An Easy Day

Wednesday was my last night teaching CFA prep for the spring. This is great news, since between prep time, teaching, and traveling, I probably get an additional 15-20 hours of "free" time a week from here on out (it seems like a lot of time, but most of the time costs were because of prep time since it's the first time I'm teaching it and I'm neurotic that way).

The money was great, and getting to talk with so many varied people in industry was extremely enlightening, but I'm just realizing now how much of a drain it was both on my time and on my body (the lack of sleep was probably a big contributing factor to my being sick for the entire month of February). Next time around it should be much easier, since most of the curriculum stays unchanged from year to year.

Today was a bit of an off day. I went in to the office to get some things done for class tomorrow, but mostly I did some organizing and cleaning up. Now that I can see my desk again, I'm eager to focus on my research for the rest of of the semester. I have two conferences to go to (the Eastern Finance Association meeting in New Orleans in Late April and the R.I.S.E. Symposium in late March, but other than that, I don't have a lot of constraints on my time.

My goal is to get two more papers under review by the end of the semester and one other working paper completed. It's a doable goal since I should be done with the final edits on a paper within the next week or so, and I've got also got another in its final stages.

On a lighter note, the Unknown Wife and I took the Unknown Kids' to a movie night at their school tonight. It was loud, but good. Just picture 150 1st-4th graders in a gym watching "Open Season" and you'll get the picture.

More on I/B/E/S Revisions

Back in November, I mentioned a working paper by Ljungqvist, Malloy, and Marston titled Rewriting History. In it, they find evidence that the analyst recommendations and forecasts in the I/B/E/S analyst forecast database were altered after the fact in several ways:

• Alterations of levels of recommendations (i.e. changing a strong buy to a buy)
• Additions and deletions of records
• Anonymizing (i.e. removing the analyst names from recommendations)
  

Thomson subsequently attributed the changes to technical glitches and argued that the authors' results were merely due to their having used the wrong data tapes. Following Thomson's defense, the authors withdrew the paper.

Now it's back, with even more interesting results. The revisions they document have systematic patterns to them:

• Additions were far more likely to be of the "hold" or "sell" variety
• Deleted records were far more likely to be of "buy" or "strong buy" recommendations.
• Alterations were primarily seen on "buy" and "strong buy" recommendations, which were subsequently revised downward."
• Anonymization" of recommendations is more likely for bolder recommendations, for more senior analysts, and for those who had Institutional Investor "all star" status.
  
• Changes were more likely to be seen in the records of larger investment houses, whether measured by analyst staff or the size of their investment banking operations.
• Finally, changes pretty much never were seen for brokerage firms that subsequently ceased operations - only for those that survived.
  

As a whole, these changes make a "revised" brokerage firm's recommendation pattern appear less optimistic after the fact. The overall impact on optimism might not be that large, since only about a sixth of all stocks are affected in a given year. But for the affected stocks, it does make the recommendations appear significantly more conservative than they originally were (particularly in the latter part of the 1990s, when analyst optimism got a lot of scrutiny).

The paper also does some nice testing to see whether the changes affect the usefulness of analyst forecasts and recommendations for making trading strategies.

A good read, and recommended for anyone who uses I/B/E/S for research or trading purposes.

HT: Barry Ritholtz at The Big Picture (who, as usual, has a better title for his post than I do).

Do Industries Lead The Market?

The title of this post comes from an article of the same name by Harrison Hong, Walter Torous, and Rossen Valkanov in the February 2009 Journal of Financial Economics (one of the top two or three academic finance journals). Their answer is "yes". Here's the abstract (emphasis mine):

We investigate whether the returns of industry portfolios predict stock market movements. In the US, a significant number of industry returns, including retail, services, commercial real estate, metal, and petroleum, forecast the stock market by up to two months. Moreover, the propensity of an industry to predict the market is correlated with its propensity to forecast various indicators of economic activity. The eight largest non-US stock markets show remarkably similar patterns. These findings suggest that stock markets react with a delay to information contained in industry returns about their fundamentals and that information diffuses only gradually across markets.

It's a bit heavy on the math for a typical undergrad or non-quant-jock, but well worth discussing in an investments class. My take on the article (at least as far as using it in the classroom) is that it provides pretty interesting evidence that economic fundamentals matter, and that markets are forward looking. Yeah, I know - these aren't new findings. But since I'm teaching CFA, I've been talking a lot about "fundamentals" (it's a big emphasis in the program). So it's been on my mind.

One More Week

It's another busy week, but this should be the last one for a while. This is the last week I teach CFA for the semester. It's taken a lot of preparation, since the class moves fast (lat week, in a 3 hour session, I covered almost 115 PowerPoint slides). So, having it end will be a major boon to my time. Tomorrow's session is relatively short, but I'm also giving an overview/summary of the last three modules. So, that'll take some time to put together.

I also have an 40+ page article to edit for a couple of coauthors. So, it's busy, busy, busy...

But at least my lungs seem to have cleared up.

Mixed Martial Arts

This is a bit off my usual fare, but it was a real "guy's night" last night. I've been working a lot lately, and made a few extra $$, so I ponied up for Pay Per View and watched the UFC Mixed Martial Arts fights last night. It was worth every penny.

They had two former champions who'd just lost their titles (Matt Hughes, a welterweight and Rich Franklin, a middleweight) who were both in their first fight since losing, and a retired 4x champ (Randy Couture) who came out of retirement to fight reigning heavyweight champ Tim Sylvia.

All the "good guys" won. And in the title bought, the 43 year old Couture completely dominated the 30 year-old, six-inch taller, 40-pound heavier Sylvia. He manhandled him on the ground (not surprising - Couture's a top wrestler), but he even beat Sylvia at his own game (on his feet). They don't call him "Captain America" for nothing.

Not surprisingly, the Unknown Wife opted out and went to bed early (it started at 9:30 and didn't end until about 1 a.m. She asked why I enjoy this so much. Well...

1. I played competitive Judo in college and took a couple of years of taekwondo in high school. So, I know just enough to appreciate just how technically good they are (it's not just a bunch of guys slugging away at weach other. They're amazingly skilled.
2. Having competed in a number of sports, I appreciate the whole competitive thing. The pre-competition "whoop whoops" in the stomach before a competition are something that's hard to describe if you haven't experienced them. But of everything I've done, there was nothing like the feeling of anxiety before a Judo match. There's just something about facing someone one-on-one -- it's probably the purest (and potentially most daunting) form of competition out there.
3. Finally, the fighters are almost without exception stand-up guys. Very few of the top guys talk much smack (in fact, Hughes is a churchgoing Illinois farm boy and Couture said he'd dedicated his fight to "Jesus Christ who stood up and died for our sins and the American Soldier who stands up and fights for our freedoms." ). And it's pretty cool to see two guys try to beat the hell out of each other and then hug and laugh with each other once the fight's over.

Anyway, it was a nice change of pace for some entertainment.

But I made a tactical error - we were out of chips and salsa, so I had to snack on edamame during the show. That's just a bit too froo-froo for fight night.....

Interview With Myron Scholes

Holman Jenkins recently conducted a must-read interview of Nobel Prize Winner Myron Scholes. It's available in today's OpinionJournal.com. Here are a few choice nuggets:

...Why can't things always be smooth and nice and predictable? Myron Scholes, operator of the hedge fund Platinum Grove Asset Management, says you wouldn't like it if they were.

...Start with the commonplace that risk is one side of a coin whose other side is reward. "We all have a taste for it," he says. "In life, it would be kind of boring if there was no risk. On the other hand if there's too much risk, too much uncertainty, too much chaos, we can't handle it either. We simultaneously want order and disorder, simultaneously want risk and quiescence."

And my favorite, when asked about the now-famous (infamous?) Long Term Capital Management failure (note: emphasis is mine)

He readily acknowledges that the episode was financially and personally embarrassing: "In life you pay tuition, right? Sometimes you pay too much tuition. Sometimes learning is costly."

Read the whole thing here. All in all, it's a fascinating look at one of the most influential financial thinkers of our times, and an easy read to boot.

Friday Link Dump

It's been an interesting day at Unknown University. We had a huge storm blow through, and there was flooding in many buildings around campus. Unfortunately, one of the buildings housed the university servers, and they had to shut down before there were short circuits that could really mess things up. As a result, they cancelled afternoon classes, and I've had no internet access all day. In any event, there have been a few interesting things that came across my bloglines account, so I thought I'd post a Link Dump before I turned in for the night.

At the Super Returns PE conference, someone asked a number of PE bigwigs what keeps you up at night worrying. Dealbook reports their answers.

Barry Ritholtz at The Big Picture put up some very nice analysis of of issues surrounding Tuesday's big stock market decline. And in a related piece, he presents the Top Ten Myths of Tuesday's Correction.

Greg Mankiw's top-selling economics principles text is centered around Ten Principles of Economics. Yoram Bauman (the world's only "stand-up economist") gives the unofficial, humorous version in this video.

The Wall Street Journal (online subscription required) reports on a large insider-trading scheme involving over a dozen individuals at investment banking firm UBS AG and several hedge funds.

That's all for now, folks.