhythm to it - we have new "crops" each semester, and a feeling of accomplishment once the semester is done. But that final week or two is always a bit crazy.
So, to all my readers: If you're a student, good luck on your exams and projects. If you're faculty, hang in there - it's almost time for the break.
Now he has a blog, titled (appropriately enough) Market Design. It's definitely worth a look-see.
HT: Marginal Revolution
Since I'm teaching Fixed Income next year, I'm sure some of these will make their way into my class.
He's also got some other videos up on YouTube that I'll post in the next couple of weeks.
Now go overdose on Tryptophan.
There's been tons of work on this topic both in the academic and practitioner literatures. But I haven't seen much on similar relationships for universities. I'm sure that a lot's been done- I just haven't seen it.
There's a good illustration in the Boston Globe of directors at Suffolk University (actually, trustees, which serve a similar role for a university) with significant business ties to the school. It turns out they just awarded the University president a 2.8 million dollar pay package. Of course, there were "good reasons" for doing so. Here's the lede from the story:
Boston lobbyist Robert Crowe was key among the Suffolk University trustees who made David J. Sargent the highest paid university president in the nation in 2006, with a $2.8 million compensation package. Less than a year later, Sargent renewed a $10,000-a-month contract with Crowe's lobbying firm to represent Suffolk's interests in Washington.
This month, as controversy flares over Sargent's pay, the job of publicly defending it falls on George Regan, himself a new appointee to the Suffolk Board of Trustees as well as the beneficiary of a $366,000 annual contract with the university.
Read the whole thing here.Is this necessarily a bad thing? Not really - it could be perfectly innocent, and it's not surprising that trustees of a university might have significant business ties to the university. After all, they tend to be prominent alumni with a long history with the school. But, when you have those ties, a pay package like that is going to get far greater scrutiny than it would otherwise. Or as Ricky Ricardo would have said, "they got some 'splainin to do".
As an aside, if you want to see some excellent examples of affiliated directors in the corporate world (along with other examples of bad governance), there's no better place to go than Michelle Lederer's Footnoted.org. She's made a career out of scouring through company documents to find some truly outrageous examples of corporate mis-governance.
I think the president of Unknown University considered having some trustees with business ties to the school, but we didn't have enough money to pay the required graft.
For the lawyers, here's the disclaimer:For 3 years you YouTubers have been ripping us off, taking tens of thousands of our videos and putting them on YouTube. Now the tables are turned. It's time for us to take matters into our own hands.
We know who you are, we know where you live and we could come after you in ways too horrible to tell. But being the extraordinarily nice chaps we are, we've figured a better way to get our own back: We've launched our own Monty Python channel on YouTube.
No more of those crap quality videos you've been posting. We're giving you the real thing - HQ videos delivered straight from our vault.
What's more, we're taking our most viewed clips and uploading brand new HQ versions. And what's even more, we're letting you see absolutely everything for free. So there!
But we want something in return.
None of your driveling, mindless comments. Instead, we want you to click on the links, buy our movies & TV shows and soften our pain and disgust at being ripped off all these years.
Warning- clicking on the link can result in hours of time wasted, a skewed perspective on life, and adoption of British accents.Now go and enjoy.
HT: Barry Ritholtz.
It looks pretty promising. Although it's less than 2 months old (the first post was made on September 26), it already has a lot of high-quality content, with participation from a pretty large nuimnber of the faculty. Just this last month, it has posts by Viral Acharya, Marti Subramanyam, Edward Altman, and Joel Hasbrouk among others).
It's definitely one to add to your feed reader.
It should make for an interesting case. Cuban has the resources to fight this thing pretty much as far as he wants (even potentially all the way to the Supreme Court), and is definitely stubborn enough to do exactly that. He's already posted a response to the complaint on his blog:
Mr. Cuban stated, “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”Not surprisingly, Stephen Bainbridge has a very thorough legal analysis of the issue. After all, it's in his wheelhouse.
In the meanwhile, I have SAS programs to run and papers to write.
In fact, my favorite Churchill story is the one about the time that Churchill was standing at the urinal in the men's room of the House of Commons. Atlee came into the room and stood at the urinal next to Winston's. Churchill looked up at him, zipped up, moved a couple of urinals farther down and resumed his business. "Why Winston, I had no idea you were so modest.", said Atlee. "It's not modesty, Prime Minister. It's only that every time you find something that is large and functions well, you try to nationalize it, and I thought it best not to take a chance!".What will they nationalize next?
C is for Credit Default Swaps, defined for me by a Wall Street watcher as: Risk whatever you want, and we insure it; risk too much, taxpayers insure it.The other 21 letters are pretty good too. Read the whole thing here.
L is for leverage (a means of maximizing your losses), liar loans, Lehman (pronounced "lemon")--and the losses/liabilities that unite them all.
M is for where it all started: the mortgage (which, aptly, means death-pledge). Like the dog, it comes in a variety of breeds, "sub-prime" being a cross between a pit bull and a chihuahua.
Q is for quants, who forgot that, every so often, past performance is no indicator of anything at all.
S is for securitization, the process by which one passes off cat food as caviar.
HT: The Big Picture.
The latest new one is a put out by The Applied Portfolio Management Program at Washburn University.
Unlike other academic blogs, this one is unique in that material is contributed both by faculty and by students in the program.
Go check it out, and add them to your feed reader - it's been added to the blogroll. And if you come across any other ones, drop me a line.
That reminds me - I have to check up on my grad assistant to see how he's doing on the assignment I gave him at the beginning of the semester.
It's interesting how much the reported ratios change by data source. As one example, for GATX corp, the reported operating margin (trailing 12 months) ranged from 18.92% (reported on Reuters) to 46.7% (on Marketwatch).
HT: Jim Mahar at Finance Professor
Don't ask me why - I just thought it was funny.
Heisenberg gets pulled over by the cops for speeding. Cop walks up to his care and asks,"sir, do you have any idea how fast you were going?"
Heisenberg replies, "no, but I know exactly where I am."
Update: if you haven't managed to get your geek on, click here (hey - a couple of people asked, and I'm nothing if not accommodating).
SnowFlake starts out by blaming the instructor (who, by the way, is one of the best in the college). After some questions and comments on my part like "Gee, that doesn't sound like Professor X at all. Are you sure?", it turns out that he hadn't been keeping up with the work, and hadn't worked more than a problem or two from the end of chapter material. Instead, he tried to cram for the first exam, and did poorly. Since that strategy worked out so well on the first exam, he decided to try it once more on the second exam for good measure. Lo and behold, the same approach yielded the same result (funny how that happens).
So, I gave Snowflake some standard advice on how to study, and then he asked if he could set up a time early this week to set up his classes for the next semester. We set a time (Monday morning at 10), and then came the kicker:
He asked if it was alright if his MOTHER came to the appointment.
I managed to keep my jaw off the floor, since he was a second-semester junior, and if you have hover-moms, they usually get cured of it by sophomore year (and they're almost non-existent in Business schools). But since I couldn't think of anything else to say (other than "You'll be all right once they drop", which didn't seem prudent at this juncture). I said, "Well, Precious, that's entirely up to you".
Monday morning comes around, and I'm running late for our 10:00 a.m. appointment. So, I have the secretary leave a note on my door saying I'd be a few minutes late, and hurry in to the office with visions of MomZilla running loose in the hallway and going on a rampage in the Dean's office.
I get there five minutes late, and there's no sign of either Snowflake or MomZilla. I hang out in my office for a few hours just in case, and it seems like a larger-than-usual number of faculty seem to filter by my office (they keep me off the beaten path, which is probably a good thing). I guess after hearing about Mom coming in, they just couldn't resist sneaking a peek.
In any event, I get a call late that morning from SnowFlake informing me that he had to be in traffic court that morning, had completely forgotten, and wanted to reschedule.
I guess I should have had his Mom remind him.
It's pretty cool explaining how our political system works to an 8 year old and a ten year old. This year, I think I'll start working through the Declaration of Independence, the Constitution, and the Bill of Rights with them - it's never too early, and most people (myself included) don't know enough about these foundations of our country.
As I grew sicker, I had what for me was an extremely comforting insight. I came to view serious and progressive illness as an ever constricting circle with oneself at the center. The interior of the circle represents the contents of one’s life. As the circle gets smaller, things that were inside get forced out. Some of these things are dearly missed; others that were once thought precious get forced to the exterior and turn out to go surprisingly unlamented.
t the innermost point of the circle are the things that really matter: family, faith, love. These things stay with you until the day you die. At the very end, because the circle has shrunk down to its center, they’re all you have left. But as we approach that end, we finally realize that all along, they were what mattered most. As a consequence, life often remains beautiful and worthwhile right up until the end.A quick reminder: we're all born with a fatal ailment - it's called life, and no one gets out alive at the end. So without getting overly schmaltzy or preachy, we'd all do well to spend more time on that "inner circle" than Barnett wrote about.
To see a list of tributes to the man at the Weekly Standard, click here.
A Short Course In Behavioral Economics: Daniel Kahneman (yes, the Nobel Laureate) has recorded and posted videos of a two day conference called "Thinking about Thinking".
Robert Schiller's Spring 2008 Financial Markets Class at Yale: Schiller has done a great deal of work in market efficiency, and also created the Case-Schiller Index of Home Prices.
While surfing through Yale's Open Classes, I also found a class titled Game Theory, by Ben Polak, a widely published economist. He seems to cover all the big topics: Nash (and other) Equilibrium concepts, Adverse Selection, Signalling, and even Evolutionary Game Theory.
If you know of other finance/econ classes on the web, let me know in the comments section and I'll post them here.
There's a great piece on this topic by Joel Sposky in Inc magazine.. Here's a choice snippet:
I'm always on the lookout for these incentive schemes gone wrong. There's a great book on the subject by Harvard Business School professor Robert Austin -- Measuring and Managing Performance in Organizations. The book's central thesis is fairly simple: When you try to measure people's performance, you have to take into account how they are going to react. Inevitably, people will figure out how to get the number you want at the expense of what you are not measuring, including things you can't measure, such as morale and customer goodwill.
...His point is that incentive plans based on measuring performance always backfire. Not sometimes. Always. What you measure is inevitably a proxy for the outcome you want, and even though you may think that all you have to do is tweak the incentives to boost sales, you can't. It's not going to work. Because people have brains and are endlessly creative when it comes to improving their personal well-being at everyone else's expense.
HT: Craig Newmark
According to a new study "Unbundling Hedge Fund Betas" by by Ulloa, Giamouridis, Mesomeris, and Noorizadesh there's evidence that hedge funds increase betas prior to market upswings. Here's the abstract:
This article is concerned with the systematic exposures of equity hedge fund managers. In particular we seek common equity hedge fund systematic exposures through rigorous model selection techniques. We study their time variance to examine if equity hedge fund style characteristics are stable through time. Most importantly, we explore the informational role of manager decisions to shift their exposures to certain styles. Our results suggest that equity fund managers are exposed to three dominant style strategies, namely the 'market', 'value' and 'momentum'. We also discover that there is a considerable degree of variability in the factor exposures over time for the various dominant sources of systematic risk/return. Finally, we show evidence that managers vary their exposures to the 'market' in time to exploit favourable market moves. A similar pattern is however not observed for their 'value' or 'momentum' exposures.
HT: All About Alpha
About two weeks ago, I went to the FMA annual meeting in Dallas (it was great, by the way). I managed to connect with a lot of old friends, and also made a few new ones.
While I was there, I started a couple of new projects. Without going into too much detail, I think I've figured out a very creative way to use a data set in a new way. Just before FMA, I started a paper with a couple of grad school classmates that uses this data. While doing it, I realized a slew of different applications for the data and methodology.
In short, it's data that's typically used by researchers in one sub-field of finance, but I think it can be used to answer a number of corporate finance research questions. The data's pretty ugly, so it took a while to get it under control. But now that I've got a handle on it, I have more ideas to use it for than I have time to implement. So, I was looking for coauthors who could help out. Luckily, I have a lot of friends, so there were people willing to listen to the idea(s). As a result, I now have three new projects. They may be garbage and I might be totally deluded that this is a good idea, but I don't think so (or at least, I hope not).
Once I got back, I bought a "new" (to me) used car, taught in our evening MBA program one night and then twice in a neighboring city in a professional program, and had two family health problems.
Unknown Son had his surgical port removed (now that he's done with chemo, he no longer needs it, and it is a risk for infection). Unfortunately, what should have been a fairly straightforward half-day affair ended up with him staying overnight at the hospital due to some complications (he's fine now, by the way). Then, the next day Unknown Daughter came down with an intestinal bug that resulted in output from both ends.
Ah well - parenthood involves a lot of bodily fluids, I guess.
In any event, I'm now giving an exam to my evening MBA class. Hey - I have to kill the 2 1/2 hours sometime, eh?
My colleague opened up his brokerage statement and noticed something verrrrry interesting (as Arte Johnson would have said).
He had two negotiable CDs - one from Washington Mutual and one from Lehman Bank. They originally had a 5-year maturity, but now had roughly 6 months until expiration, and were both under the FDIC limit. Here's the kicker - they were quoted at 92 and 93. In other words, you could buy them at 92% of face value, and would receive the full face amount at maturity 6 months later. This works out to a compound annual return of over 18% for the one quoted at 92, and about 15 1/2% for the one at 93. And this is for an FDIC-insured instrument.
So, he called his broker to see if there was an error. He was told that a significant number of people panicked when they saw the WAMU or Lehman name, and wanted to get out of their CDs at all costs. So, although the brokerage firm didn't advertise the fact, if my friend wanted to buy more CDs, he could have them at that price.
It's quite a story, and it illustrates how many people overreact in times of stress. 18% in a federally-insured instrument.
Berkshire's plan "is a sign of confidence from one of the nation's most respected investors," said James Angel, a finance professor at Georgetown University, who added that "sharp investors" now are "sniffing around the wreckage of the credit crunch to pick up good assets on the cheap."I think the second part of the statement is closer to the truth than the first. Here's what the Sage of Omaha gets for his money
The deal is structured in two parts, giving Berkshire a stream of cash and potential ownership of roughly 10% of Goldman. Berkshire will spend $5 billion on "perpetual" preferred shares of Goldman. These are not convertible into equity but pay a fat 10% dividend.So, while the preferred isn't convertible, he gets what is essentially "synthetic convertible preferred". In essence, he gets his preferred payouts if the stock price doesn't rise, and the option to buy stock at a discount if the price is above $115. So, in effect he has a combination of preferred stock and an in-the-money call option. Barry Ritholtz prices the warrants at approximately $1.5 Billion, giving Buffett an effective yield of 14%, and cites another source who estimates their worth at $3.5B, and a yield of 17%.
Berkshire also will get warrants granting it the right to buy $5 billion of Goldman common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. At Goldman's roughly $50 billion market value, based on that closing price, exercising those warrants would give Berkshire about a 10% stake in Goldman.
Once again, Buffett has been able to make an investment at a very attractive price. In times where there's a lot of turmoil, having cash on hand makes it easy to buy companies (or parts of them) at a bargain, and according to Berkshire's first quarter, they had $31 Billion on hand. So, Buffett had cash at a time when Goldman desperately needed it. As a result, he got a great deal.
Just Damn. That guy is smart.
I gave him a little coaching on the way over (i.e. make sure you ask everyone that comes out, look them in the eye, don;t take the first "no" without asking again, and so on). The kid absolutely hung the moon. He sold about 50% more than the other two kids that were there, and the grownups standing around really got a kick out of watching him. It's hard to say no to a determined, charming, and extremely cute 9-year old (of course, I'm completely unbiased).
Sunday was mostly used for prepping for my week's classes (I teach MBAs on Monday evenings, and other classes on Tuesdays and Thursdays). Unfortunately, U.S. started getting a fever Sunday night. We took him into the oncology clinic Monday morning (he had a regular appointment set up anyway), and they sent us home, feeling that it was likely a virus of some kind (no evidence of anything on his scans, and no signs of a bacterial infection). But, by the time I got out of class at 9:00, his fever was spiking to 103.
The doctor didn't seem to feel like he needed to come back in (it's about a 30 mile drive), so we gave him Tylenol, Motrin, and a cool bath, and his fever eventually broke around 1:00 in the morning.
So, I guess I start the week sleep deprived. What else is new.
ed: I had previously written that Unknown Son was 19. That's only in his ability to argue. Chronologically, he's only 9.
So, we gave the paper one last thorough going over. It was sent out today. It' s early, and the paper will need a lot more work (and polishing) before it's ready to submit to a journal. But the initial results look good, and it's always satisfying to have a finished version (even if it's preliminary) of a paper.
I like working with these coauthors. It's the first time I've worked simultaneously with two fellow alumni of the Unknown Alma Mater, and the initial experience has been very, very good.
Also, I'm a political junkie, so it's fun to see students in a finance class actually think about politics in a different way.
In any event, it now seems like the McCain for President contract and the Obama contracts have switched places (they're trading at $0.495 and $0.50 respectively). I always find it interesting to see how they react to various news events.
As an aside, I usually get a bit of a traffic spike when I post something on McCain, Obama, or the presidential elections. Unfortunately, it also results in a lot of fevered comments that I have to delete to protect all my many readers' (all three of them) delicate sensibilities.
Of course, if I did it for the traffic, I'd just mention that I have Sarah Palin Bikini pictures.
But that would be wrong. Very, very wrong.
To do my part, I had to update the data set to reflect the latest year or so of data. I thought "this should be easy." That thought was four days and about 30 hours of programming ago. It turns out that the final data set resulted from three intermediate steps, which also required data sets to be updated.
The end result was that I ended up running programs last night at 12:00 in between watching Mixed Martial arts on TV. All in all it's not bad -- I'm a big fan since I did a bit of competitive judo college (pretty low level stuff, and I wasn't that good) and took taekwondo in high school.
But I'd have been happy to Tivo it for a reasonable hour if I wasn't already up dealing with data issues.
I once had a fellow grad school student who said that "empirical research is easy." If we ever cross paths again (he went into industry) I'm gonna go upside his head with a full hard copy of the SAS manuals.
He somehow managed to get an internship at the bank this summer, and totally nailed it. That wasn't surprising, because he always did FAR more work in class than I asked, and always asked for more. He just got the offer (and accepted it ) today, and came into my office to tell me about it about 10 minutes ago. It was a pretty good one - mid 50s , a couple thousand signing bonus, and great benefits.
It just goes to show that internships matter - a lot. After he graduates, he'll be working in a temporary slot at the firm for six months until his training program starts. So, he figures it'll be a good time to knock out the CFA Level 1 exam (did I mention he really likes finance and isn't afraid of extra work?)
Maybe after I'm tenured...
- Adam Smith said that.
- Unfortunately, there is an identification problem which is not dealt with adequately in the paper.
- The residuals are clearly non-normal, and the specification of the model is incorrect.
- Theorizing is not fruitful at this stage; we need a series of case studies.
- Case studies are a clue, but no real progress can be made until a model of the process is constructed.
- The second-best consideration would, of course, vitiate the argument.
- That is an index number problem (obs., except in Cambridge).
- Have you tried two-stage least squares?
- The conclusions change if you introduce uncertainty.
- You didn’t use probit analysis?
- I proved the main results in a paper published years ago.
- The analysis is marred by a failure to distinguish transitory and permanent components.
- The market cannot, of course, deal satisfactorily with that externality.
- But what if transaction costs are not zero?
- That follows from the Coase Theorem.
- Of course, if you allow for the investment in human capital, the entire picture changes.
- Of course, the demand function is quite inelastic.
- Of course, the supply function is highly inelastic.
- The author uses a sledgehammer to crack a peanut.
- What empirical finding would contradict your theory?
- The central argument is not only a tautology, it is false.
- What happens when you extend the analysis to the later (or earlier) period?
- The motivation of the agents in this theory is so narrowly egotistic that it cannot possibly explain the behavior of real people.
- The flabby economic actor in this impressionistic model should be replaced by the utility-maximizing individual.
- Did you have any trouble in inverting the singular matrix?
- It is unfortunate that the wrong choice was made between M1 and M2.
- That is alright in theory, but it doesn’t work out in practice (use sparingly).
- The speaker apparently believes that there is still one free lunch.
- The problem cannot be dealt with by partial equilibrium methods; it requires a general equilibrium formulation.
- The paper is rigidly confined by the paradigm of neoclassical economics, so large parts of urgent reality are outside its comprehension.
- The conclusion rests on the assumption of fixed tastes, but (of course) tastes have surely changed.
- The trouble with the present situation is that the property rights have not been fully assigned.
Some of the commenters on the piece added more options. Here are some of the better ones:
- How did you handle endogeneity problem?” (Note: this almost always works well at finance conferences, particularly for corporate finance pieces)
- Your standard errors are too small because you failed to cluster (or clustered at the improper level).
- At Fed banks, certainly one of the items for this list would be, “How is this of any relevance to monetary policy?”
- The results are driven by unobserved heterogeneity.
- Did you try using a Difference-in-Difference technique? Did you try using a non-parametric estimation?
- Experiments conducted by Kahnmen and Tversky have clearly demonstrated that people do NOT choose rationally under those conditions.
- Is there a weak instruments problem?
- But what if the actors aren’t rational?
- Isn’t this just Modigliani-Miller?
- How is your model identified?
- Have you included fixed effects?
- That’s ok in practice, but it won’t work in theory.
- This theory is only valid in the static case and won’t work in the dynamic one.
- Why do we care about this? or “Why is this question important anyway?"
- That’s true, but not very interesting
- That’s not a large effect you’ve found, it’s a small effect.
- That’s not a small effect you’ve dismissed, it’s a large effect.
- Did you try first-differencing?
- What happens if you estimate it by GMM?
- You just ran a bunch of regressions. What have we learned from your analysis?
- Here's a popular one, in the “I did this back in..” vein:“I was troubled that you didn’t cite my work in the field.”
- Your empirical results are obviously biased by a troubling sample selection issue.
- But what if we view this as a 2-stage game?.
- ‘In an efficient market, that type of arbitrage isn’t possible’.
- I believe your correlation is a spurious one unless you convince me you checked for co-integration.
My colleagues thought the clown makeup merely increased the resemblance to his father. Those who know me can judge for themselves. He's done with his chemotherapy, so his hair is starting to grow back. This means that the resemblance should rapidly fade over the next month or so.
At Unknown University, we do our annual faculty productivity reports on a June-June basis. So this means I start the new year with a slap single already on the scpreboard.
Results for the CFA exams were just announced, and a number of people who seemed to be locks for passing ended up failing. For others, it was not the first time failing at the exam (I've heard that the average time to completion is 5 years, which means most people that complete the people fail 2+ exams along the way).
In any event, people on the forum were consoling and encouraging those who failed, and one of them linked to a bit of dialog on the movie Rocky Balboa (one of my all-time favorite pictures). It may be the best talk I've ever heard a father give his son:
"Let me tell you something you already know. The world ain't all sunshine and rainbows. It's a very mean and nasty place, and I don't care how tough you are. It will beat you to your knees and keep you there permanently if you let it. You, me or nobody is gonna hit as hard as life.
But it ain't about how hard you hit. It's about how hard you can get hit and keep movin forward. It's about how much you can take and keep movin forward.
That's how winning is done.
Now if you know what you're worth, then go out and get what you're worth. But you gotta be willing to take the hits and not be pointing fingers and saying 'it's because of him, or her, or anybody'. Cowards do that, and that ain't you. You're better than that. "
Now go rent the movie, and watch it with your kids.
- Harry Potter could be a classmate, playing on their Quidditch team
- GPS satellite navigation systems have always been available.
- Gas stations have never fixed flats, but most serve cappuccino.
- All have had a relative--or known about a friend's relative--who died comfortably at home with Hospice.
- WWW has never stood for World Wide Wrestling.
- Clarence Thomas has always sat on the Supreme Court.
- Schools have always been concerned about multiculturalism.
- There have always been gay rabbis.
- Roseanne Barr has never been invited to sing the National Anthem again. (a good thing, IMO)
- Their parents may have watched The American Gladiators on TV the day they were born.
- They never heard an attendant ask “Want me to check under the hood?”
- They have never known life without Seinfeld references from a show about “nothing.”
- There have always been charter schools.
But who cares? I passed.
So for now, it's back to research. Here's what's on my plate:
- Finish two papers that are somewhere between initial results and finished manuscript. They WILL be done by mid-September to submit to a conference. On one, I'm the data guy. On the other, I'll probably do the initial draft.
- Do the final edits on a paper that's previously been rejected and reworked. It should be done by next week to send out to yet another journal
- Finish updating the data set to add another 5 years of data for another paper that was rejected, then redo all the analyses. I get to play "data monkey" on this one too, and my coauthor gets to do the rewrite.
Someone PLEASE shoot me now!
Arghhh! A reader reminded me that (unlike in previous years), the extensions are now until October, not August. At least they're done now.
But after church today, we stopped by a Learning Express (basically a place with educational toys). Right there on the shelves was a Water Balloon slingshot (in case you're wondering, here's a link to a similar model). When we got home, I got my neighbor who lives three doors down to help me out and started launching balloons down the street and over the trees. We soon had the Unknown Daughter and the neighbor's three sons try to catch water balloons we launched from about 60-80 yards away.
Back in college we used to make a similar contraption called a "Funnellator" by attaching surgical rubber tubing to a funnel. We used it to launch water balloons (and other, far more disgusting things) almost 200 yards with our deluxe model. It surprising how many other contemporaries had similar experiences. In fact, a member of the advisory board for our student-managed investment fund once told me (after a few beers) that he's used a Funnellator to launch a sheep's brain (yes, you heard me right, a sheep's brain - he was a Biology major before he switched to Finance) almost 150 yards to land in at the front-door of one of the sororities' houses.
My neighbor and I are thinking about modifications to the store-bought model to see if we can bring it up to code. After all, you never know when the development down the street might try to attack us. We might bring the engineering professor down the street into the loop to see if we can make something more automated.
Preparedness is all.
Today's Wall Street Journal has an interesting story about a new trend in books for boys. It turns out that they don't like to read as much as girls, unless it involves stuff that's gross or at least somewhat inappropriate (real news flash there, eh?). Hence the title of this post. It's the title of a new children's book by Zack Freeman. Here's the description from Amazon:
Zack Freeman is ready to tell his story...the story of a brave young boy and his crazy runaway butt. The story of a crack butt-fighting unit called the B-team, a legendary Butt Hunter's formidable daughter, and some of the ugliest and meanest butts ever to roam the face of the Earth. A story of endurance that takes Zack on an epic journey across the Great Windy Desert, through the Brown Forest, and over the Sea of Butts before descending into the heart of an explosive buttcano to confront the biggest, ugliest, and meanest butt of them all!It's a story you and your butt will never forget!
So boys like off-kilter, gross, and tasteless stuff. Who could have known? Of course, when I brought up the article at the breakfast table, Unknown Wife thought it was inappropriate and tasteless. I, on the other hand, when right over to the computer and ordered the books from our library for the Unknown Son. He's pretty excited about themsince he's just about done with his latest in the Captain Underpants series.
Meanwhile, Unknown Daughter is reading Fairytopia. Thus speaks the chromosomal divide.
So far, it's been a good summer. I've almost finished reworking a paper that got rejected (it'll be sent out to a nearly-top-tier journal in the next week or two), started two new projects that we've already got interesting initial result on (they'll be done in time to submit to a conference in September), and moved a fourth project from the "vaporware" stage to the point where it could also possibly be conference ready by the end of September.
But I have to be careful what I say, because coauthors on two of the projects are regular readers of the blog. So, I can't gripe about them here. Not that I have to - they've all been (if for different reasons) pleasures to work with. Keep up the good work, y'all.
It's probably just the latest conspiracy theory.
Junior Chavers, foundry operations manager, said that when the trade center steel first arrived, he touched it with his hand and the ‘hair on my neck stood up.’ ‘It had a big meaning to it for all of us,’ he said.Read the whole thing here here:
- Brook's Law - "adding manpower to a late software project only makes it later" (this also holds for academic initiatives)
- The Dilbert Principle (coined by Scott Adams) - "the most ineffective people are promoted to the place wher they can do the least amount of damage: management"
- Godwin's Law - "As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches one."
- Hanlon's razor - "Never attribute to malice that which can be adequately explained by stupidity."
- Muphry's law - "if you write anything criticizing editing or proofreading, there will be a fault of some kind in what you have written"
- Parkinson's law - "work expands so as to fill the time available for its completion".
- Peckham's Law - Beauty times brains equals a constant.
- Peter principle - "In a hierarchy, every employee tends to rise to his level of incompetence"
- Skitt's law - a corollary of Murphy's law, variously expressed as "any post correcting an error in another post will contain at least one error itself"
- Wirth's law — Software gets slower faster than hardware gets faster.