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Article Archive: Markets Invest for the decades 04/21/24   Markets "Even in one of the worst equity markets in history, someone who bought over time would've done okay if they had just stuck with it." Sector neutrality in factor investing 04/21/24   Markets "We show both analytically and empirically that the average longâ€" short investor is more likely to benefit from hedging out sector bets, whereas the long-only investorshould, on average, avoid sector neutralization." It's not the economy 04/14/24   Markets "One of the most widely cited surveys papers, summing up all the economic literature on the ability of financial market movements to predict economic growth, said that while economists have often noted some sort of link between stocks and growth, 'upon closer inspection, however, this link is murky.'" The empirical problem with competitive strategy 04/06/24   Markets "There is no empirical evidence that a company's market share predicts its profitability. But that hasn't stopped academics, business school curricula, and management consulting firms from promulgating the idea for decades." Don't bank on the equity risk premium 04/06/24   Markets "If stocks will assuredly outperform bonds over intervals of, say, 20 years or more, where is the risk? And if stocks aren't risky over long intervals, why should their returns exceed the returns on bonds that are not risky?" Shining moment 03/31/24   Markets "Where will gold go from here? It's hard to know. Gold doesn't pay any income. As Warren Buffett likes to say, it 'just sits there.' In fact, gold costs money to hold, because it requires storage space and security." The B-Team 03/30/24   Markets "we do not believe the current market and profit cycles are perpetual. Like past cycles, we expect many of the trends inflating profits and asset prices will revert and be proven unsustainable. In basketball terms, this game (cycle) isn't over. We plan to keep shooting, finish the game, and are prepared for the final shot. Instead of giving up, we believe valuations matter more today than ever." Economic momentum 03/30/24   Markets "Strong empirical evidence demonstrates that momentum (both cross-sectional and time-series) provides information on the cross-section of returns of many risk assets and has generated alpha relative to existing asset pricing models. Brooks, Feilbogen, Ooi, and Akant's study adds to that body of research by providing tests of pervasiveness and robustness, increasing our confidence that the findings of momentum in asset prices are not a result of data mining." 90% is much better than nothing 03/30/24   Markets "Noise is not only a fact of life for financial data, it is present in economic data, health data even data about Reddit comments. As the great Fischer Black said in his prescient article on data noise, published almost 40 years ago: 'I think almost all markets are efficient almost all of the time. 'Almost all' means at least 90%.'" Forecasting is hard 03/23/24   Markets "Although we might not like to admit it, we know that forecasting economic and market variables is tough, but just how tough? A new study by Don Moore and Sandy Campbell sought to answer this question. They looked at 16,559 forecasts made in the Survey of Professional Forecasters since 1968, and found that those making expert predictions had 53% confidence in their accuracy but were only correct 23% of the time." Why are U.S. stocks expensive? 03/23/24   Markets "But I do think Zack Morris is right to describe the U.S. stock market as a savings vehicle as much as an investing one, thereby earning a monetary premium." Why quality stocks perform so well 03/23/24   Markets "And this is good news for investors because it means that investing in highly profitable companies is not associated with higher risks and at the same time based on behavioural biases that are unlikely to change over time, so the effect should be relatively persistent." 2023 private equity fundamentals 03/23/24   Markets "PE-backed firms generally have much lower margins than public companies, so this rise in interest costs has meant that the median PE-backed company is actually generating zero free cash flow." Sclerotic small caps 03/17/24   Markets "We think the changing composition of industries and quality among the small-cap universe is more to blame for weaker recent returns to small caps rather than a structural change in the upward mobility for small-cap equities." Global Investment Returns Yearbook 2024 03/09/24   Markets "Today, the US market dominates its closest rival and accounts for a staggering 60.5% of total world equity market value. Japan (6.2%) is in second place, the UK (3.7%) in third position, while Mainland China is ranked fourth (2.8%). France, Canada, Switzerland, Australia, Germany and India each represent 2-3% of the global market, followed by Taiwan with 1.7% and South Korea with a 1.4% weighting." Cost of capital and capital allocation 03/09/24   Markets "There is an old saying that 'in theory there is no difference between theory and practice, while in practice there is.' One area where this appears to be true is the actions of public companies in the U.S. during the recent period of 'easy money,' when financial capital was cheap and abundant." Stocks (and bonds) for the long run 03/09/24   Markets "Outside the post-World-War years from 1941 to 1981 stocks in the US did not outperform bonds by any meaningful margin. Let me repeat that: Apart from the four decades to the 1980s, stocks did not systematically outperform bonds. Sometimes stocks outperformed bonds, sometimes bonds outperformed stocks" The low-volatility factor 02/25/24   Markets "The low-volatility premium may be the most compelling anomaly in financial markets: Less risky securities outperform their riskier counterparts over the long term." The blue and yellow can 02/25/24   Markets "the current market reminds us of the late 1990's when investors were also crowding into tech and high-quality stocks. Stocks such as Coca-Cola (KO) were in high demand as investors looked for ways to participate in the rising equity market while minimizing risk. As investors crowded into Coca-Cola's stock to reduce risk, its valuation soared along with the risk of overpaying. The flight into quality eventually resulted in losses, as Coca-Cola's stock declined over 50% from its cycle peak in 1998 to its trough in 2003, reminding us that good businesses don't always make good investments." How many factors do you need? 02/16/24   Markets "Putting all this together, we end up with the knowledge that the factor zoo can be reduced to some 10 to 20 factors and that among the most important factors to consider are value, momentum, quality, and growth." The persistence of growth 02/16/24   Markets "An implicit assumption in most forecasts is that growth is persistent. While analysts underwrite high growth for companies that have grown quickly and slow growth for companies that have grown slowly in the past, a large body of evidence demonstrates that reversion to the mean of both positive and negative abnormal earnings growth is the norm." Increasing returns 02/09/24   Markets "Although Adam Smith pointed out increasing returns two and a half centuries ago, much of economic theory over time has featured perfect competition and decreasing returns. However, Kenneth Arrow, an economist and also a Nobel Prize winner, noted that a review of economic studies over time reveals that, “[the theory of increasing returns] acts like an underground river, springing to the surface only every few decades.”10 Research over the past 50 years has allowed the river to flow to the surface, and it is time to see what it has to say and what it means." [pdf] Overcoming experimenter bias 02/09/24   Markets "One dramatic visual example of backtest overfitting is shown in the graph at the right, which displays the mean excess return (compared to benchmarks) of newly minted exchange-traded index-linked funds, both in the months of design prior to submission to U.S. Securities and Exchange Commission for approval, and in the months after the fund was actually fielded. The 'knee' in the graph at 0 shows unmistakably the difference between statistically overfit designs and actual field experience." Pods, passive flows, and punters 02/09/24   Markets "Eventually, the market is a weighing machine. If you want some evidence â€" even from some of the most iconic, well-followed, index-heavy, retail-engaged, pod-owned, successful companies, it is still, eventually, about the fundies." Investing at all-time highs 02/03/24   Markets "Historically, equities (as a whole) tend to outperform in the short run following all-time highs, but there is less clarity over longer time periods." Investing in beauty trends 01/21/24   Markets "Fashion may garner the attention but it's the little things - lipsticks and face creams - that steadily rake in the dollars no matter who is designing the frocks that season." New all-time highs 01/21/24   Markets "Most of the time new highs are followed by more new highs. The average one, three, five and ten year total returns following new highs were +16%, +27%, +59% and +206%, respectively." Regional growth and returns 01/21/24   Markets "We believe the simple argument to invest in the fastest-growing region doesn't work as an investment strategy - something investors should be conscious of as they hear the seductive calls to overweight the United States even further." Should your job determine how you invest? 01/21/24   Markets "For example, as someone who works in the financial industry, this table suggests that I should have some of my wealth invested in commodities (despite their poor track record) and that I shouldn’t have any allocation to REITs." Oh those share price forecasts 01/14/24   Markets "A simple forecast of a 7.5% return for the S&P 500 (the average annual price change since the end of World War II) would have been better than either the analyst bottom-up forecasts or the strategists’ forecasts. Over the last twenty years, it would have been slightly pessimistic, but the root mean square error (RMSE) as a measure of forecast accuracy of this simple 7.5% forecast was lower than either the RMSE of the bottom-up analyst forecasts or the strategists’ forecasts." The all U.S. stock portfolio 01/14/24   Markets "Though the U.S. stock market is far more diversified than any other stock market on Earth, investing 100% of your portfolio into U.S. stocks is inherently tilting your portfolio toward the U.S. technology sector." Money misconceptions 01/14/24   Markets "Sure, a big paycheck makes it easier to save. But in the end, what matters is your savings rate as a percentage of your income, rather than the size of your paycheck. In other words, a modest earner could potentially achieve financial freedom faster than a high-income individual with undisciplined spending and savings habits." Costly shorts 01/14/24   Markets "we believe in most instances the most pragmatic application of hard-to-borrow data is to steer clear of taking long positions in these stocks, serving as a strategic compass in the often-tumultuous seas of market speculation." Crowded trades 01/07/24   Markets "On average, crowded stocks were associated with future superior returns, while the least crowded stocks provided inferior returns" The biotech boneyard 01/06/24   Markets "It seems that there is but one savior for biotechs with no revenue: get to revenue." The financial distress puzzle 12/29/23   Markets "The empirical research findings demonstrate that the return premium generated by being long low-distress risk stocks and short high-distress risk stocks is persistent" The spring crack-up boom 12/29/23   Markets "As is often the case during the later stages of asset bubbles, we believe we’ve reached a point where higher home prices do more harm than good. While the current environment is favorable for homebuilders, another leg-up in prices would be very troublesome for the millions of Americans already priced out of the housing market." Long-Term News 12/15/23   Markets "The Dow Jones Industrial Average fell 48 points on Tuesday. Greg Jones, an analyst at Merrill Lynch, expected that no one would care about that useless, vapid, fact by tomorrow." The Temptation of Factor Timing 12/15/23   Markets "Returns to value strategies in individual equities, industries, commodities, currencies, global government bonds, and global stock indexes are predictable in the time series by their respective value spreads." Quality of new entrants 12/08/23   Markets "We decided to revisit the US small-cap quality question, this time exploring whether the change in quality is attributable to declining profitability of companies that have been public for years, an influx of newly listed unprofitable companies, or de-listings/M&A from highly profitable companies." A passive crash 12/03/23   Markets "When the traders put in their sell orders, the same algos that got in front of their buy orders on the way up will get in front of their sell orders on the way down. At that time, we expect the combination of algorithmic trading and passive outflows will create tremendous opportunities for those with liquidity." The case of covered calls 11/25/23   Markets "Because the covered call strategy eliminates the upside potential, it produces negative skewness of returns (the kind investors dislike). And while it is true that a covered call strategy reduces kurtosis (fat tails), the problem is that it eliminates the potential for the good fat tail (the one to the right) while having no impact on the risk of occurrence of the bad fat tail (the one to the left), only reducing its size by the amount of the premiums collected." Not always for the long run 11/21/23   Markets "Once investors accept that stocks can disappoint, no matter the interval, diversified portfolios become more attractive. In an Ibbotson/Siegel world, any portfolio not 100% in stocks must underperform over the long term. Only investors with a low tolerance for short-term volatility can justify mixing in bonds. But if sometimes stocks do well and sometimes not, even an investor with a high tolerance for risk can justify diversifying away from a 100% stock position." Death of inflation 11/19/23   Markets "The reality is that stocks have averaged about 4.4% according to Dimson (2020) or 6.6% according to Siegel (2014). A lot of this depends on which market you look at and what time horizon, but the global stock market has generated nowhere near 10% when you account for real factors like inflation, taxes and fees. And that's important because we don't live in a nominal world. We live in the real world where we pay for inflation, taxes and fees over time." Diversification is not a free lunch 11/19/23   Markets "Diversification is a vital concept for investors. It is an acceptance that the future is inherently unknowable and can take many different directions. If done well it provides protection against both uncertainty and hubris. The best indicator of an investor's overconfidence is how concentrated their portfolio is. If we could accurately predict the future, then we would only own one security." Inflation and the stock-bond relationship 11/12/23   Markets "For stocks to be more attractive than bonds during periods of inflation, it is not necessary that stocks be perfect inflation hedges. All that is required is that stocks be better inflation hedges than bonds." Beyond risk parity 11/05/23   Markets "The problem is that this still requires investors to forecast the expected returns of different asset classes and sub-asset classes, diagnose the risk of those asset classes, and then combine those asset classes in an optimal way based on their correlations. This problem seems equally, if not more daunting than individual security selection." Soft serving a hard landing 11/05/23   Markets "Interestingly, and slightly off topic, we're noticing more companies are choosing debt reduction over stock buybacks. It's a growing trend that we expect will accelerate assuming interest rates and refinancing risk remain elevated. Although this would be a positive for balance sheets, it could remove one of this cycle's most aggressive buyers of equities - corporations." Retail performs poorly 10/29/23   Markets "The evidence demonstrates that the attention-induced behavior of individual investors leads to anomalies (mispricings). That is why retail investors are referred to as 'noise traders,' while sophisticated institutional investors are referred to as 'informed traders.' Sadly, individual investor trading driven by attention leads to poor returns." Sea change 10/29/23   Markets "The upshot: While bonds might be relatively more attractive today than they were in the past, the data suggest that bonds will remain relatively less attractive compared to stocks." Worst year in generations 10/22/23   Markets "The tried-and-true 60-40 portfolio lost 17% last year, its worst performance since at least 1937" Post-earnings announcement drift 10/21/23   Markets "Instead of buying stocks with positive earnings surprises and selling stocks with negative earnings surprises, one should focus on buying stocks with positive earnings surprises that trade near their 52-week highs and selling stocks with negative earnings surprises that trade near their 52-week lows." Paradox of past performance 10/14/23   Markets "Although we may not like to admit it, the past performance of an asset class or fund is likely to have an overwhelming influence on our decision making. We may try and mask the hold it has on us, but we are inescapably drawn towards investments with strong recent returns. The more pronounced and persistent the outperformance, the greater the pull. There is probably no more prevalent nor puzzling paradox in investing - in order to enhance our returns we make decisions based on a measure that is likely to reduce them." Risk of ruin 10/14/23   Markets "Haghani was dismayed at how few participants grasped how to play their edge, even at an intuitive level. As well as betting on tails, they'd over-bet, under-bet, and erratically bet. Yet position sizing is a huge determinant of performance in gambling and in financial markets." One less vulnerability 10/07/23   Markets "Many of the relationships we have come to know and love (oil vs. USDCAD, Aussie vs. Terms of Trade) have broken down as transmission mechanisms have changed." The tide is going out 10/01/23   Markets "Much like the tidal cycle in Nova Scotia, which sees the tide go in and out every 12-hours, the economy has been in a very advantageous tidal period for more than 12-years given how long interest rates hovered near historic lows. Yet, with the Fed having hiked rates more quickly than in any period since the early 1980's, the economic tide is clearly shifting. So far, we have just seen the earliest signs." Asset class CAPM 10/01/23   Markets "CAPM suggests that stock returns should rise linearly with volatility. But chart equity returns against volatility and you'll see a scatter plot - indeed, the best-fit regression line that runs through the scatter in fact slopes downward." Downside of short selling 09/24/23   Markets "Activist short-sellers who remain anonymous typically do so for fear of harassment of themselves and their families, from either their targeted companies or investors who lost money when the stocks of those companies declined in value. They also worry about fending off costly lawsuits." We'll have a good time then 09/24/23   Markets "The Fed needs to be very careful here. The working class and younger generations may discover who is responsible for their inability to own a home." Stock-bond correlation 09/17/23   Markets "Investors tend to think of stocks and bonds as negatively correlated, with stocks doing well in positive growth environments and bonds doing well when growth slows or declines. And that was largely true for the last quarter century. But earlier this year, the trailing three-year correlation between stocks and bonds turned positive for the first time since November of 2000" Network effects unravel 09/16/23   Markets "For network effects to occur, the product or service has to be highly relevant to its users. When relevance fades, network effects quickly unravel." Hot stocks of the decade 09/10/23   Markets "In each of the five full decades we studied, the weight of the top 100 stocks at the end of one decade was materially lower in the next. The decade following the dot-com craze of the 1990s (the 2000s) witnessed the lowest survival rate in our study with only 73% of stocks remaining a decade later" Dissecting the investment factor 09/03/23   Markets "The investment factor should not be considered in isolation when building portfolios, as profitability and how asset growth is financed (internally or externally) matters. Not all high investment firms (defined as high asset growth) have low expected returns, as those with high profitability and asset growth financed internally have high expected returns." Market returns with error 09/03/23   Markets "For periods beginning 1926, it is conventional to suppose that historical market returns are known with reasonable accuracy. This paper challenges that comfortable certainty. Multiple indexes of market return are examined to show that return estimates do not closely agree across indexes and are unstable within index over time. The paper concludes that two-decimal precision - to the whole percentage point, with an error band of plus or minus one percentage point - would better reflect the accuracy of historical estimates of annual market return. Implications for evaluating mutual fund performance and back testing investment strategies are considered." Castles built on sand 08/27/23   Markets "I woke up to the realization that no matter what the text books say about risk-free investments, there are times when finding an investment with a guaranteed return can become an impossible task." Scared money 08/27/23   Markets "Our bottom-up review supports our belief that the economy is slowing. The inflation rate is also slowing, but accumulated inflation remains a serious concern, especially for middle to lower-income consumers." Investing for immortals 08/20/23   Markets "Within equities, I would probably split it 50/50 into a value and a momentum portfolio and within each of these portfolios, I would hold equal amounts in each stock." Against Cassandras 08/13/23   Markets "if you listen to Cassandras, I am very confident, you will lose money in the long run. The only way to make money with doom and gloom forecasts is to time them both on the way in and on the way out very precisely. And I know nobody, who can do that. In fact, the simple observation that the Cassandras all seem to be bearish all the time should tell you one thing: The only ones making money from these doom and gloom forecasts are the ones who make them." Corrections in bull markets 08/07/23   Markets "So in almost half of all years when the U.S. stock market is up by 20% or more, there has been a double-digit correction during the journey to those wonderful gains." The Top 5 08/07/23   Markets "The last 10 years have seen a concentration of returns to the tech sector and to a few companies within that sector. This is both notable and unusual. With the advent of exciting new technologies like AI and superconductors, we think it's plausible that the top 5 largest companies 10 years from now may look quite different from the top 5 today. In which case, a diversified portfolio would likely serve investors better than a highly concentrated size-defined portfolio." End of an era 07/29/23   Markets "A Fed economist argues we should expect a slowdown in net income growth" Everything is cyclical 07/29/23   Markets "A lot of mistakes in life come when you think risk is something caused by external forces, when in fact the weight of your own success is enough to pull you down without any outside help." PE Improvements 07/23/23   Markets "We received a large number of emails and questions about last week's research, and so we thought we'd do a deeper dive into the data to try to provide further insight into the most controversial points." International diversification is prudent 07/16/23   Markets "Given the current (as of March 2023) economic positions for the U.S. CAPE (at 3.4%) and the EAFE CAPE 10 (5.6%), unless these values change, investors can reasonably estimate EAFE markets to outperform the S&P 500 by 2.2% annually." P.E. operational improvements 07/16/23   Markets "By and large, as an industry, PE firms take control of businesses to increase debt. As a result, or in tandem, the growth of the business and the rate of spending on capex slows. That's a simple, structural change, not a grand shift in strategy or a change that really requires any expertise in management." Sustainable investors expect lower returns 07/16/23   Markets "The takeaway for those investors is to recognize that they are accepting not only lower expected returns, but lower risk-adjusted expected returns, to invest in accordance with their sustainability preferences." End of an era 07/09/23   Markets "I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period's exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future." He got us to diversify 07/02/23   Markets "Markowitz's lasting contribution is that he taught investors how to think about diversification, and few people debate that." Bulls are back 06/25/23   Markets "When you combine the current drawdown, the possibility of further inflation, and the high amount of market concentration in our current rally, you can see why I'm hesitant to take a victory lap for the new bull market." Losses in the safest asset 06/25/23   Markets "So, let's pause and briefly recap. At this point, it's clear that there's no single asset that is guaranteed to preserve your wealth. The best we've done is a -49% decline. In the safest asset you still lost half your money at some point!" [pdf] The replication problem in finance 06/25/23   Markets "There is a problem with replication of finance studies on risk premia and trading strategies. Additionally, there is a problem of out-of-sample results not matching in-sample returns. You don't get what you think with most financial studies. There are a couple of reasons for this disconnect. One, the construction of the test was poor. Two, the articles published are only extremes from data mining. Three, risk premia, once observed are arbitraged away. Four, market behavior and structures change. Overall, the buyer needs to beware." Stocks a good hedge 06/16/23   Markets "Households who want to fund a goal over an extended period that is adjusted for inflation (e.g., retirement income) should actively consider owning equities, even if they are relatively risk averse." Bad at forecasting 06/11/23   Markets "The long-term average market return is 8.9%, yet the average forecast return is less than half that at 3.8%! The average return of the CFO survey is 4.0% and the average return from the household surveys is 6.7%." Bull market vs unemployment 06/11/23   Markets "Average annual returns have been higher from higher unemployment rates and lower from lower unemployment rates." The worm turns 06/11/23   Markets "Have we finally reached a point of spending exhaustion where the decline in the middle- and lower-income consumer outweighs the growth in spending from the higher-end? From our bottom-up perspective, it appears a growing number of consumers have reached a tipping point. While two months don't make a long-term trend, we believe the worm has finally turned. The all-important consumer is slowing." Hidden cost of covered call writing 06/05/23   Markets "there is a hidden cost of covered call writing, which is the potentially significant opportunity cost of having the stock go above the strike price causing lost portfolio appreciation." Private equity fundamentals 06/03/23   Markets "From a quantitative perspective, the fundamentals of sponsor-backed companies look frightening. Yet private equity remains the darling asset class of sophisticated investors, with many endowments and family offices nearing a 40% allocation The financial fundamentals look far less attractive than one might expect, given such high level of enthusiasm." The sin premium 06/03/23   Markets "Their findings are consistent with economic theory - investors require higher expected returns to hold more sinful stocks." Trend following in equities 05/28/23   Markets "Japan can be used as a case study as it is ahead of the rest of the world in terms of a declining population. Economic growth has been anemic and its stock market features a long bear market between 1989 and 2010. The results from this analysis do not highlight that long-short trend following was effective when applied to the Nikkei 225, although long-only trend following generated attractive risk-adjusted returns." The time to buy stocks 05/28/23   Markets "Sixty-one percent of U.S. adults say they have money invested in the stock market, the highest percentage Gallup has measured since 2008. Stock ownership fell during the Great Recession and stayed depressed for more than a decade, including lows of 52% in 2013 and 2016." Timing 05/28/23   Markets "Difficult as it might be sometimes, investors' best bet is to choose an asset allocation - and then to stick with it." The investing mystery of our age 05/21/23   Markets "The paradox of our decade is that the capex needs of a multipolar, environmentally conscious, world are enormous. But, nobody wants to invest in capex for commodities! This is untenable." Zero-day options 05/21/23   Markets "Wall Street has accepted that derivatives trading will never be the same after the frenzy for fast-twitch stock options took hold. What it next has to absorb: The equity market itself is threatening to go the same way." Diversification 05/14/23   Markets "It's worth noting that any strategy that attempts to beat the market will, by definition, need to have a tracking error greater than 0. One way this could potentially be achieved is with a very concentrated (10- to 20-stock) portfolio, as employed by many actively managed hedge funds. Another way could potentially be through a quantitative approach that seeks to capture factor premia while diversifying away unsystematic risk through larger portfolios." Best times to trade ETFs 05/07/23   Markets "Avoid the open. Avoid FOMC announcement periods." Garbage is back 05/07/23   Markets "hype-driven rallies around narrative themes have become a dominant feature in the US equity markets" Expectations affect share repurchases 04/30/23   Markets "It finds that firms repurchase significantly more shares when they expect higher future earnings relative to market expectations, which is consistent with the undervaluation hypothesis. This finding holds regardless of the level of underlying valuations. The results do not appear to be driven by managerial misvaluation or bias. Rather, my findings suggest that firms utilize insider information to time the market with respect to share repurchase decisions." The age of average 04/02/23   Markets "Distinctiveness has died. In every field we look at, we find that everything looks the same. Welcome to the age of average." So much to like 04/02/23   Markets "Not only are stocks better value than they were 15 months ago, but also the long-term benefits remain as impressive as ever. What benefits? Here are nine reasons I have 88% of my retirement portfolio in stocks." Feel bad all the time 04/02/23   Markets "The average number of days to go from peak to trough is 381, so just over a year. The average number of days to go from the previous peak to new all-time highs is 1,166 days or more than 3 years." Simple diversification 04/02/23   Markets "The research we reviewed demonstrates that a simple 1/N factor diversification strategy will likely be at least as efficient as more 'sophisticated' versions such as mean-variance and minimum variance strategies." Mr. Market's paddle 03/25/23   Markets "Fed members also appear confused by the relationship between the Fed's powerful tools and concerning macroeconomic trends, such as inflation, wealth inequality, and the declining labor participation rate. Chairman Powell recently commented on the labor participation rate, noting rising retirements were contributing the decline. Based on his comments, it appears Powell is unable to connect the dots between the Fed's powerful tools and retirement-enabling portfolio and home values. Instead, he blames COVID and doesn't consider the linkage between the Federal Reserve's bloated balance sheet, asset prices, and labor availability." Executives with remarkable timing 03/25/23   Markets "Never-before-seen IRS records show that CEOs are sometimes making multimillion-dollar bets on the stocks of direct competitors and partners - and doing so with exquisite timing." Merger arbitrage 03/25/23   Markets "There are about 40 deals per year meeting our criteria; 89% of deals close successfully. The arbitrageur earns about 2.0% on the successful deals and loses 2.8% on cancelled deals for a blended average 1.5% return on long exposure if they were to bet on every merger." Institutional impact on factor premiums 03/25/23   Markets "For anomalies that are risk-based, that is what we should expect to see because, while risk cannot be arbitraged away, cash flows can reduce the size of the premium. For the anomalies that are behavioral based, it appears that limits to arbitrage are still sufficient to allow them to persist post-publication." Central banks move 03/19/23   Markets "In a global response of the type not seen since the height of the pandemic, the Fed said it had joined with central banks in Canada, England, Japan, the EU and Switzerland in a co-ordinated action to enhance market liquidity. The ECB vowed to support euro zone banks with loans if needed, adding the Swiss rescue of Credit Suisse was .instrumental. for restoring calm." UBS to rescue Credit Suisse 03/19/23   Markets "UBS is paying 3 billion Swiss francs ($3.25 billion) for Credit Suisse, about 60% less than the bank was worth when markets closed on Friday. Credit Suisse shareholders will be largely wiped out, receiving just 1 UBS share for 22.5 Credit Suisse shares they own. Extraordinarily, the deal will not need the approval of shareholders after the Swiss government agreed to change the law so that it can be completed rapidly." Cliff Asness interview 03/18/23   Markets "Neither he nor AQR engages in market timing, but the spread between value and growth had gotten so huge that he felt comfortable 'sinning a little.'" [audio] Bank run 03/18/23   Markets "It would be shocking if we are not talking about loan-level delinquencies, charge-offs and credit losses later this year. Our expectation is that the stress banks' asset-liability managers are under right now gets shifted to banks. credit officers in the second half of this year. This is the slower-moving risk in banks that has been dormant for many years now thanks in part to easy monetary policy, and it seems to be awakening due to the knock-on effects of higher interest rates and the draining of liquidity from the financial system." US backs customer deposits 03/12/23   Markets "Silicon Valley Bank customers will have access to their deposits starting on Monday, U.S. officials said on Sunday, as the federal government announced actions to shore up deposits and stem any broader financial fallout from the collapse of the tech startup-focused lender. ... SVB equity and bondholders would be wiped out, said the official, who briefed reporters after the announcement." Defying Logic 03/12/23   Markets "In theory, higher rates should result in downward pressure on housing prices. But there's another, more subtle factor at play: Many existing homeowners, who had been considering selling, now feel 'stuck.' The problem is that, if they move, they'll have to take out new mortgages, which might be prohibitively expensive. The result: Fewer homeowners are putting their homes on the market. That reduction in supply is putting upward pressure on prices at the same time that higher rates are applying downward pressure." Bank Runs, Now and Then 03/12/23   Markets "There was an infamous story of a bank run in Hong Kong that was caused by a long line in front of a pastry shop that just so happened to be right next to a bank. People assumed the line was for depositors taking their money out of the bank, word spread and soon the bank run was on for no other reason than the herd mentality." The Demise of Silicon Valley Bank 03/12/23   Markets "One of the features of banking crises is that they rarely repeat consecutively. This matters because policymakers have a tendency to craft regulation around the last war. US stress tests include all manner of scenarios for bad credit, but few for interest rate shocks. The severely adverse scenario for 10 years Treasury yields is 0.8-1.5%; the baseline scenario, reflecting a shallower recession, incorporates yields of 3.2-3.9%." Stocks and bonds are positively correlated 03/05/23   Markets "For the past 30 years, the correlation between stocks and bonds has been negative. But last year, the trailing three-year correlation turned positive for the first time since November 2000. This is something that many investors today have never experienced in their professional lives." Wild lumber prices 03/05/23   Markets "Lumber is currently at $369 per 1000 board feet. This is down from the peak of $1,733, and down 72% from $1,441 a year ago." The long term 02/26/23   Markets "Elroy Dimson, Paul Marsh and Mike Staunton published a book the early-2000s called Triumph of the Optimists: 101 Years of Global Investment Returns that looked at the historical record of equity markets around the globe since the year 1900. This book provides the answer to these questions. And lucky for us, the authors update the data on an annual basis for the Credit Suisse Global Investment Returns Yearbook." Stocks vs bonds 02/25/23   Markets "A more revelatory observation is that, in the first 150 years of McQuarrie's data, bonds and stocks perform about the same. And they also perform nearly the same from 1982 to 2012. In fact, what emerges is that the equity outperformance that seems so evident in Siegel's data is in fact concentrated in the period from around World War II to 1982." Risk eats return 02/19/23   Markets "To understand the intuition behind reducing exposure with the square of volatility, first consider an investor whose portfolio returns ten percent one month and draws down ten percent the next. The end portfolio isn't flat: the investor has lost one percent of their starting investment, even though the average return over the two periods was zero. Now consider an investor whose portfolio rises five percent before falling by the same amount. That investor will only lose 25bps relative to his starting point." We measure what we can 02/12/23   Markets "There is a common idea in academic finance that is conspicuously dismissed by both contrarian investors and the popular culture: the claim that historical volatility is a good indicator of future risk." Helpful in theory 02/12/23   Markets "Each bubble differs, but the eventual comeuppance always feels brutally familiar." 60-40 annus horribilis 02/05/23   Markets "2022 was the first year in which both assets were down significantly. The Bond Agg lost 13.0 while the S&P 500 fell 18.1%. The only other year a 60/40 portfolio lost money and had a negative bond return was 1994, a mere blip on the chart." Why equal weighting works 02/05/23   Markets "two factors will remain the key driver of outperformance: three parts small cap and one part value." Arithmetic vs. geometric returns 01/29/23   Markets "with apologies to all the people who know this by heart, let me spend today discussing the difference between arithmetic and geometric returns and why understanding this relationship is crucial for long-term investment success." Asset allocation crash risk 01/29/23   Markets "While Factor-Based and Risk-Parity portfolios exhibit best risk-adjusted returns in the long run, the Dynamic Asset Allocation reduces the abandonment risk due to its lower expected drawdown. Across all strategies, risk-tolerant investors that rely on the longer history for setting their expectations, experience significantly better outcomes, particularly if their investment horizon includes times of crisis" Price-to-fantasy ratio 01/17/23   Markets "If reported earnings next year merely match the likely final 2022 level of $181, then the current price-to-forward earnings (P/F) ratio is 21. In 2023, if earnings tumble just 20% from 2022 levels, then the correct current P/F ratio is 26, hardly a bargain." Harvey vs the spread 01/08/23   Markets "The spread, which Harvey's work is based on, has been consistently inverted since mid November and hovered Wednesday at around minus 82 basis points. Despite the curve being inverted for the ninth time since 1968, Harvey said it's probably not a harbinger for a recession." A disaster for Tesla 01/08/23   Markets "On this metric, Tesla still has a similar enterprise value to many of these automakers combined even after falling so sharply in 2022, despite being utterly unjustified by current fundamentals." Take your losses 12/31/22   Markets "Given that the yield curve inverted in 2022, we need to examine what returns look like following an inversion. After digging into the data, I discovered the answer - after an inversion returns tend to be more bell shaped and more negative." Rational rebalancing 12/31/22   Markets "We find that optimal methods involve rebalancing that is neither too frequent, such as monthly or quarterly calendar-based methods, nor too infrequent, such as rebalancing every two years. Implementing an annual rebalancing strategy is optimal for investors who don't participate in tax-loss harvesting or maintain tight tracking to a benchmark portfolio, such as passive funds-of-funds. Most of the efficiency of these rebalancing strategies is generated by harvesting equity risk premium, while allowing reasonable portfolio drifts." [pdf] Don't try to get rich twice 12/18/22   Markets "Anyone who has become rich twice is dumb. Why would you risk what you need and have for what you don't need? If you are already rich, there is no upside to taking on a lot more risk, but there is disgrace on the downside." 'Twas the bill before Christmas 12/17/22   Markets "The Fed made an enormous error in miscalculating inflation and their ability to print trillions without consequence. As the Fed stirs investor enthusiasm by 'taking into account the cumulative tightening of monetary policy', cumulative inflation continues to build and influence real-world pricing and spending decisions. Without a sharp decline in the Fed's balance sheet, asset prices, and economic activity, we do not expect cumulative inflation to recede to levels the stock market appears to be pricing in. Instead of focusing on the cumulative tightening of monetary policy, we suggest the Fed consider how its cumulative loosening over many years continues to pressure businesses to raise prices, suffocate the consumer, and threaten real economic growth." Size and monetary policy 12/11/22   Markets "The size premium was much stronger during periods of monetary easing - a statistically significant 0.41 percent per month at the 1 percent confidence level. However, it disappeared entirely during periods of monetary tightening." Becoming less discerning 12/04/22   Markets "My guess is that the rise of passive investments also has something to do with it. But whatever the reason, the trend is clear: Individual company earnings matter less and less compared to the overall market trend and how investors perceive this overall market trend." How much to expect 12/04/22   Markets "After controlling for all of these factors, we can get a better idea of what kind of growth a typical retail investor can expect going forward. This is important because many of us are trying to plan our financial futures based on growth expectations we get from the personal finance industry. And if those growth expectations are inflated, then we may overestimate our probability of reaching our financial destination." Savers get paid again 11/27/22   Markets "In recent years, I have been bombarded by investors questioning why they should place any portion of their portfolios in bonds. Cash was never even under consideration. I do give credence to the argument that historically low-interest rates had nowhere to go but up, and that rising interest rates cause bond prices to fall. Regardless, my point on the investor question about bonds was merely the start of the risk-taking debauchery that ensued." Momentum in option markets 11/27/22   Markets "Momentum (6 to 36 months) is a far stronger phenomenon in options than in other asset classes, with a pre-cost Sharpe ratio at least three times higher than the standard cross-sectional momentum strategy for stocks." A crypto analogy 11/27/22   Markets "The same is true of promoted penny stocks. If they did a large issuance of stock, the price would quickly go to something near zero." Amazon is becoming an ad 11/27/22   Markets "When you search for a product on Amazon, you may not realize that most of what you see at first is advertising. Amazon is betraying your trust in its results to make an extra buck." Proof of work 11/20/22   Markets "When you see a lot of people making a lot of money that wouldn't normally be making a lot of money, that's a sign that something's off. When you have 29 year-olds worth $26 billion naming sports stadiums, look out. When individuals are going from unemployment to retirement in a few months, proceed with caution." Return manipulation in private equity 11/20/22   Markets "We provide evidence that private equity (PE) fund managers manipulate returns to cater to their investors." Persistence of margins 11/12/22   Markets "While we've been adamant that growth is not persistent and that high growth rates should not be carried out for many years, margins and returns on assets are relatively sticky. Very high margins and returns on capital do mean revert, but slowly. While growth may be ephemeral, profitability is not." Small cap opportunity 11/06/22   Markets "Within the U.S., small caps trade at a 21% discount versus their typical relative multiple against the total market." The Impact of OPEC 11/06/22   Markets "We looked at how oil futures prices responded to OPEC production cuts from 2015 to the present. We found, as shown in the graph below, that, while OPEC production cuts generally resulted in about a 5% increase in oil prices, prices faded quickly over the course of the week following the announcement." The value of a brand 10/28/22   Markets "Analysts covering the companies that own these brands systematically underestimate the pricing power and future earnings growth associated with these brands. This leads to a systematic underpricing of these shares and as a result a constant stream of positive surprises. The effect seems to be particularly large for companies that have developed their brands in-house and thus have no value associated with it on their balance sheet. It seems this ability to constantly surpass expectations is what drives the outperformance of the best brands." Asset growth anomaly 10/23/22   Markets "For investors, the takeaway is that an efficient way to improve the expected performance of an equity strategy might be to systematically exclude firms (especially small firms) with high asset growth and extreme past returns, especially if they have low profitability." The unwind continues 10/16/22   Markets "We believe that Value will outperform Growth purely and simply because it is priced to do so." Where growth forecasts err 10/16/22   Markets "This analysis provides a tidy logic for value investing. Value investing works because stocks with low growth expectations priced in are less likely to disappoint dramatically." Russell Napier interview 10/16/22   Markets "First of all: avoid government bonds. Investors in government debt are the ones who will be robbed slowly." Growth fades 10/09/22   Markets "Twenty-five years later, and we still can't find evidence of persistent growth" Don't sell 10/09/22   Markets "You don't need to catch the bottom. And you don't need to get super aggressive in drawdowns either. Not everybody has the stomach for that. But you absolutely cannot under any circumstances sell after a major decline. You just can't do it." Florida's insurance market 10/09/22   Markets "That exposure of Florida as a low-lying peninsula means you have to charge much more than people can afford, and you will need public policy that will involve buying people out and saying 'You can't live here anymore.'" Back to fundamentals 10/02/22   Markets "The story of the financial markets over the past four decades can be told with two data points. In September 1981, the yield on the 10-year Treasury note almost reached 16%. In August 2020, it got as low as 0.52%. The intervening decline in interest rates drove up not only bond prices, but also the value that investors were willing to put on stocks." Let's get nuts 10/01/22   Markets "In our opinion, the long overdue normalization of corporate profits is currently underway. As demand begins to falter and corporate costs remain elevated, we suspect a growing number of companies will announce lower earnings guidance later this year and into 2023. We anticipate businesses tied to housing will lead the way." Stocks vs bond yields 09/25/22   Markets "The average annual arithmetic expected ERP was 5.40% and the average annual expected geometric ERP was approximately 3.0%. This is slightly higher than the realized ERP values, at 5.0% (arithmetic) and 2.6% (geometric), respectively." Investing after market declines 09/25/22   Markets "However, once the market has declined by 40% (or more) from all time-highs, everything changes. At this point, it seems like the benefit of doubling down is quite large." Alpha and the road less traveled 09/24/22   Markets "With pessimism this pervasive, it wouldn't take many positive surprises to overturn the obvious - and make global diversification lucrative again" Estimating future returns 09/18/22   Markets "With the ten-year T-note yielding 3.41%, the S&P 500 at 3946 indicates likely nominal returns of 3.00%/year over the next ten years." An edge for retail investors 09/11/22   Markets "In all four sizes (large-cap/mid-cap/small-cap/micro-cap) the low liquidity stocks outperformed significantly. But, as you will notice, the difference in returns diminished with increasing size. Yes, you will find more illiquid stocks among microcaps simply because of the characteristics of the sector, but nevertheless, even among large-cap stocks, you can put the odds on your side." Buyback myths 09/11/22   Markets "Dividends and buybacks are already taxed twice: when the company makes money and again when the investor receives payment. Taxing buybacks three times is obviously insane" Why fundamentals matter 08/27/22   Markets "if you woke up on a Casper mattress, worked out with a Peloton, Ubered to a WeWork, ordered on DoorDash for lunch, took a Lyft home, and ordered dinner through Postmates only to realize your partner had already started on a Blue Apron meal, your household had, in one day, interacted with eight unprofitable companies that collectively lost about $15 billion in one year." Lessons from history 08/19/22   Markets "One of the most fascinating parts of the Great Depressions isn't just that the economy collapsed, but how quickly and dramatically people's views changed when it did." Bucked the trend that was your friend 08/19/22   Markets "Even over one of the tougher decades you'll see for managed futures, it did what it's supposed to do. It delivered non-trivial positive returns and excelled when it was supposed to and was most needed." Recessions as a timing tool 08/19/22   Markets "As a market-timing tool, the NBER announcements are clearly abysmal. The delays on the announcements are so long that it is effectively a countercyclical indicator." Products based on incomplete research 08/19/22   Markets "one of the key things you can do to improve your performance is to test the same methodology for other markets that have different dynamics and different performance histories. So, I calculated the daytime and nighttime returns of the US, UK, and Europe ex UK stock markets over the last 10 years. And as you can see below, while the nighttime returns for the S&P 500 look quite good, the nighttime returns for the European and UK markets are not only quite a bit lower but also roughly the same as the daytime returns." Mounting costs 08/14/22   Markets "Lately, 12-month CPI-U has been running around 9%. But if we extend the time horizon back 10 years, to mid-2012, the recent spike barely registers, with the average annual increase for the past decade coming in at just 2.6%." Drawdowns and rallies 08/01/22   Markets "Investors may have sighed a breath of relief in July after months of pain. And perhaps we have already seen the market's 2022 lows and this recovery will follow the rapid pace of 2020. But a broader set of base rates suggest there's reason to be cautious, that risk is still elevated, and that we might yet experience an even more significant drawdown." That's the ticket 07/22/22   Markets "After creating the highest rate of inflation since 1981, the aggressive monetary and fiscal policies that led to the record earnings boom in 2021 have been put on hold. Businesses are finding themselves on their own to manage through an increasingly uncertain economy. While it's very early in the process, we believe peak earnings will be one of the victims of an economy that is currently attempting to normalize." Calling 1981 07/17/22   Markets "So in 1981 consumers were looking at 10% savings account yields, 17% mortgages, 10% bond yields and 9% inflation. Today it's 1% savings account yields, 5% mortgages, 3% bond yields and 9% inflation." A mild recession 07/17/22   Markets "That's 33 consecutive weeks of more stocks making new lows than making new highs. As you can see, this is historically as bad as it gets with the lone exception of the Great Financial Crisis in 2008-2009. Again, this is not the future, this is the present. We have already been living through it." Dollar cost averaging 07/10/22   Markets "Don't fear though, because I am here to defend dollar cost averaging as the greatest investment approach ever invented for the individual investor. How so? Because I'm going to show you how it held up during one of the worsts period in U.S. stock market history - the mid 1960s to the early 1980s. And if it worked there, it can work anywhere." The long tail is gone 07/03/22   Markets "For those who don't know the term, the Long Tail concept refers to businesses that focus on products and services with almost no customers." Time for a pep talk 07/03/22   Markets "This is where savvy investors get their edge. It's tough to outsmart other investors. But we can play a different game - by focusing not on next week but on the next 10 years." Plan now for recession 07/03/22   Markets "Today, the yield curve is not inverted, so why worry? As with the recent two-fold surplus of job openings relative to job seekers, this too shall pass. Really? The forward markets do a pretty good job of forecasting near-term Fed decisions and they are suggesting a 90% likelihood of a 75 basis-point hike in July followed by another 50 to 75 basis points in September. Those moves would take the 3-month Treasury bill yield to about 3%, within hailing distance of the current 3.15% yield on the 10-year Treasury bond. Absent a run-up in long bond yields, one additional hike before year-end would leave us with an inverted yield curve." Imminent recession 07/02/22   Markets "High inflation is at the top of the Federal Reserve's, Washington's, and Wall Street's list. Rosenberg says they are looking at the wrong numbers and that disinflation is already taking hold. Interest rates are expected to go higher for longer. Rosenberg cites evidence of economic slowing which will require easing sooner than expected." [video] Understand rebalancing 06/24/22   Markets "Wise then went on to derive an interesting formula for the probability that buy-and-hold will beat rebalancing in the very long run - that is, as time goes to infinity. The result is that if the average difference between constituent portfolio assets' expected returns is small, less than about one percent, then rebalancing will, in the very long run - that is, at eternity - surely beat buy-and-hold; but if the average difference is greater than that, buy-and-hold will surely beat rebalancing." How bad is it? 06/17/22   Markets "The average stock in the S&P and the Dow are not being beaten up as badly as they were during the Covid crash. The same cannot be said for the Nasdaq, where the average stock is getting killed, down 41% from its highs." Estimating future returns 06/17/22   Markets "What are the possibilities given where the market is now? When the market is expecting 3.57% nominal [over the next 10 years], give or take one percent, what tends to happen?" Insider trades and non-trades 06/17/22   Markets "Consistent with prior literature findings that insider purchases are more informative than sales (sales can be made simply for diversification purposes), the return difference was more pronounced for insider purchases than for insider sales." The worst years for balanced indexing 06/12/22   Markets "Since bonds are having such a rough go at it during a correction in the stock market, this year is currently on par with 60/40 returns in 2008 and 1930. Not the kind of company you want to keep." Bedtime for Bonzo 06/05/22   Markets "The clock is ticking on the Fed's delay game. They have waited and waited, as inflation has destroyed the standard of living of millions of Americans they promised to protect. And while moderating year-over-year inflation data may show statistical progress, it does nothing to reverse the inflation that has occurred or compensate those that have been harmed. Further, while the rate of year-over-year inflation may continue to decline as it did in April's CPI report, we believe inflation will remain well above the Fed's target and well above what the average family can withstand without significantly altering their spending and voting decisions." Risk when credit spreads rise 06/05/22   Markets "Every equity drawdown of -30% or more has occurred within six months of high-yield spreads crossing the 10-year median of 430bps. As Ben Bernanke highlights, credit markets amplify and propagate shocks to the real economy. Within this framework, deteriorating credit market conditions - such as increases in insolvency and rising real debt burdens - feed back into the economy, which in turn worsen credit conditions." Rallies to the bottom 06/05/22   Markets "I thought it would be useful to exam how the U.S. stock market has bottomed historically and the false rallies that have occurred along the way." Buy high sell never 06/05/22   Markets "I always remember Bob when I'm putting money to work in the market, as I am today. It's never fun to watch an investment go down shortly after making it. Regret is a powerful emotion. But if you invest in a diversified stock portfolio and hold on for a decade or longer, just as Bob did, you should fare just fine." Still overrated 05/29/22   Markets "In sum, PE LPs are paying higher-than-S&P 500 prices for near-distressed credit quality micro-caps with a heavy sector bias toward tech and healthcare. With cracks showing in public markets for these sectors, and for growth in general, I fear that the reckoning might be finally arriving for private equity." The worst years in the market 05/23/22   Markets "Here's the good news - the longer-term returns after the worst years ever are pretty good. The average 3 year forward return is +35%. The average 5 year forward returns is a gain of almost 80%." Hedging with gold 05/23/22   Markets "If for whatever reason, things become extremely difficult, I may be running more risk than I thought in my funds. So gold is a nice insurance policy. The 5%-7% weighting would partially offset the hit we would take on equities." Big selloffs are part of investing 05/15/22   Markets "Huge stock market sell-offs are normal. The S&P has historically seen an average annual drawdown of 14%. Some years see milder sell-offs. Other years see worse ones." Welcome back to 1994 05/14/22   Markets "At present I am pretty sure 30-year mortgage rates will rise to 6%, and maybe 7%. No one is panicking enough on this, so it will likely go higher. MBS hedging is a powerful force, and will continue until people no longer want to buy houses at such high interest rates." 15 charts 05/14/22   Markets "Pundits spent a lot of time asking if Warren Buffett had lost his touch in 2020. It felt like the market had passed him by. As usual, Buffett just had to wait" 75/25 the new 60/40 05/08/22   Markets "His point about cash outperforming when bond returns go negative is certainly applicable in today's rising interest rate environment. Bernstein offered up a mix of 75% in stocks and 25% in cash equivalents as an alternative to the 60/40 stock-bond portfolio." Up in smoke 05/08/22   Markets "The two characteristics of thematic investing are having a good story and attractive returns. No matter how sexy a theme is, the majority of investors only hop onto the train once it started moving uphill. Naturally, this makes thematic investing so dangerous as it appeals to our love for stories, and greed for making money. Stated differently, thematic investing is performance chasing with a narrative." The great inventory build 05/08/22   Markets "With The Great Inventory Build in full swing, we believe we are getting closer to a point when rotating out of energy stocks and into beaten down consumer discretionary stocks will make sense." The scale versus the casino 05/01/22   Markets "In the short run, the market is a casino, but in the long run, it is a scale. Is this an improvement? Probably not, but speculation has become so rampant that it may be a necessary modification to change voting machine to casino." This time wasn't different 05/01/22   Markets "Arguably, the market is hitting the worst offenders because they deserve it. For instance, over 40% of all stocks had no earnings over the last 12 months. But what we haven't seen in at least 20 years is such a high number of stocks with no sales. 15% of all stocks reported no revenues over the last year! That's a smidge over 900 stocks with no sales!" Sell in May and go away 04/29/22   Markets "we think it is fair to conclude (as many empirical studies already have) that there may be something to this 'selling in May and going away' thing, especially over very long time horizons." Confidence 04/24/22   Markets "The value factor works well when spreads are falling and poorly when spreads are rising. The cheap cyclical stocks captured by the value factor are heavily impacted by changes in credit conditions. Notably, this is the opposite pattern shown by 10-year Treasurys, which is why the two asset classes serve as good complements in a business-cycle based strategy." On concentrated positions 04/17/22   Markets "Be careful with concentrated positions. You need certainty about safety most, earnings second, and growth third. Otherwise you are a gambler, and most gamblers lose." Risk-reward in a hiking cycle 04/17/22   Markets "We believe there's a strong practical argument for a large allocation to fixed income today. The argument is simple: rising rates tend to be bad for all asset classes, and fixed income actually tends to perform relatively well, with significantly lower drawdowns." Lost decades 04/10/22   Markets "As with any insurance-like products, the signal would have slightly underperformed the benchmark in most of the other periods. This is because investors would trade upside capture for downside protection by holding cash roughly one-third of the time." Inverted bonds 04/10/22   Markets "Going back to 1970, in the year after a yield curve inversion, U.S. stocks had a median inflation-adjusted total return of 4.7% while 5-Year U.S. Treasuries had a median inflation-adjusted return of 4%. Even if we were to extend this analysis to look over two or five years, we would find that 5-Year Treasuries still underperform U.S. stocks following a yield curve inversion." Predictable price pressure 04/03/22   Markets "The market moves higher when dividends are paid. Market returns are 4x higher when dividend-payments are the highest. The results hold internationally as well. Some specific stats: market returns are 13bps higher on the top 5 dividend-payment days and 5bps higher on the top 50 dividend-paying days. The largest price pressure effects are in the first quarter of the year, when the probability of an asset manager reinvesting is highest. In contrast, the effect is muted in the fourth quarter, when the probability of reinvestment is lowest (managers are using cash to pay off investors)." Bill Miller's biggest loss 04/03/22   Markets "Miller lost $300 million on Enron. It was roughly an 89% loss and the most money he had ever lost in a single position (at that point in his career). It also turned out to be the quickest. It only took 60 days." Optimists are too pessimistic 03/27/22   Markets "Michael Kitces did an analysis where he discovered that retirees following the 4% rule in a 60/40 portfolio were more likely to 4x their wealth than deplete any of their principal after 30 years. In other words, if you started retirement with $1 million in a 60/40 portfolio and withdrew 4% a year, your chance of ending up with $4 million was higher than your chance of ending up with under $1 million after 30 years." Markets follow profits 03/27/22   Markets "Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years." The low beta premium 03/19/22   Markets "The superior performance of low-volatility stocks was first documented in the literature in the 1970s - by Fischer Black in 1972, among others - even before the size and value premiums were 'discovered'. The low-volatility anomaly has been shown to exist in equity markets around the world. Interestingly, this finding is true not only for stocks but for bonds as well. In other words, it has been pervasive." Commodities vs Commodity ETFs 03/13/22   Markets "The average correlation between oil and oil ETFs was only 0.8. Gold ETFs provide better exposure to gold than oil ETFs to oil. Gold mining stocks are hybrids that feature gold and equity beta." Estimating future returns 03/13/22   Markets "The only period compares with this valuation-wise is the dot-com bubble. We are near dot-com level valuations, in the 98th percentile. And if you view the 10-year returns from the worst time of the dot-com bubble to now, you can see that the results they obtained are worse than what I forecast here." Do what Jack said 02/27/22   Markets "But while I worry about the Ukrainian people, I'm not much concerned about the stock market's decline. It's not because I have a crystal ball. Unlike the talking heads on the financial cable TV shows, I have no idea what will happen next in the financial markets. But I'm certainly not selling my stock funds. In fact, if the decline continues, I'll be investing more and, if the drop is steep enough, a whole lot more." Noise traders 02/13/22   Markets "Research has demonstrated that individual investors generate negative results by paying attention to the noise of the market even before the costs of the trades. In addition, their behaviour induces increased crash risk in the stocks they buy. Investors should have learned that lesson from the crash of the dot-com stocks in March 2000." The long run 02/13/22   Markets "To give you an idea about the numbers, real rates are currently very close to these long-term trends but slightly below. In order to get back to trend, real rates would have to rise by about 0.7% to 0.8% in the United States and the UK." When short-sellers attack 02/04/22   Markets "short-sellers are biased. They issue fare more negative target prices than can be justified by fundamentals. This isn't surprising. Short-sellers make money if a share drops, so they systematically overstate the negatives and understate the positives. As a rule of thumb, it seems a good idea to divide the target return of a short seller by ten and you get the true reaction of the share price in the first week or so after the short-seller attacks." Observations from the decline 01/30/22   Markets "The average stock with a Price/Sales over 10 has lost 19% so far this year. The average stock with a Price/Sales over 30 has lost 23.5%." When the Fed raises rates 01/30/22   Markets "Surprisingly, stocks have held up relatively well during past hiking cycles. The average total return in these periods was 23%." Casualties of success 01/23/22   Markets "Size is nature's leverage. Sought after for its benefits straight up to the point that it ferociously turns against you. Same thing applies to companies and investments." Inflation expectations 01/22/22   Markets "Most importantly, the relationship between inflation expectations and future inflation changes over time, not just in degrees, but in sign, meaning that sometimes higher inflation expectations lead to higher inflation and other times they lead to lower inflation." Goodbye upside 01/16/22   Markets "I was shocked when I saw the 2021 performance of Global X Nasdaq 100 Covered Call ETF (symbol: QYLD) compared to that of the Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100. The Global X fund was up a paltry 10% last year, while the Invesco ETF soared 27%." The 52-week high glass ceiling 01/15/22   Markets "Chart analysts would tell you that at the 52-week high many investors will want to sell their stocks in order to lock in their profits at that salient anchor. Thus, selling pressure increases and the share price often bounces lower from this psychologically important level." Factor Olympics Q4 2021 01/09/22   Markets "It is easy making the case that we are currently at the peak of the current market cycle, eg by pointing to the sale of an invisible rock NFT for $12,800. However, the same position could have been taken in 2017 when the Argentinian government sold 100-year bonds shortly after resolving its latest sovereign default. The good times can not continue forever, but short-term predictions are futile. A more nuanced argument is that there has already been a change in the investment sentiment that is reflected in the factor rotation from momentum to value stocks." Growth stocks sell off 01/09/22   Markets "If growth stocks sell off will they bring value stocks down with them?" Stock market history 01/02/22   Markets "This also means that US growth is not necessarily 'expensive' vs. European growth, but that European value has a decent chance - at least from a historical perspective - of being extremely inexpensive not only when compared to European growth, but also when compared to US value." Separate processes 12/19/21   Markets "Mindless stock bulls talk of TINA [There Is No Alternative (to buying stocks)], as if there is no limit to how high stock prices can go when interest rates are low. I want to tell you about TIN. There Is Nothing (worth buying). This is the nature of financial repression." Estimating future market returns 12/19/21   Markets "At the end of the third quarter, the S&P 500 was poised to nominally return -0.64%/year over the next 10 years. As of the close today, that figure was -1.83%/year, slightly more than the -1.84%/year at the record high last Friday." The very-long-run CAPE 12/12/21   Markets "The CAPE ratio, the popular market valuation metric, created by Professor Shiller, shows cyclically adjusted price-to-earnings ratios. It currently stands at 38.7. This is very high in the context of historical levels, exceeding all prior peaks except the Dotcom - since 1800." The value of satisfied employees 12/12/21   Markets "During recessions like 2000 to 2002 and 2008 to 2009, the outperformance of companies with a highly motivated workforce is particularly strong." The Bogle method 12/12/21   Markets "I think we can draw two key conclusions. First, the Bogle method suggests we should ratchet back our return expectations for the next 10 years. It seems unlikely that the S&P 500 will notch 10% a year, and it could return far less. That's the bad news." Cheap money is driving overvaluation risk 12/12/21   Markets "Today, credit is extremely cheap and extremely accessible, and that is driving rising asset prices in three key markets: public equity markets, private equity markets, and housing markets. In each of these markets, rising asset prices are accompanied by decreasing loan-to-value ratios, falling debt costs relative to income, and, most strikingly, asset prices that look extremely high relative to history." The Fed's labor trap 12/05/21   Markets "Whether bullish or bearish, few can argue this is not one of the most fascinating times in the history of financial markets. Last week equities reached another record high, bolstered by strong earnings and the Federal Reserve, which remains committed to its 0% fed funds rate and a dovish taper. It appears investors continue to assume business as usual, with ultra-easy monetary policy always being there to save the day." A difficult choice 11/28/21   Markets "When I focused on the percentage I had in stocks, I thought I could weather a bear market. But I'd lost sight of the total dollars at risk. Losing 30% to 40% of that money doesn't feel nearly as manageable. That's why I've let my stock allocation trend down from 64% a year ago." The value of value 11/28/21   Markets "About a year and a half ago, after one of the worst relative drawdowns the value factor has ever seen, I wrote a piece showing the value factor was cheap relative to history. Since then, value strategies are on a solid run (look at pretty much any type of value strategy and I think you'd agree). Today? The valuation spread between the cheapest 10% and the universe of stocks is cheaper. We are at levels beyond 1999 by some measures." This will not last 11/28/21   Markets "if four years ago you looked at the stocks with a P/S ratio above 20 and those with a P/S ratio below 20, the above 20 group would have underperformed (and lost money on absolute terms) through today" Musing about S&P 500 valuations 11/28/21   Markets "Analyzing the 10 largest stocks in the S&P 500 shows a quite heterogeneous picture based on the earnings expected for the next fiscal year. The shareholders of JP Morgan Chase only have to wait approximately a decade for their initial investment to be earned by the company, although it is worth mentioning that bank earnings are highly cyclical, which might make this significantly longer. In contrast, the investors in Tesla require close to 200 years for the earnings to accumulate to its market capitalization, which reflects a rather obscene valuation." Sector-neutrality not a mistake 11/21/21   Markets "We show both analytically and empirically that the long-short investor is more likely to benefit from hedging out sector bets, whereas the long-only investor is more likely to benefit from investing in the factor as it stands." Estimate of the future 11/21/21   Markets "In some ways, the Federal Reserve is the whipping boy of Congress. Congress can't decide on anything significant, so the Fed fills in the blanks, and keeps things moving, even if it creates humongous asset bubbles in the process. That is what we are facing today." Crazy or normal? 11/14/21   Markets "I can't help but think about the research papers that will be written on the current marketplace. There will certainly be differences, at the margin, but it is truly the case that when it comes to human behavior, history repeats itself. Over. And over. Again." Inflation, factors, and returns 11/06/21   Markets "Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." Gone with the wind 11/06/21   Markets "With asset prices soaring, we've made the difficult and contrarian decision to lower our sails and reduce risk. Based on current prices, we believe investors are dismissing the substantial risk associated with extraordinarily expensive valuations combined with unsustainable monetary and fiscal policies." Risking, fast and slow 10/30/21   Markets "For example, stocks have lots of fast risk, but little slow risk. The S&P 500 could drop 20% tomorrow, but 30 years from now it's likely to be much higher than it is today. On the other hand, cash has lots of slow risk, but little fast risk. Next year your dollar should be worth about the same as it is worth today. But 30 years from now? Not so much." A 60/40 warning 10/24/21   Markets "The historical average real return for the 60/40 portfolio is 3.4%. Our middle ground forecast cuts that by more than half. That's not good news." Reaching for returns 10/24/21   Markets "The 40-year decline in interest rates has put investors today in a difficult position. They are forced to either reach for higher returns or accept the reality of lower ones." Long volatility strategies 10/23/21   Markets "a simple equal-weighted portfolio of JPY/AUD and gold would have replicated the CBOE Eurekahedge Long Volatility Hedge Fund Index reasonably well since 2004." Craving risk or losing reward 10/07/21   Markets "Because even if we observed that the average investor allocation to stocks was at record highs, it wouldn't necessarily imply that investors were craving more risk. In fact, I'd argue that any change in aggregate allocations over the last few decades has little to do with changing risk appetites and everything to do with lower bond yields." What to do about inflation 10/07/21   Markets "When seeking inflation protection in your portfolio, it is important to make the distinction between assets that hedge inflation (have returns that move closely with unexpected inflation) and assets that outpace inflation over the long term. If your goal is to fund short-term consumption that is tied to inflation, you will want to consider hedging assets. If your goal is to fund spending over the long term, investments that outpace inflation are more appropriate. And chances are you need some combination of both in your portfolio to help protect current consumption and long-term spending needs." Energy shock 10/03/21   Markets "Energy prices are soaring from the U.S. to Europe and Asia as economies rebound from a pandemic-induced lull and people return to the office. The shortage is so acute that China ordered its state-owned companies to secure supplies at all costs and Europe is burning more of its already depleted stocks of the dirtiest of fossil fuel, a move that may complicate climate talks next month." Hedging with options 10/03/21   Markets "Despite significant research, we were unable to identify a simple options-based approach that both protected against black swan events and did so at an acceptably low cost - achieving this goal requires either a complexity of strategy or a robust active approach that goes beyond our basic quantitative efforts." This time it's different 10/03/21   Markets "The current investing world is odd indeed and perhaps this time it's different: interest rates are zero, central banks manage stock markets, start-ups with unrealistic plans to make money are valued at billions, the market cap of cryptocurrencies has breached a trillion dollars, zombie companies like GameStop have been rejuvenated, and so on." Inflation builds 10/03/21   Markets "Assuming current trends continue, we expect the transitory inflation narrative will eventually succumb to reality and threaten the Federal Reserve's ability to monetize debt and maintain negative real interest rates. Without the Fed's intrusive interference in the free markets, interest rates would once again move freely, allowing asset prices to properly reflect their underlying fundamentals. Ironically, instead of the Federal Reserve saving us from inflation, we believe it will be inflation that saves us from the Federal Reserve." Financial Crisis Prediction 09/24/21   Markets "we have just entered a Red Zone as of the end of 2020. This is driven by the rise of debt-to-GDP and the equity market rally. Even if debt-to-GDP is calculated using the pre-COVID GDP level, this result holds. So, if crises are by-products of credit and asset price growth cycles, as the authors' evidence strongly suggests, then the US may have just entered the danger zone." Stock markets becoming more correlated 09/24/21   Markets "One interesting aspect of this analysis is that both the value and momentum factors are currently exhibiting the highest correlations across markets since the tech bubble in 2000, which is a reflection of the global enthusiasm for expensive and strongly performing technology stocks." Yielding to buybacks 09/24/21   Markets "Utilities and real estate are the only two industry sectors, out of 11, with a negative buyback yield. These two sectors are issuing stock, while the other nine industries are net share repurchasers. As of the end of the first quarter, the energy sector featured the highest total shareholder yield (5.2%), followed by financials (3.8%). Meanwhile, real estate (1.9%) and consumer discretionary (0.7%) have the lowest total yields." Amazon and inflation 09/19/21   Markets "Labor productivity among nonstore retailers rose about 20% from 2019 to 2020, which is more than twice the 8% rate of labor-productivity growth experienced by the retail industry as a whole." Portfolios in crashes 09/19/21   Markets "based on their liquidity requirements, most large institutional investors have no alternative but to adopt cap-weighted strategies. Investing billions in small caps or emerging markets is more expensive than trading large-cap US stocks. Equal-weighting may offer higher returns for equity investors over the long run, but the majority of capital may not be able to access them." Rational at night, irrational at day 09/12/21   Markets "Meanwhile, all the different deviations from the rational model of CAPM appear during the day. Size, value, quality, and investment factors all have very high returns during the day when humans mess up all the nice rational models economists have developed. At night, these factors tend to lose a bit mostly because the stocks that have underperformed during the day catch up some performance based on the overnight news. But the nighttime setbacks aren't strong enough to eliminate factor returns." Inflation portfolio using asset classes 09/05/21   Markets "Finally, we calculate the correlation of the portfolio to inflation. Although the asset classes were selected based on their correlation to inflation, the average correlation to inflation was only 0.4 during the period from 2006 to 2021. Investors might regard this as low, but the correlation of TIPS, which are popular inflation instruments, was approximately 0." Small stocks pricier than they appear 08/29/21   Markets "Metrics that include negative earnings show the Russell 2000 went from trading at 27 times its past 12 months of earnings at the end of March 2020 to trading at 238 times earnings one year later, according to data from index provider FTSE Russell. That multiple fell by nearly half over the following month, and as of July was down to about 70. With loss-making companies removed, the Russell 2000's price-to-earnings multiple was both lower and less volatile: about 14 in March 2020, up to nearly 25 in March 2021 and then down to 19 at the end of July." Touching the sky 08/21/21   Markets "With today's new high (4,479.71) in the S&P 500, the share of funds model now rates the market as having the highest valuation since 1945. The share of funds in stocks is over 52.3%. Projected returns over the next 10 years are -1.87%/year, not adjusted for inflation." Hanging by a thread 08/15/21   Markets "Events, like money, compound. And the central feature of compounding is that it's never intuitive how big something can grow from a small beginning." The economic recovery catches a cold 08/15/21   Markets "Are we really going to just ignore the worst consumer sentiment numbers in a decade?" Evaporating liquidity 08/15/21   Markets "The Fed is tightening as they reduce QE, and begin raising the Fed Funds rate in 2022. It will end in a market meltdown in late 2022 as an overly indebted economy cannot tolerate the increase in the financing rate. The Fed will find itself trapped and interest rates will remain low. My confidence level on this idea is only 70%." Building an inflation portfolio using stocks 08/15/21   Markets "Although we selected stocks based on their correlation to inflation, we have not analyzed how effective these stocks are as inflation-proxies. The average correlation was 0.4 in the period from 2007 to 2018, which is only marginally higher than the 0.3 of the Russell 2000. Given that the performance of both portfolios was approximately similar, this is not surprising. However, perhaps more surprising is that the correlation of other inflation-proxies like TIPS was not high either. In fact, the correlation of TIPS to inflation was 0.1 over the same time period, which is explained by the lagged inflation data that feeds into the TIPS principal and coupon calculation." The overvalued market 08/15/21   Markets "While it would be foolish to call the stock market anything but expensive right now there is some context required here. The JP Morgan Guide to the Markets has some excellent charts that do just that. Here's a good one that shows a number of different valuation measures compared to their 25-year averages" The benefits of sin stocks 08/08/21   Markets "As the shunned-stock hypothesis suggests, sin stocks have not only provided higher returns than the market portfolio but higher risk-adjusted returns as well. In addition, Richey's study demonstrates that sin stocks provide the added benefit of being defensive in nature, reducing the tail risk of investing in equities. Risk-averse investors may conclude that, for them, sin investing is a good choice." Just say no 08/08/21   Markets "In fact, a portfolio holding a basket of stocks (with at least a $100 million market cap) exceeding 15x sales lost money from January 2000 to today. What's worse, it suffered a 92% drawdown! Not many investors can recover from that. Of course, maybe this time is different. Maybe valuations don't matter. But history suggests otherwise." Investing nightmares 08/07/21   Markets "My investment nightmare doesn't involve a 50% decline or a lost decade like the one we had in the U.S. from 2000-2009 either. It's far worse than that. Because even the Lost Decade for U.S. stocks wasn't that bad when you consider the path markets took over that time period." Bonds and inflation 08/02/21   Markets "Inflation has never been this high, with bond yields this low." Double or nothing 07/25/21   Markets "As signs of policy-induced imbalances grow and become more difficult to defend, we believe the days of consequence-free money printing are over. Instead of adjusting to the heightened risk of quantitative easing ending, investors appear to be doing what they've been conditioned to do over the past decade: shake it off, parrot the Fed's narrative, and ride the stock market higher without concern. In effect, the game of double or nothing continues." What happens after a decade 07/25/21   Markets "Doing anything but hold a 60/40 portfolio (or a derivation of it) has almost inevitably come at a cost. It is now considered to be the natural, default option by many investors. It is not clear, however, whether this status is because of something innate in the 60/40 structure that makes it the neutral choice, or whether investor opinions would change if it endured a prolonged spell of disappointing returns." Hedging inflation is hard 07/19/21   Markets "Markets always require context but the biggest lesson here is how hard it can be to hedge against short-term risks in the markets. People have been pounding the table on inflation for a number of years now. I'm sure many of them were ready for a victory lap now that it's finally here. Yet the markets aren't cooperating." Equities as an inflation hedge 07/19/21   Markets "Equities generated attractive nominal returns across all inflation regimes. However, real returns were zero when inflation was above 10%. Energy and materials performed best, consumer-facing sectors worst." Patient investing is hard 07/11/21   Markets "Unfortunately, my more than 25 years of experience in advising investors has taught me that when it comes to judging the performance of investment strategies involving risk assets, far too many investors believe that three years is a long time, five years a very long time and 10 years an eternity." When dollar cost averaging fails 07/11/21   Markets "If you had picked a random month to start buying U.S. stocks and kept buying for the rest of the decade, there is a 98% chance that you would have beaten cash (and an 83% chance that you beat 5-Year Treasuries as well). Yes, there were times when you underperformed, but in a vast majority of periods you would have made significant gains." Meme stock investing 07/11/21   Markets "You can't do this forever. It smells a bit like a Ponzi Scheme already, in fact. Eventually, you run out of marks." Don't try to predict it 07/11/21   Markets "Consumers, economists and bond traders often attempt to forecast inflation, but we really are walking in the dark." On negative oil and futures prices 07/04/21   Markets "The spot barrel is the oil you can buy right now in the cash market for (almost) immediate delivery. Forward barrels are similar cash market transactions where you contract today for delivery of oil at some point in the future." Bubble of epic proportions 07/04/21   Markets "Grantham will explain why he is calling this a bubble of epic proportions and suggest ways that investors can handle it." [video] High expectations 06/27/21   Markets "After capturing returns of 12.5% above inflation in 2020, investors anticipate even higher returns post-pandemic markets: For 2021 they expect to achieve annual returns of 13% above inflation. Over the long term, they anticipate 14.5%. Both numbers are substantially greater than the 5.3% above inflation financial professionals say is realistic." Market trivia 06/27/21   Markets "16 Unbelievable Facts About the Markets" Doctor copper 06/27/21   Markets "The results indicate that while oil is a top performer during economic recoveries, copper performs best when the economy is expanding." On oil 06/27/21   Markets "Today, we note that the high-yield spread over the last three months has fallen materially (from 3.86 to 3.36), indicating that now could be a good time to implement our strategy on the long side. In the long run, we believe this strategy could produce excess returns and be a valuable diversifier to tailored investor portfolios." The impact of intangibles 06/27/21   Markets "The good news is that intangible-intensive companies can grow faster than their tangible counterparts. The bad news is they can also become irrelevant and shrink fast." [pdf] Estimating future stock returns 06/20/21   Markets "On March 31st, the S&P 500 was priced to return 0.07%/year over the next 10 years. Today, that figure is -0.67%. At the close on Monday, that figure was -1.03%. These figures do not take account of inflation, so it indicates real annual returns between negative 2 and negative 3 percent." Mid-Caps 06/20/21   Markets "Unfortunately, this creates a conundrum for investors. They can look at 90-years of data for US stocks, where mid-caps did not generate attractive excess returns, or 30-years of data across other stock markets where mid-caps outperformed." Day traders learning about their ability 06/13/21   Markets "We analyze the performance of and learning by individual investors who engage in day trading in Taiwan from 1992 to 2006 and test the proposition that individual investors rationally speculate as day traders in order to learn whether they possess the superior trading ability. Consistent with models of both rational and biased learning, we document that unprofitable day tradersare more likely to quit than profitable traders. Inconsistent with models of rational speculation and learning, we document that the aggregate performance of day traders is negative, that the vast majority of day traders are unprofitable, and many persist despite an extensive experience of losses." [pdf] Questioning emerging markets 06/06/21   Markets "We can demonstrate this relationship by comparing the outperformance of EM to US equities and the inverted US Dollar index. We observe that EM equities outperformed when the US Dollar depreciated. It is not a perfect relationship (there are none in finance), but it held broadly in the period between 1990 and 2020." Tobacco and defense as inflation shelters 06/06/21   Markets "tobacco and defense have historically been reliable inflation shelters, rewarding investors with positive real returns during periods of higher inflation that more negatively impacted both their respective sectors and the broad market." Stakeholder capitalism 06/06/21   Markets "The solution is thus to ensure that the CEO remains an owner, holding long-term equity, rather than being a salaried employee paid with a bonus based on short-term profit. Indeed, research shows that CEOs who own a substantial chunk of their firm outperform those who own little by 4-10 percent per year in long-term shareholder returns." Investing in commodities 06/06/21   Markets "On an individual basis, commodities appear to be largely unpredictable. And even though the significance of the mean regression factor improves dramatically in the cross-sectional analysis, there remains a lot of noise within the other factors, as their signs flip from positive to negative and they go from statistically significant to insignificant on different time frames. Market timing strategies based on fundamental factors in commodities do not appear to be as reliable as factor-based strategies in stocks and bonds." How boom turned to bust 05/30/21   Markets "Over the last 30 years, a buy-and-hold strategy in commodities underperformed the S&P 500 by 10% and the classic 60/40 portfolio by 9%, while also enduring colossal drawdowns and significantly more volatility." Economics of customer businesses 05/23/21   Markets "Understanding the basic unit of analysis is an essential element of security analysis. An investor should have a point of view on how a company makes money, what opportunities exist, and the role competition might play in shaping the financial outcome. Boiled down to the core, the basic unit of analysis seeks to assess whether a company's investments are likely to earn a return in excess of the cost of capital." [PDF] The failure of anomaly indicators 05/23/21   Markets "One springboard for the You-Xue-Zhang article was a 2016 study by Harvey, Liu and Zhu, who after analyzing 296 anomalies from published papers found that between 80 and 158 (i.e., up to 53%) are likely false discoveries." Fall of the titans 05/16/21   Markets "The argument that low (and negative) interest rates justify higher valuations does not seem to hold water when the 10 largest companies by market-cap have an aggregate valuation multiple three times higher than the market. Add in the growing numbers of unsophisticated investors who are buying and selling stocks based largely on speculation, and the result is a potent mix for investors in today's stock titans." Hanging tough 05/02/21   Markets "Finally, as I argued last year, I don't see any alternative to owning stocks. After factoring in taxes and inflation, cash investments and most bonds are priced to lose money." Craziest market 04/25/21   Markets "Currently, we have an antiquated video game retailer (GME) being valued at $10 billion (nearly 10 times what it was worth at the start of the year). We have a literal joke internet coin (Dogecoin) that has a market cap of over $50 billion. And I just recently heard about a single deli in New Jersey (HWIN) that was recently valued at over $100 million. The deli had $35,000 in sales over the previous two years." Tesla and base rates 04/11/21   Markets "What I wanted to focus on however was the revenue outputs in the model where the CFA credited analyst has $31b in 2020 rising to $700b in 2025, that's a CAGR of 117%! One of the things that always staggers me is the way analysts forecast revenue growth without any context to the base rate." After big gains 04/11/21   Markets "I looked at the returns over the ensuing one, three and five year periods to see what happened after enormous gains of the past." Death to the lost decade 04/11/21   Markets "Stable growth and tame inflation rewarded both equities and bonds and rendered less valuable any diversifying assets that sought to profit from more volatile or negative growth or higher inflation. Macro-economic analysis.and even more simple concepts like international diversification or value investing - failed to benefit investors. But growth has not always been so stable nor inflation so tame. And when those key economic drivers have behaved differently, the results for investors in different asset classes have been markedly different." It's all in the mix 04/11/21   Markets "It's impossible to predict where the market will go next, so your best defense is to have an appropriate asset allocation. But how exactly can you determine an ideal allocation?" Momentum and mean reversion 04/04/21   Markets "Momentum dictates that what has done the best in the past will continue to do the best and Mean Reversion just the opposite - where what is done the worst will eventually do the best, reverting back to its mean. That both can be true is one of the great paradoxes in investing." Yield shortage 04/03/21   Markets "But the nice thing about dividend-payers is that they're easier to hang onto if you just view the volatility as the cost of higher income. Stocks are violent, dividends are steady." Disappearing BOGOs 04/03/21   Markets "Based on numerous trips to the grocery store and other retail outlets, I've noticed a sharp drop in promotions over the past several months. Recent quarterly results and commentary of the businesses on our 300-name possible buy list support my anecdotal observations. With declining inventories and rising costs, companies have been reducing promotions to protect gross margins and receive full price on their limited supply." Replication crisis that wasn't 03/28/21   Markets "In plainer words, done properly (using a consistent methodology, accounting for the simultaneous testing of many factors, comparing to a fair yardstick and not 100% of a backtest, studying the broadest set of factors in the most places, using global data, and even making their code and data available online) the study of ex post 'after the research paper came out and told everybody the good news' factor results is extremely supportive of factor investing." Replication crisis in finance 03/28/21   Markets "Value factors became stronger when controlling for other effects because of their hedging benefits relative to momentum, quality, and leverage. And the Leverage cluster became one of the most heavily weighted, in large part due to its ability to hedge value and low-risk factors." The great reversal 03/21/21   Markets "The current narrative is that a) small companies will benefit more from stimulus measures than their larger counterparts, b) global stocks will benefit from a falling dollar and higher global growth, c) value stocks will improve with the rise in interest rates and the steepening yield curve, d) technology will underperform as the vaccines and herd immunity will allow people to leave their homes again, e) bond yields will rise with inflation pressures mounting, and f) commodities will move higher with a resumption of growth and demand." Blowing bubbles 03/21/21   Markets "Drawing on economist Hyman Minsky, Bernstein says there are four conditions necessary for a financial bubble to form: easy credit, exciting new technologies, amnesia about the prior bubble and bust, and the abandonment of old, prudent methods for valuing investments." Financial leverage makes stocks riskier 03/14/21   Markets "When calculating the risk-adjusted returns, the conclusion on the lack of value creation via leverage crystalizes further as the stocks with the lowest leverage generated far higher risk-return ratios than the most leveraged stocks on a sector-neutral basis. Given this, investors should avoid stocks with too much leverage, especially sector specialists." A new ice age 03/14/21   Markets "So instead of it being a new ice age for the traditional vendors, is it possible they might actually end up being the ones selling most of the new-age ice?" Valuing private equity 03/14/21   Markets "Our results don't imply that PE doesn't create any value, to be clear. But they are consistent with a Berk and Green story in which the value is extracted as fees by the GPs, leaving little in the way of excess return for the investors." The long run is lying to you 03/07/21   Markets "To state the obvious, when strategies get more expensive, all-else-equal they do better while that richening is occurring. Yet to assume these changes are the expectation going forward, as simply examining past returns does, strikes us as folly. I examine the returns on various markets, market differentials, and most importantly, the value factor, using a regression framework that accounts for these valuation changes." Groundhog day and overnight returns 03/07/21   Markets "my (admittedly basic) view is that the release of overnight news (such as take-outs, mergers, and earnings reports) is the primary driver of the 'overnight return puzzle' and that the fact that there is negative autocorrelation to intraday returns (which effectively 'gives back' a third of the overnight return) is probably driven by a mix of investor overreaction, market structure, and perhaps a little investor heterogeneity." Shill bidding 03/07/21   Markets "We find that a price premium of between 16% and 44% can be achieved by shill bidding. Importantly, shill bidding is quite easy to implement and neither the market maker nor bidders showed any indication that they noticed. We conclude that market makers should make a careful re-evaluation of the risks of shill bidding, since only they are in a position to take meaningful action to prevent it from occurring." Drew Dickson on European behavioral investing 02/28/21   Markets "Mr Dickson holds an MBA from the University of Chicago Booth School of Business, where he was a research assistant for behavioural economist Richard Thaler" [video] Financial bubbles of historic proportions 02/28/21   Markets "James Grant on bubbles and bitcion" [video] How to buy a business 02/20/21   Markets "Most small companies are complete disasters that are held together with bailing wire and duct tape by the owner who works 60-80 hour weeks and knows the business inside-out. If it looks too good to be true, it probably is. Find the catch." Inflation beating asset classes 02/20/21   Markets "Some asset classes, such as equities, which many believe to be good at hedging inflation, actually provide poor inflation hedging characteristics but strong returns above inflation over the longer term" [large] A short history of U.S. corrections 02/14/21   Markets "The longest the stock market has gone without a double-digit correction since 1950 is 7 years from 1990-1997. Then from 2002-2007 there was a four-and-half-year drought with no corrections. This may surprise some people, but the third-longest streak of no market corrections over the past 70 years or so was the four years from late 2011 through late-2015." The defining trait of bubbles 02/14/21   Markets Figuring out the greatest bubble in history is like asking someone who their favorite child is. I go back and forth between the South Sea Bubble and 1980s Japan." Grantham and the next crash 02/07/21   Markets "Jeremy Grantham, co-founder and chief investment strategist of Boston's GMO, believes U.S. stocks have become an epic bubble and will burst in a collapse rivaling the crashes of 1929 and 2000." [video] Shorting stocks 02/06/21   Markets "The margin calls kept coming. So did sleepless nights. There was no internet at the time and I had to wake up every weeknight at 2 a.m. to run to the store to get the newspaper to see whether there was any news on the deal. Not only did I have financial difficulties, but also my wife started to wonder why I kept running out of our apartment in the wee hours." Unfortunate investing traits 02/06/21   Markets "To make money they didn't have and didn't need, they risked what they did have and did need. And that's foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense." There is no wall of money 02/06/21   Markets "Prices matter. Buy low, sell high. But don't attribute anything to the 'wall of money.' It is a bogus concept, and should be ignored. The biggest changes in prices happen when the market is closed, and trading is limited." Volkswagen 10 years later 01/30/21   Markets "Then, over the weekend, Porsche SE dropped a bomb. They issued a press release stating that they had control (via option and swap positions) of an additional 31.5% of the company through option positions, in addition to the 42.6% they already held. This got them to approximately 75%, which not only effectively meant they had a domination agreement (aka they owned VW), but that given the 20% stake already held by the state of Lower Saxony and more by other long-term shareholders, there basically was no float left for the most heavily shorted company in the world." The GameStop revolution 01/30/21   Markets "Individual traders banded together this past week to move markets like never before. But the buildup to this remarkable moment has been happening for decades." The grocery store puzzle 01/30/21   Markets "If most e-commerce companies have been pulled 1-3 years into the future in terms of their revenue, then the e-commerce businesses of most category leading brick and mortar retailers have been pulled 5-10 years into the future" Investing in a bubble 01/24/21   Markets "This ratio of growth to value valuations has already reached 1999 levels and is trending towards dot-com bubble levels. While this is not a definitive sign that we are in a bubble that is about to burst, it is yet another in a growing number of red flags. And while we believe value will prevail in the full sweep of history, those who want to participate in the bubble.s upside might want to consider implementing trend-following rules that might help cushion the fall if the large-cap technology market turns." Quality, where art thou 01/24/21   Markets "Unfortunately, neither quality nor quality income ETFs had significantly lower maximum drawdowns during the global financial crisis of 2009 or the more recent COVID-19 crisis of 2020, which resulted in lower risk-adjusted returns compared to the S&P 500. In contrast, the portfolio comprised of highly profitable stocks achieved meaningful reductions in drawdowns in both crisis periods." Growth can go out of style 01/24/21   Markets "Amazon's stock fell from a peak of $113 to a low of $5.51. That means that from the peak, it got cut in half, then it got cut in half again, and then it got cut in half a third time, and then, you guessed it, it got cut in half again. And then it lost another 22% for good measure. So the next time you see somebody say, 'If you invested $10,000 at Amazon's IPO,' you can safely dismiss the second part of their statement." Another alpha bites the dust 01/24/21   Markets "One of the claims of active fund managers is that the rise of indexing and passive investing in general would make the markets less informationally efficient. It would also create more opportunities for exploiting index funds that focus on minimizing tracking error.they are forced to trade, and, thus, likely to take a loss when rebalancing occurs. If that were the case, the rise in passive investing would have led to an increase in the Index Effect. Yet, the exact opposite has occurred." High stock valuations are fine 01/17/21   Markets "Let me restate that: most of the excess returns from the best performing stock periods have come from valuations going from really low back to average or above." Morningstar's influence on style returns 01/16/21   Markets "But with the introduction of the style box, Morningstar at least managed to reduce the amount of flows chasing past performance. And this apparently also influenced style returns. If investors put a lot of funds to work in funds that had strong performance in the past, they create a herding effect that perpetuates the price momentum of past winners." Waiting for the last dance 01/10/21   Markets "The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000." A generational moment 12/20/20   Markets "While we can't predict the future, based on price and valuation, we are fairly certain young investors are not being presented with a generational buying moment. More likely, we believe investors are being offered a generational selling moment" The Tesla bubble 12/19/20   Markets "Tesla is entering the S&P 500 with a stupendously high valuation and will likely be ranked sixth in the index. Traditional cap-weighted indices, such as the S&P 500, are structured to buy high and sell low - and Tesla is a prime example of this maxim." FATMAN-G 12/19/20   Markets "And for each of them in aggregate to generate 15% annual returns over the next fifteen years, they would need a combined market cap of over $70 trillion. Not that it is a valid comparison, but in 2035, that will be greater than the combined GDPs of the US and Europe." Estimating future stock returns 12/12/20   Markets "Welcome to Wonderland, boys and girls. At the end of the third quarter, the S&P 500 was priced to return 2.92%/yr for the next ten years, with no adjustment for inflation. You might say, 'But David, you've reported levels that low in the past, and you were concerned, but you never said 'Wonderland.' True, but the market has rallied further since the end of the quarter, and the level of the S&P 500 now is priced to return 1.79%/yr for the next ten years, with no adjustment for inflation. That's in the 97th percentile of valuations." The McRib effect 12/05/20   Markets "When the McRib is available, the S&P 500 has an average daily return about 7 basis points (0.07%) higher than on days when it is not available. To put that into perspective, when annualized, that difference would be 19% every year." The Q ratio 12/05/20   Markets "Q Ratio is not a useful indicator for short-term investment timelines. This metric is more appropriate for formulating expectations for long-term market performance." Canadian bills lose legal tender status 11/22/20   Markets "The Bank of Canada issued a reminder on Thursday that hundreds of millions of $1, $2, $25, $500, and $1,000 bank notes will have their legal tender status removed as of Jan. 1, 2021." Day traders lose money 11/22/20   Markets "Large increases in Robinhood users are often accompanied by large price spikes and are followed by reliably negative returns." Great company, wrong price 11/22/20   Markets "The one thing he would point out is his strong belief that there is a difference between a company and its stock price. He believes that when a stock price underreacts to great things, or overreacts to terrible things, this creates opportunities. He also believes that you can pay too much for a good company. He believes this, because as mentioned above, he covered tech stocks during the tech bubble and its aftermath." The dead versus the living 11/08/20   Markets "In this short research note, we will explore the current state of the zombification of stock markets across the globe as this is bound to change dramatically over the next few months and years. More zombies will emerge, and they will haunt the living." The risk-free asset 11/08/20   Markets "Blitz found strong evidence that the risk-free rate used in asset pricing models is misspecified, as the empirical evidence provides support for intermediate-term Treasuries as the more appropriate benchmark. In addition to the empirical evidence, economic theory posits that the one-month rate is not a riskless rate for investors with horizons beyond that term. His findings help explain at least part of the equity risk premium puzzle. In addition, the evidence helps explain the performance of low-beta stocks." Memory gets in the way of a jolly market 10/24/20   Markets "So if you are old enough to remember the 1987 Crash, memory will serve you well as you judge what kind of risk is appropriate. If you aren't old enough, then you need to pay especially close attention to the academic studies which conclude that another crash is someday inevitable." In defense of the IPO 10/24/20   Markets "The handy rule of thumb is: if you need money, an IPO, for all its flaws, makes the most sense and is probably the best option; if you don't, a Direct Listing may be preferable; if you need money, speed, and certainty, a SPAC may be best." Global valuations 10/18/20   Markets "The TOPIX looks like a negative bubble, with the vast majority of stocks trading at less than 1x sales, while the NASDAQ looks like a classic bubble, with over 30% of companies trading at >9x sales." FANMAG envy 10/11/20   Markets "It is difficult to look at growth multiples today and make a valuation argument based on history. In our view, the data we have shown screams overvaluation. All great bubbles are built on compelling stories, and the FANMAG story is compelling. But all great bubbles are also built on unrealistic expectations, and we believe that those unrealistic expectations are already in the growth stock prices." Hyperinflation and me 10/11/20   Markets "October 1993 brought the now-infamous 500 billion dinar note. I remember my father reporting this note with 11 zeros was worth 'roughly one cabbage' at the time of issue. The data seem to back this up. By 31 December 1993, one US dollar was worth 1,775,998,646,615 Yugoslavian dinars. At that rate, the dinar was no longer useful as a medium of exchange." The stock-market disconnect 10/11/20   Markets "The best explanation for why stock markets remain so bullish despite a massive recession is that major publicly traded companies have not borne the brunt of the pandemic's economic fallout. But having been spared by the virus, they could soon find themselves squarely in the sights of a populist backlash." Expected 10-year returns 10/03/20   Markets "The S&P 500's total return over the next decade will be just 1.9% annualized - including reinvested dividends." How sales growth and other factors explain returns 09/26/20   Markets "TEV/sales multiples are high, but still below the nosebleed levels of 1999 and 2000. The primary driver of stock price returns is sales growth ..." Estimating future stock returns 09/26/20   Markets "At present, the S&P 500 is priced to return 3.51%/year over the next ten years. Now if you were buying some ten-year investment grade corporate bonds, you might expect something around 2%. Is that 1.5% over corporates worth it?" Selling stocks for the long-term 09/26/20   Markets "These demographic trends have both good and bad news for investors. Fortunately, most of the dramatic population declines are expected after 2050. Before that, only Japan is affected significantly." Information in asset prices 09/26/20   Markets "We investigate the informational content of prices in financial asset markets. To do so we use a large number of market experiments where the amount of information held by traders is precisely observed. We derive a new method to estimate how much of this information is incorporated in market prices. We find that public information is almost completely reflected in prices, but that surprisingly little private information - less than 50% - is incorporated in prices. Our estimates therefore suggest that while semi-strong informational efficiency is consistent with the data, financial market prices may be very far from strong-form efficiency." Hitting return targets 09/19/20   Markets "For many decades the expected rate of return was close to that of prevailing interest rates so not only was it a simpler time to be an allocator, but an easier time. That relationship has broken down in recent decades." Persistent high volatility 09/19/20   Markets "A situation has been set up by the functional equivalent of the 'Wizard of Oz' where small changes to interest rates or economic activity will have big impact on stock prices. And so I am telling you, be ready for whippy markets." There is no size effect 09/18/20   Markets "Adding in lags to account for illiquidity takes the historically weak small firm effect and renders it non-existent." Settling the size matter 09/11/20   Markets "We conclude that size is weak as a stand-alone factor but a powerful catalyst for other factors." The 60/40 Portfolio 09/11/20   Markets "The 10 year treasury yielded 2.2% at the outset of 1940. By the start of 1980 it was up to 10.8%. Today it's roughly 0.7%. The 60/40 portfolio will assuredly have lower returns over the next 40 years than it had over the last 40 years. That's simple math based on starting yields for bonds." Drawdowns in wonderful companies 09/11/20   Markets "Investors in the greatest companies faced a drawdown of 32.5%, on average, despite being one of the greatest decades of performance ever. That was just the largest drawdown, on average. It says nothing of the second, third, and so on drawdowns during the same decade." Crowding in large tech 09/11/20   Markets "I say to you 'lighten up on your large cap tech positions.' Those who own those positions have short time horizons, and may bolt. There is no way these companies grow into their valuations, so don't think you can hold on for years. This is just a mania, and as such, it will meet its end." Seasonal patterns in the Canadian market 09/11/20   Markets "There is a January effect in Canada and, more importantly for this time of the year, a 'sell in May and go away' effect. In fact, the average annual rate of return over the last 60 years (1957-2018) would have been 17% had investors gone long in the equally weighted index in November-April and gotten out of risky securities altogether in the May-October semi-annual period and, over that period, invested instead heavily (and exclusively) in government of Canada bonds. It would have been 18% in the 1988-2018 sub-period." The new normal 09/06/20   Markets "I think the days of a simple 60/40 allocation or even something fancier like the All Weather Portfolio generating meaningful real returns are probably behind us for at least the next decade." The game of Tesla 09/06/20   Markets "This is the Common Knowledge Game in action. It is the power of the crowd watching the crowd. It is the power of - not what you think is true, and not what you think the crowd thinks is true - but of what the crowd thinks the crowd thinks is true." Only a trickle 09/06/20   Markets "The S&P 500 model is forecasting returns of 2.23%/year over the next 10 years. Even if you compare that to the 10-year Treasury Note yielding 0.66%, that's not enough of a risk premium. We are in the 97th percentile of valuations." Distorting the prices of small-cap stocks 08/30/20   Markets "Our analysis here offers reason to expand our explanation for pricey stocks beyond exuberant expectations for growth: it seems that outsized passive ownership is contributing to a more general price inflation in low-float stocks." Long-term reversal in equity returns 08/22/20   Markets "Long-term reversal is an independent asset-pricing phenomenon, not subsumed by other well-established return predictors (such as the value effect). The effect is largely robust to alternative holding and formation periods and to the influence of calendar seasonalities (such as the January effect), and remains strong in different subsamples. The effect is particularly pronounced in periods of elevated market volatility and return dispersion. In fact, during periods of low dispersion, the effect is almost nonexistent." Stocks didn't outperform bonds for 50 years 08/22/20   Markets "if you combine the S&P 500 with a 20-year US Treasury (this Treasury roughly matches the long-term interest rate sensitivity of the S&P 500) then you can get a lot of short-term diversification between stocks and bonds while not reducing the long-term expected return of a pure stock portfolio." Stocks that emerge from bankruptcy 08/22/20   Markets "Our analysis found that post-reorg equities from 2008 to 2019 consisted of more losers than winners, but successful firms produced notably high returns. One year following emergence, the average return was 19.8%, with the Russell 2000 returning 11.2% during the same period." Cross-asset signals 08/14/20   Markets "Simultaneously positive momentum regimes in bond and equity markets predict better outcomes for the economy, with high industrial production growth, high investment, and decreasing unemployment over the next 12 months. In contrast, simultaneously negative momentum regimes predict negative industrial production growth, low investment, and increasing unemployment. Thus, time-series momentum and cross-asset time-series momentum are not just financial market phenomena; they also contain information about fundamental changes in economic activity." Public to private equity 08/09/20   Markets "Over the past quarter centurythere has been a marked shift in U.S. equities from public markets to private markets controlled by buyout and venture capital firms. This change has had reverberations for asset managers, investors, executives, and policy makers." [pdf] Tail risk hedging 07/26/20   Markets "The common view that Put costs more but is a more effective tail hedge contains a kernel of truth but does not capture the full story. We will give a more nuanced picture, including practicality for investors, and end up preferring Trend over Put." Down the rabbit hole 07/26/20   Markets "There are only three things you need to know about private equity: leverage, leverage and leverage" The bubble 500 07/26/20   Markets "Paying >10x revenue for exciting growth stories is historically one of the worst long-term investment methodologies ever. Our research on similarly priced, similarly unprofitable new-issue stocks with similar growth prospects suggests that this is because of their dramatically high failure rate and disproportionate risk of extreme multiple compression. And this is true even excluding the dot-com bubble. Bankruptcy-level losses occur at such high rates that the group of stocks has an actuarial price return risk equivalent to investing exclusively in tomorrow's levered defaulters." Canadian micro 07/18/20   Markets "Paul Andreola seeks fundamental cash flow and earnings in micro-cap and smallcap companies. Paul has 30 years of smallcap experience as the co-founder of two public companies and CEO and director of another in the technology space." [video] Fight the Fed model 07/12/20   Markets "This has the appearance but not the reality of common sense. The empirical evidence tells us the Fed model has no power to forecast long-term real stock returns. On the contrary: Traditional methods, like examining the market's unadjusted P/E alone, have been very effective." A world with no yield 07/12/20   Markets "Around 90% of developed countries have government bond yields of 1% or less. Almost 40% of these countries have negative yields. Rates are low for a reason. We're in the midst of a depression which is a deflationary force and central banks are doing their damnedest to keep rates down to be able to fund all of the government spending and keep borrowing rates low." A top-heavy stock market 06/26/20   Markets "To this point, charting the performance of stocks following the year they joined the list of the ten largest firms shows decidedly less stratospheric results. On average, these stocks outperformed the market by an annualised 0.7% in the subsequent three-year period. Over five- and ten-year periods, these stocks underperformed the market on average." Broken asset classes 06/26/20   Markets "In the five years after an asset class was declared broken, each roared back in a strong, and for many, swift rebound. All except one snapped back within one year, generating returns that ranged from 14% for US stocks to 68% for commodities. The sole dawdler, REITs, rebounded in 18 months, ultimately delivering a cumulative 86% return at the five-year mark - the weakest performance of the group." Costs kill the overnight anomaly 06/20/20   Markets "dissecting the data behind this supposed market timing strategy reveals that not only are any excess returns diminished by transaction costs, but the performance relative to buy-and-hold gross of costs has waned over the years." Behind private equity 06/06/20   Markets "After fees, investors in private equity funds earn exactly what they would have in public stocks, according to new research. But the high fees have not only created a new billionaire class, they're squeezing private equity-backed companies for unrealistic growth." Diversification drag 05/31/20   Markets "Diversification has been a drag on investor portfolios for a number of years now. In a world where one asset class (U.S. large-cap growth stocks in this instance) is far and away the best performer, diversifying into other asset classes or strategies will make you feel silly." Equity styles and the Spanish flu 05/31/20   Markets "We study the performance of equity styles during the period around the Spanish Flu pandemic of 1918-1919 and other deep historical market corrections to gain a deeper understanding on the performance of different groups of stocks during crises. We extend the widely used CRSP database with hand-collected data on U.S stocks and examine the major pre-1926 market corrections. We find that low-volatility and momentum tend to reduce losses during sharp market selloffs. By contrast, smaller stocks with high yields (value) offer less protection, but perform well during the recovery phase. Over major market selloffs and subsequent recoveries combined equity styles added value." Pizza arbitrage 05/22/20   Markets "If capitalism is driven by a search for profit, the food delivery business confuses the hell out of me. Every platform loses money. Restaurants feel like they're getting screwed. Delivery drivers are poster children for gig economy problems. Customers get annoyed about delivery fees. Isn't business supposed to solve problems?" Why the market isn't down more 05/15/20   Markets "Instead, it appears this has been more of a 'risk off rally' with investors rapidly selling the stocks of smaller companies, those with weaker balance sheets and those with economically sensitive business models, and piling into stocks of larger companies, with strong balance sheets and economically defensive business models." Market roulette 05/09/20   Markets "After all, where else can you find a game that will make you $0.05 a day (in expectation) for every $100 wagered? Where else can you earn $1 a month, or $12 a year, for every $100 at stake?" The yield curve indicator 05/09/20   Markets "Cam explained that this indicator - when Treasury interest rates on shorter-term bonds rise above those being paid on longer-dated bonds - has been successful at predicting recessions 7 out of 7 times with zero false signals along the way. This recession means it's now 8 for 8!" [video] An anatomy of calendar effects 05/03/20   Markets "This paper studies the interaction of the five most well-established calendar effects: the Halloween effect, January effect, turn-of-the-month effect, weekend effect and holiday effect. We find that Halloween and turn-of-the month (TOM) are the strongest effects fully diminishing the other three effects to zero. The equity premium over the sample 1963-2008 is 7.2% if there is a Halloween or TOM effect, and -2.8% in all other cases. These findings are robust with respect to transactions costs, across different samples, market segments, and international stock markets. Our empirical research narrows down the number of calendar effects from five to two, leading to a more powerful and puzzling summary of seasonal effects." Rally isn't a real recovery 04/24/20   Markets "In a recovery, value and dividend yield are winners followed closely by small cap securities. High volatility stocks are almost as good as value. In addition, the performance of momentum is lackluster or even negative. Growth and low volatility are losers, according to StyleAnalytics." Day of Reckoning for Private Equity 04/17/20   Markets "No set of companies across industries is more at risk than those owned by private equity firms. Leveraged buyouts - now euphemistically called private equity - have 'leverage' in their name for a reason. That financial tool works both ways, magnifying returns in good times and punishing results for equity holders when the tide turns." When dollar cost averaging matters most 04/04/20   Markets "Even the contributions that were way too early or way too late in relation to the bottom look amazing in terms of their growth. Those contributions have had longer to run than the more recent purchases but that.s the whole point." Buying during a crisis 03/28/20   Markets "Nevertheless, there is a silver lining for investors who are buyers of equities right now. Every dollar they invest in the current market environment will grow to far more than one invested in months prior, assuming that the market eventually recovers." Prepare for more weird 03/28/20   Markets "The market going down rapidly is less unusual than it going up rapidly. Typically the speed of down moves is twice as fast as up moves. For the current up moves to be so fast is astounding." After the fall 03/22/20   Markets "Once stocks fall 20%, long-term returns start to improve with every painful leg lower. This is why it's so important to stay in the game. Nobody ever said you have to have all of your money in stocks, but you can't be all cash either because lower returns today plant the seeds for higher returns tomorrow." Good decisions in uncertain times 03/22/20   Markets "Over the full 24-month period, returns remained very strong, with small value earning positive returns in 100% of 24-month periods and having the highest absolute performance of these four categories. Small growth performed the next best, then large value, with large growth being the worst performer." Risky returns 03/22/20   Markets "Many investors are experiencing the real downside of stockmarkets for the first time. Suddenly they're no longer placid, happy holiday resorts where riches gently roll to shore simply by waiting. A volcano has erupted and everyone is running around with their hair on fire stealing each other's coconuts and hoarding pineapples." U.S. valuation 03/22/20   Markets "median valuations in the US stock market: large, mid, then small cap" The right time to buy 03/22/20   Markets "Our country has experienced World Wars, inflation, deflation, stagflation, financial panics, and everything in between. We have come out of all of these events stronger than ever, and we will do so today. It's going to hurt like hell, but we'll pull through this." An ill wind 03/22/20   Markets "In other words, if investors see there's a path to health, they'll gladly welcome financial incentives that provide a path to restoring wealth." Money back after a bear market 03/15/20   Markets "So investors could be waiting a while before being made whole from the prior peak. But there is a silver lining here if you look at these numbers a different way. The last column in this table shows the gains necessary to be made whole from these different loss levels" Who cares what Mr. Market thinks 03/06/20   Markets "So, with the market down more than 12%, it is like the market is discounting no earnings for the next four years! Nuts!" Distorting the market 02/21/20   Markets "On this week's episode, we speak to Mike Green of hedge fund Logica Capital, who argues that the trend is causing major market distortions that will eventually unwind with ugly consequences." [video] Equity returns don't compensate for risks 02/21/20   Markets "If this doesn't give you pause, then you either haven't understood finance theory or these results. They are a direct contradiction of the most basic premise of finance and indicate that we get something fundamentally wrong about finance" Levered long 02/21/20   Markets "Stocks and bonds both have positive expected returns, so I understand why a young person with a high risk tolerance would find this appealing. But after looking at the numbers, it probably doesn't make sense to do it with your entire portfolio, if at all. It requires constant monitoring, and an iron stomach. Leverage can turbo charge your returns, but it can also wipe them out if you're not careful." Great to gone 02/15/20   Markets "Success often contains the seeds of its own destruction, and not just when it comes to family fortunes." Epidemics and market returns 02/15/20   Markets "A global pandemic that killed 3% of the Earth's population only sent markets down 10% over a period of 4 months. This is a stunning result. The worst virus since the bubonic plague and markets go through a run-of-the-mill decline? I would not have guessed that beforehand." The temptation of cash 02/07/20   Markets "How long do you usually have to wait before you would reach the absolute lowest price for any given trading day? The median amount of time before hitting an absolute low is 184 trading days (~9 months), but the average is 508 trading days (~2 years)." Five investing heresies 02/07/20   Markets "Dan Rasmussen proceeds to knock down five investing heresies" [video] 50 years of industry data 01/24/20   Markets "of the forty-eight industry portfolios considered on a value-weighted or market capitalization basis, only six boasted a higher Sharpe than the broad market: Smoke, Food, Beer, Guns, Drugs, and Utilities." Dan McMurtrie talks to Tobias Carlisle 01/24/20   Markets "Daniel McMurtrie, better known as FinTwit's @Supermugatu, runs a long/short hedge fund, a Bangladeshi venture fund and wrote the modern 95 Theses for millennial daters: The Dating Market" [video] Rebalancing frequency 01/10/20   Markets "My prior with most market-based analyses is that the patterns we observe are just noise and randomness. Given the conclusions found from those who have studied rebalancing previously, I am inclined to believe that this is true in this case as well." The art of not selling 01/10/20   Markets "Of our most costly mistakes over the years, almost all have been sell decisions. The mistake, in virtually every instance, has been selling too soon." The long suffering 01/03/20   Markets "We know that stocks are risk assets, and that U.S. government bonds, specifically one-month T-Bills, are often referred to as risk-free assets. But the absence of risk can be very costly if your goal is to outpace inflation, which is why we take risk in the first place. Looking at this chart, one should conclude that risk-free is not only reward-free, but its the epitome of risk." A pension storm 12/16/19   Markets "By combining the expected returns from equities and bonds based on historical data, we can create a return matrix for a traditional 60/40 portfolio. Our model anticipates an annualized return of 3.1% for the next 10 years. That is well below the 7.25% assumed rate of return and is awful news for US public pension funds." Profits always matter 12/16/19   Markets "The message is clear: profitable companies outperform unprofitable ones over the long term - by nearly 450 percentage points since 1999" Online dating and the economy 12/16/19   Markets "How online dating is reshaping the entire economy" [audio] How retailers hide the costs of delivery 12/11/19   Markets "The main reason small businesses can't keep up with the behemoths is economies of scale. Thanks to their huge infrastructure, mega-retailers simply pay less per package for shipping. Scale also helps when it comes to an ever more popular companion to free shipping: free returns. They're another salve for the pain of paying, but processing returns requires manpower and eats into profits. Big clothing retailers can recoup some of the costs by off-loading returns and stale inventory to discount stores such as Marshalls, but small businesses don't have that option." Forget the shorts 12/11/19   Markets "The results show that a hedged long position will have a better Sharpe ratio than the classic long/short factor portfolio. The short portfolios are positive, and in some cases, better than the long portfolios; however, the short combination of factors are inferior." 8 centuries of global real interest rates 12/03/19   Markets "Against their long-term context, currently depressed sovereign real rates are in fact converging 'back to historical trend.'" Source of market returns 12/03/19   Markets "When you look at the data, however, this decade's performance is being almost exclusively driven by the fundamentals, much to the chagrin of perma-bears who blame everything that's happened on the Fed." The investment factor 11/22/19   Markets "In the case of small caps, in the U.S., while there was similar performance for the bottom three quartiles (annualized compound returns of 14.3 percent to 16.5 percent), the annualized compound return for the top quartile is substantially lower (7.2 percent). And the difference in average monthly returns between the bottom and top quartiles is 50 basis points and is reliably different from zero. The results for developed ex-U.S. and emerging markets are similar. In all three regions, there is a reliably positive investment premium that is driven primarily by the significant underperformance of small-cap firms with high asset growth." Value is cheap 11/16/19   Markets "Value stocks as a group are as cheap as they have ever gotten. 'The only time in history that Value has gotten this cheap was in 2003 and 2008, when Value outperformed Momentum by 22ppt and 69ppt, respectively, over the subsequent 12 months.'" The Sirens' call 11/16/19   Markets "The stock market model is projecting a 3.06%/year return over the next ten years as of the close on 11/15/2019. That's near where a 10-year mid-single-A rated bond would trade. That's not offering a lot of compensation for putting your money at risk." The case against REITS 11/16/19   Markets "Despite REITs featuring only moderately positive correlations to stocks, the diversification benefits were marginal over the last 30 years. Stated differently, real estate stocks are just not unique enough and introduce additional, unnecessary complexity for asset allocation models. Furthermore, the real estate asset class is largely a bond proxy and has benefited significantly from declining interest rates over the last 30 years. Given that bonds yields have reached zero or negative levels in many countries, this likely makes the outlook for real estate less appealing." Growth bankruptcies 11/08/19   Markets "Buying and holding IPO stocks, you would have lost about half of your wealth half of the time and 75% or more of your wealth in one out of three or four IPOs. And according to the data, the most toxic of these growth-bankruptcy-prone IPOs have been the seemingly most exciting technology and communications stocks, where you would have lost about 60.70% of your wealth half of the time (like SnapChat within its first two years) and 90% or more of your wealth in almost 25% of IPOs (like BlueApron within its first two years)." Rise and fall of calendar anomalies 11/08/19   Markets "In this paper, we conduct a comprehensive investigation of calendar anomaly evolution in the US stock market (given by the Dow Jones Industrial Average) for the 1900 to 2018 period. We employ various statistical techniques (average analysis, Student's t-test, ANOVA, the Kruskal-Wallis and Mann-Whitney tests) and the trading simulation approach to analyse the evolution of the following calendar anomalies: day of the week effect, turn of the month effect, turn of the year effect, and the holiday effect. The results revealed that 'golden age' of calendar anomalies was in the middle of the 20th century. However, since the 1980s all calendar anomalies disappeared. This is consistent with the Efficient Market Hypothesis." Another great depression 11/03/19   Markets "This index of Greek stocks is currently suffering a 97% drawdown from the highs reached prior to the financial crisis. And this is despite the 36% returns for Greek stocks in 2019." Michael Mauboussin interview 10/18/19   Markets "Michael Mauboussin talks about luck and skill with Tobias Carlisle" [video] It's a code red 10/11/19   Markets "Campbell Harvey is a Professor at Duke University and a partner at Research Affiliates. He sat down with Michael Batnick and Josh Brown of Ritholtz Wealth Management to discuss the meaning of the yield curve indicator, which he discovered in 1986 while working on a dissertation." [video] Lawrence Hamtil talks about sectors 10/11/19   Markets "Through his blog and his Twitter account, Lawrence frequently discusses the under-the-radar influence of uncompensated sector bets on the performance of value, small and micro, and international strategies." [video] Bubblicious 10/04/19   Markets "Most of us value investors don't believe in market timing at all. It is so amusing to watch the market go down 200 pts (or more) on a tweet only to reverse itself within a day or two by another tweet. Why anyone would trade based on this stuff is beyond me. I am a believer that headlines almost never mark turning points in the market. If the market is making a new high and then plunges on some negative headline, you can bet that that high will not be a high of any significance. I have seen various attempts over the years to analyze peaks and troughs in the market and matching it with news headlines; there usually is no headline that marked the top or bottom of a market." How high can markets fly 09/24/19   Markets "The graph of the ratio of imputed US household net worth to GDP is more of a statement about the low cost of capital than it is a statement of improved economic prospects in the US." Low vol is not the new value 09/17/19   Markets "Investors that sort the stock market for cheap stocks are primarily looking to generate excess returns by buying companies that might be somewhat unpleasant to hold given firm- or sector-specific issues. On the other hand, investors buying low-risk stocks are hoping for equity-like returns with a reduced downside. These are two fundamentally different investment philosophies." Private equity destroys investors' wealth 09/17/19   Markets "A passive portfolio of small, low EBITDA multiple stocks with modest leverage and hold-to-maturity accounting produces an unconditional return distribution that is highly consistent with that of the pre-fee aggregate private equity index." The cost of waiting 09/17/19   Markets "My results show that any stock/bond portfolio combination (even a 100% bond portfolio) would have, on average, outperformed a 24-month DCA into an all-stock portfolio." Factor investing on the country level 08/31/19   Markets "It is worth noting that the performance of the Value factor on country level is similar to that on single stock level. In both universes, the factor experienced a significant boom-and-bust cycle over the last 30 years. Investors have been buying cheap and selling expensive stocks as well as countries at approximately the same time periods." Recession probability 08/19/19   Markets "If the rest of August is like the first half, then the probability of recession in August 2020 is 47%." Low vol rises 08/12/19   Markets "In this short research note, we will investigate if the Low Volatility factor has changed structurally over the last 30 years as its status changed from obscurity to a common staple in investment portfolios." 200 years of safe withdrawal rates 07/31/19   Markets "200 years of Safe Withdrawal Rates in one chart!? Is that interesting, or what?" Opposite of conventional wisdom 07/26/19   Markets "One-month U.S. Treasury bills, often put in the risk-free bucket, went 68 years with a negative real return. Sure stocks can kill you fast, but bonds can kill you slowly." Bill Gurley interview 07/07/19   Markets "My guest this week is Bill Gurley, a general partner at Benchmark Capital and one my favorite investment thinkers. As you'll hear, despite enormous success through his career, Bill is clearly still in love with business and investing. Where many might discuss past glories, I've been incredibly impressed with how both Bill and his partners emphasize the current portfolio and market landscape." [audio] The earnings mirage 07/07/19   Markets "The conceptual problems with book value as an accounting tool are well-known. But one problem that often gets missed is the problem of inflation. Book values are not adjusted for inflation over time, and therefore they tend to understate the true value of corporate net assets. We recently developed a new technique for calculating book value, called 'integrated equity' that corrects this distortion. Our original research piece, "The Earnings Mirage" carefully explains this technique and uses it to generate data for sectors, countries, periods of history, and even factors." Tattersall on Canadian buybacks 06/26/19   Markets "A similar situation has developed in the United States in spite of huge buybacks in that market. The S&P Buyback Index has outpaced the broad S&P 500 Index by more than five percentage points a year over the past 10 years, but all of this occurred during the first five years. For the year to date and the latest one and five years, it has marginally trailed the 500 index." O'Shaughnessy talks to Livermore 06/26/19   Markets "This week I have a very special guest years in the making. Like another favorite episode, with anonymous guest Modest Proposal, this conversation is with one of the stars of the financial twitter universe who writes anonymously and goes by the pseudonym Jesse Livermore." [audio] Beat online bookmakers 06/21/19   Markets "A team of researchers found a way to make money legally from online bookies. But then their troubles began." Volatility targeting 06/06/19   Markets "When viewed through the lens of the Sharpe ratio, the research demonstrates that while MV has enhanced outcomes, on average, over the buy-and-hold benchmark, it does so with great variation. In addition, enhancements are period-dependent. However, they do alter the higher moments of the return distribution in a favorable way, enhancing skewness and removing fat tails. Thus, they improve utility for risk-averse investors. It's also important to note that MV strategies are characterized by material turnover and trading activity due to their dynamic adjustment of exposures. The result is that MV strategies are likely to be tax inefficient." 10 times sales 05/15/19   Markets "First, over the past 10 years, buying stocks trading above a relatively high level of sales (10x) was actually a decent strategy as it would have beat the market (before transaction costs and taxes). However, over a longer time period, this was a bad bet." The will to survive 04/21/19   Markets "In the world of investing, you don't have to be bold. You don't need to find alpha. You just need to survive." Recessions vs. bear markets 04/21/19   Markets "So stress is not necessarily proportional to how good or bad things are in. Much of it has to do with the changes to our current situation. Going from great to just OK could cause a much worse reaction in the markets than going from awful to not-so-great." Stock picks from space 04/16/19   Markets "Panos N. Patatoukas, one of the study's co-authors, told me he thinks the use of satellite imagery creates opportunities for sophisticated investors at the expense of small individual investors." The size premium should persist 03/25/19   Markets "To repeat, investors must expect that any risk-based factor will experience long periods of underperformance. One only has to observe the U.S. value factor to see that it's having a very rough decade. However, that's not a reason to avoid exposure to a factor, such as size. In fact, investors should find satisfaction in the erratic performance of small stocks. If you believe that small stocks are riskier than large stocks, it should follow that small stocks should not always outperform large stocks in all periods - sometimes the risks show up. This is true even though the expected returns are greater for small-cap stocks over the long term." On being wrong 03/04/19   Markets "All of the fundamental investors - the straight-A students - don't want to make an investment with a 40% chance of being wrong. Imagine being an analyst at Viking and pitching stocks with 40% error rates each month: How many disasters would it take before you got fired? In contrast, quantitative investors would look at the base rates and prefer these characteristics." Why markets go up 02/25/19   Markets "The data point we seek to explain is real earnings growth of 3.42% using the forces of Productivity and Population Growth." How to invest a lump sum 02/25/19   Markets "While 3.7% is the average underperformance of DCA, 5%-10% underperformance is far more common. More importantly, the distribution is quite symmetric, meaning that DCA has roughly the same amount of underperformance as outperformance at the tails of the distribution. So your fear of a market crash needs to be balanced out by the fear of being left behind as the market shoots upward." The worst case 02/20/19   Markets "Then I came to realize that just getting market returns is no walk in the park." DCA vs buy the dip 02/13/19   Markets "My point in all of this is that Buy the Dip, even with perfect information, typically underperforms DCA. So if you attempt to build up cash and buy at the next bottom, you will likely be worse off than if you had bought every month. Why? Because while you wait for the next dip, the market is likely to keep rising and leave you behind." An economic story 02/05/19   Markets "The Great Depression experienced a GDP decline of nearly 27% with a high unemployment rate of 25%. The downturn technically ended in 1932. In that year, wages fell 60% while stock market dividends were slashed 57%." Is risk a function of sector or size? 01/28/19   Markets "It would appear that the realized risk and returns in these were largely functions of their sector characteristics as opposed to size." Retail arbitrage 01/22/19   Markets "I was introduced to a suspiciously profitable practice called retail arbitrage. The concept is fairly simple: You purchase products from a retail store, like Walmart or Target, and then you sell them somewhere else, like Amazon, for a higher price." Is risk a function of sector or size? 01/22/19   Markets "It would appear that the realized risk and returns in these were largely functions of their sector characteristics as opposed to size." Long-term thinking 01/16/19   Markets "On a daily basis, it's more or less a coin flip between being positive or negative but the further out you extend the time horizon the better your chances of success." Payday anomaly revisited 01/16/19   Markets "First, by replicating and comparing the initial paper to other data sets, we found out that yes, there were days with stronger average returns, specifically day 16, day 1, day 2, and end-of-the-month days." The forgotten bear markets 01/08/19   Markets "There's been plenty of ink spilled about history's great market crashes but investors pay little attention to the other historical bears that didn't reach ludicrous mode. Here is a list and short synopsis of some of the forgotten bear markets of the past 80 years" Buying when stocks are down 12/26/18   Markets "What I do know is the history of stock market performance shows that the longer you extend your time horizon, the higher the probability you have of seeing gains. This relationship seems to hold following a big down quarter in stocks, as well." Next year 12/17/18   Markets "Nearly everyone interested in common stocks wants to be told by someone else what he thinks the market is going to do. The demand being there, it must be supplied." One market constant 12/17/18   Markets "To survive this inherent uncertainty requires an investment strategy that's durable enough to withstand either scenario without wrecking your portfolio or your psyche. The risk of loss is the one constant in the stock market that will never go away." Wrong, random, or worse 12/10/18   Markets "Every year, the prognosticators come out of hiding. You have to wonder why they bother, given their record." When cash outperforms 12/03/18   Markets "Cash hasn't outperformed both stocks and bonds over the course of a year since 1994. It's only happened 10 times in 92 years. The only time cash was positive while both stocks and bonds were negative was in 1969 and 1931." The rise of zombie stocks 11/26/18   Markets "This short research note highlights that the number of zombie stocks in the US has been increasing steadily and is close to an all-time high. Given that interest rates in the US are rising, this will require these companies to restructure their balance sheets or face bankruptcy. Although cleansing the corporate world of zombies is a natural and healthy process, it will result in companies laying off employees." The opportunity in trucking 11/19/18   Markets "Lewis was intrigued by private interests circling the freight tech sector. 'What will a hedge fund manager pay you to have exclusive access to your data?'" When stocks fell 11/01/18   Markets "So roughly 60% of the time a 10% correction didn't lead to a bear market while roughly 40% of the time it did. The further down you go on the loss spectrum the smaller the sample size but this gives you a good idea of how things have looked historically in terms of the loss profile of the stock market once they have already begun their descent." The best market predictor is useless 10/09/18   Markets "While you might think this is far-fetched, the basic forces of supply and demand are also one of the best predictors of future stock market returns." The death of the 200 day 09/29/18   Markets "The major market averages' recent all-time highs have done more than confirm that the bull market is still alive: They have raised yet more questions about the market-timing value of the 200-day moving average." A trend equity primer 09/17/18   Markets "While many investment strategies have a concave payoff profile that reaps small rewards at the risk of large losses, trend-following strategies exhibit a convex payoff profile, one that pays small premiums with the potential of a large reward." Quants at the track 09/06/18   Markets "Benter and Coladonato watched as a software script filtered out the losing bets, one at a time, until there were 36 lines left on the screens. Thirty-five of their bets had correctly called the finishers in two of the races, qualifying for a consolation prize. And one wager had correctly predicted all nine horses." In a crisis correlations go to 0.87 09/06/18   Markets "When the U.S. market suffered a sharp sell-off, the opposite occurred: correlations turned positive to the tune of +0.87. This analysis confirms what experienced market traders know intuitively: 'In a financial crisis, all correlations turn to +1.0'." The inflation advantage of equal-weight 09/06/18   Markets "I have written favorably several times before about the advantages of equal-weighted portfolios, and it is worth reminding readers that going back to 1990, the S&P 500 Equal-Weight index has not suffered a single negative 120-month return, which stands in stark contrast to the capitalization-weighted parent index, which experienced several negative 120-month periods around the time of the financial crisis" Levered 60/40 vs equities 08/28/18   Markets "Asness's study, and the levered 60/40 portfolio utilizing the same approach he outlined in the paper, actually saw portfolio returns outperform in the following 25-year period compared to its historical back test. The levered 60/40 portfolio returned 12.2% for the 1994 - 2018 period, 260 bps ahead of the 100% equity line, compared with only 80 bps during his original test." Fixing chicken 08/13/18   Markets "Today on the show, we follow the story of how some shadowy Wall Street investors became convinced that chicken companies were conspiring to charge Americans too much for their chicken." [audio] The equilibrium delusion 08/13/18   Markets "Economics is a discipline for quiet times. The profession, it turns out, ... has no grip on understanding how the abnormal grows out of the normal and what happens next, its practitioners like weather forecasters who don't understand storms." MIB: Rob Arnott 07/30/18   Markets "If you are at all interested in things like fundamental indexing, what's wrong with market cap weighting, how large that sector can grow, the advantages of factor-based investing, and I also learned that there are now over 500 such factors, I had no idea, I knew it was hundreds, I had no idea it was that many. This is really a master class in this space." Aaron Brown on risk 07/16/18   Markets "Aaron Brown talks about risk at market highs and lows." [video] Tails, you win 06/25/18   Markets "The S&P 500 gained 108% over the last five years. Twenty-two companies are responsible for half that gain. Ninety-two companies made up three-quarters of the returns." Mistakes were made 06/25/18   Markets "I thought it would be an interesting exercise to look at all the times where I got it almost entirely wrong, not for self-abasement, but rather as an exercise in how we can learn from our mistakes and still go on to do very well in life and our chosen careers." What you know for sure that just ain't so 06/25/18   Markets "Recently, my colleagues have written two papers questioning things we thought we knew. The first questions what we really know about current stock market valuations (e.g., the Shiller CAPE) forecasting long-horizon future returns. The second questions, among many other explorations, whether or not the patriarch of the family of anomalies or factors, the size effect, really exists." A season for sectors 06/12/18   Markets "we find that seasonality has been economically significant and surprisingly robust to specification methods over the past 75 years." Attention and low volatility 05/28/18   Markets "The bottom line is that investors do not need to invest in low-volatility stocks (which are now much more highly priced) to exploit the low-volatility anomaly. The reason is that it's mostly about the very poor performance of high-volatility stocks. And the poor performance of high-volatility stocks can be avoided simply by screening out stocks with the negative characteristics of high idiosyncratic volatility, high skewness and low prices." Meb talks to James Montier 05/23/18   Markets "James starts from accounting identities. There are essentially four ways you get paid for owning an equity: a change in valuation, a change in profitability, some growth, and some yield. James fleshes out the details for us, discussing time-horizons of these identities. One of the takeaways is that we're looking at pretty miserable returns for U.S. equities." [audio] On yield curves 05/07/18   Markets "Articles often use dramatic language like whenever the yield curve inverts, a recession has followed. They also bring up how the last time the yield curve inverted in the U.S., some well-known policy makers doubted its predictive power, only to be set straight by the worst recession since the Great Depression. It sounds scary. It also happens be true ... in the U.S. ... in recent times. Internationally, the yield curve's predictive power has been mixed." In praise of short sellers 05/07/18   Markets "A growing body of academic literature argues that short interest can identify stocks likely to underperform the market - and that this signal can complement better known market signals like value and momentum. This research suggest that if there is substantial short interest in a stock, long-only investors would do well to beware." Where have the public companies gone? 04/10/18   Markets "The people who supervise the U.S. stock market are grappling with what they see as a troubling trend: One of the great innovations of Western capitalism - the public company - appears to be losing ground." Smart marketing 04/10/18   Markets "More recently, long-only factor futures have been launched for European and US stock markets. Such derivatives can be used efficiently to create long-short factor exposure by combining them with a short position in the index future. In the US, investors can even purchase long-short factor ETFs, even though these have relatively low assets under management." A back test checklist 04/02/18   Markets "The checklist's objective is to help users determine how much confidence to place in a back test or a set of statistical results. No back test is perfect. Every back test suffers from limitations and the possibility of errors and biases affecting results. While these problems can't be avoided, they can be minimised and managed. Our task as users of back tests is to find a back test whose limitations we can live with. In other words, the back test's limitations, degree of bias or chance of error are not so bad that they completely invalidate the results." What's cheap? 03/27/18   Markets "Stocks with high conviction buyback programs are as cheap as they've been since the tech bubble, and trending cheaper." The lottery hackers 03/27/18   Markets "After stopping in one morning at a convenience store he knew well, he picked up a brochure for a brand-new state lottery game. Studying the flyer later at his kitchen table, Jerry saw that it listed the odds of winning certain amounts of money by picking certain combinations of numbers. That's when it hit him. Right there, in the numbers on the page, he noticed a flaw - a strange and surprising pattern, like the cereal-box code, written into the fundamental machinery of the game. A loophole that would eventually make Jerry and Marge millionaires, spark an investigation by a Boston Globe Spotlight reporter, unleash a statewide political scandal and expose more than a few hypocrisies at the heart of America's favorite form of legalized gambling." Andrew Tobias interview 03/12/18   Markets "Andrew is a Harvard grad who went on to write for New York Magazine, covering the world of finance. For several years he had a column in Time and frequently appeared in Parade. His work has also appeared in such places as The New York Times Sunday Magazine and on the cover of Harvard Magazine. His twelve books include three New York Times best-sellers, one of which is The Only Investment Guide You.ll Ever Need, with more than one million copies in print." [audio] About your almond farm 03/12/18   Markets "I've grown weary hearing investors and consultants cackle about how niche investments like almond farms and small-market private credit deals in India could provide the returns they so desperately seek." Private equity returns in public markets 03/05/18   Markets "It has been a while since we discussed private equity on the show, so I was excited for this week's conversation. My guest is Dan Rasmussen, the founder of Verdad advisers. Dan worked in private equity and has spent years studying the entire field. Dan identified several key drivers of private equity's outsized returns: size, value, and leverage. His firm uses these factors as a starting point to build a portfolio of public equities that behave like their private brethren." [audio] Private equity: overvalued and overrated 02/20/18   Markets "The great postcrisis private equity gold rush is on, fueled by cheap debt and enthusiastic investors. A lawn care chain might get half a dozen calls and emails a week from business brokers and 'searchers.' A regional bank auctioning off a business with $15 million in profits might pitch two hundred prospects, receive fifty letters of intent, and take twelve separate private equity firms to management meetings, ending in a sale price which the majority of bidders considers crazy. And the greatest prize of all - a software company - could sell for many multiples of revenue, regardless of profitability." Smart beta is sick 02/20/18   Markets "Smart beta may be state-of-the-art, but it has also become the E. coli of institutional investing. There are at least 300 published factors, with roughly 40 newly discovered factors announced each year." Risk parity derangement syndrome 02/12/18   Markets "You may have noticed the market turbulence lately. You may have also noticed the legion of commentators among the media, politicians, and famous investors, blaming this turbulence on 'risk parity,' 'trend-following strategies,' or my favorite, just 'the machines.' Poppycock. Yes, it's come to this; they've driven me to swear like Mrs. Doubtfire." The bankruptcy of modern finance theory 01/29/18   Markets "The profession of finance as practiced today relies heavily on modern finance theory: the dividend discount model and the capital asset pricing model. These models are the centerpieces of most business school finance courses, and surveys suggest that they are used by over 70 percent of CFOs for capital budgeting. They are also used by almost every fundamental investor and most financial advisers. Yet these theories have been empirically invalidated time and again in well-publicized, peer-reviewed studies. Their continued usage represents another calibration error - between the claimed precision of the models and the actual unpredictability of mark" A letter from an old friend 01/22/18   Markets "I'm at my lowest equity allocation in 17 years. I am at 65% in equities. If the market goes up another 4-5%, I am planning on peeling of 25% of that to go into high quality bonds. Another 20% will go if the market rises 10% from here. At present, the S&P 500 offers returns of just 3.4%/year for the next ten years unadjusted for inflation. That's at the 95th percentile, and reflects valuations of the dot-com bubble, should we rise that far." U.S. equity returns: a best-case 01/15/18   Markets "Adding in 2% for inflation, we get a 5.95% nominal upper limit total return estimate for U.S. equities." One-year performance is a terrible metric 01/15/18   Markets "So ignore one year returns (unless you're taking the average from lots of them) and instead focus on five year returns and ten year returns." Bitcoin 101 01/15/18   Markets "Seth takes a moment to share a commercial he recently saw that explains what Bitcoin is and how it works." [video] CAPE Fear 01/08/18   Markets "The CAPE (cyclically adjusted PE) ratio is not a useful timing signal for market turning points, but is a powerful predictor of long-term market returns." Top opinion of 2017 01/01/18   Markets "Not all great reporting requires hushed conversations in back allies or on burner phones. Sometimes - like what columnist Angelo Calvello did with A Crime Foretold - all it takes is an old magazine, Google, and a relentless curiosity about the inner workings of institutional finance. In case you missed it, here's Institutional Investor's top column of 2017 and the rest of the year's best" Purgatory for pessimists 12/18/17   Markets "Also, notice the disparity in excess return between an equal-weighted versus a cap-weighted portfolio construction process. These are the exact same stocks! Yet, a cap-weighted approach underperforms by hundreds of basis points, even in large 300-stock portfolios." Career risk and Stalin's pension fund 12/18/17   Markets "To concentrate the mind, I fantasize about managing Stalin's pension fund where the penalty for failing to deliver 4.5% real per year over 10 years is death. I believe only a very large investment in EM equities will give an excellent chance of survival." 1974 and 1999: history turned upside down 12/11/17   Markets "Many years later, a leading small-stock fund manager recalled to me, half-horrified and half-amused, that he was ranked in the top tenth of his peers in 1973 and 1974. After inflation, he reminisced, he had lost only 85% of his shareholders' money since the beginning of 1973." Time diversification redux 11/11/17   Markets "Return volatility rises as its calculated holding period nears 1 year and falls as it lengthens to 10 years. Lower volatility at longer holding periods implies that longer-term mean reversion exists." Risks building in the markets 10/23/17   Markets "On the 30th anniversary of the 1987 market crash, leading financial risk expert Richard Bookstaber identifies the biggest risks in today's markets." [video] The dangerous allure of designer risk factors 10/23/17   Markets "Some investors are falling into a perilous spiral of loving factor investment strategies too much, and understanding them not enough." The cat ETF 10/07/17   Markets "I was rich. Right? I mean, that's what my Bloomberg said. I'd just entered in an index built from companies with 'cat' in their names -- yes, the furry felines -- hit a button and watched it back-test to an 849,751 percent return. Forget the internet, I thought. Cats are about to take over smart beta." Forward returns 10/01/17   Markets "We are now in the 93rd percentile of valuations." Bubble territory 10/01/17   Markets "It's tough to get away from the idea that the market is getting a bit ripe." A great trade 09/23/17   Markets "It was the best wakeup call I could have received. I resolved to begin searching for empirically supported investment strategies that withstood the test of time. It got me to understand that if I were to succeed over the long-term, I had to match my investment strategy to my time horizon. If I had 30 or more years to go to achieve my goals, I thought I should find out which strategies performed the best over much longer periods of time and which had the highest base rates of success against their benchmarks." Adaptive markets talk 09/23/17   Markets "Drawing on evolutionary biology, neuroscience, artificial intelligence, and other fields, Adaptive Markets shows that the theory of market efficiency isn't wrong, but merely incomplete. Taking several examples from his book, Prof. Lo will provide an overview of his new theory of financial markets and what it means for financial crises, how we invest, and the future of financial technology." [video] The data mine 09/17/17   Markets "The authors take the Compustat universe of data points, and use every variable in the dataset to create over 2 million trading strategies" The front test 09/11/17   Markets "The biggest problem for investors is never finding a good backtest. That's the easy part. The hard part is passing the front test by understanding your parameters, filters, and guidelines enough to be able to implement it in the real world and stick with it when it's out of favor." ILTB with Meb Faber 09/11/17   Markets "Meb is a quantitative researcher whose firm Cambria has been behind many interesting investment strategies that break the Wall Street mold. We talk investing factors, dividends, angel investing, podcasts and more." [audio] Team Ritholtz 09/02/17   Markets "My guests this week don't need to be introduced. In celebration of the one year anniversary of invest like the best, I asked Josh Brown, Mike Batnick, and Barry Ritholtz to join me for an hour" [audio] Business vs investing 08/16/17   Markets "My guests this week are both veterans of the podcast, Jason Zweig and Morgan Housel. They are two of the best in the world at making the complicated simple..." [audio] Perfect storm 07/30/17   Markets "We've seen this act before. If you didn't own the nifty 50 stocks in the early 1970s, you underperformed and, thus, money continued to go into them. If you were a growth stock manager in 1998-1999 and you were not buying 'net' stocks, you underperformed and were fired. More and more money went into fewer and fewer stocks. Today you have a similar case with the FANG stocks. More and more money is being deployed into a narrower and narrower area. In each case, this trend did not ended well." The math behind futility 07/30/17   Markets "The underlying statistical issue is underappreciated. Even if there weren't fees and expenses, the odds are you'll underperform." Jerry Neumann interview 07/16/17   Markets "We start very broad, discussing where we may be in a large 70-year economic cycle. We then break down the so-called power law which seems to govern venture capital returns and business outcomes. Then we get even more specific, discussing Jerry's process for evaluating early stage companies, and the particulars of what might make a good venture capitalist." [audio] Ed Thorp interview 07/16/17   Markets "This week we sit down with Ed Thorp, the math professor who Beat the Dealer, and Beat the Market, and became the first true quant hedge fund manager. His new autobiography is A Man for All Markets." [audio] The Myth of 1926 06/26/17   Markets "How much do we know about long-term returns on U.S. stocks?" Great returns, gut-wrenching drawdowns 06/18/17   Markets "Our bottom line result is that perfect foresight has great returns, but gut-wrenching drawdowns. In other words, an active manager who was clairvoyant, and knew ahead of time exactly which stocks were going to be long-term winners and long-term losers, would likely get fired many times over if they were managing other people's money." Quant vs traditional investors 06/18/17   Markets "Our conversation centers on the massive shift from what we call discretionary portfolio management - basically stock picking - to a landscape that is increasingly dominated by quantitative investors of various types. We talk about how any investor might hope to earn alpha, and how doing so is harder and harder." [audio] Still not crazy 06/18/17   Markets "Putting all of this together, it means that some of the FAANGs will be back in these stories (for positive or negative impact) soon enough over some ex post time period (3 months, 5 months, 1 year, we'll figure it out after it happens!). And it will likely be just as normal then as it is now and as it was after 2015 when Cliff first noted this." Hannibal spirits 06/11/17   Markets "The Buffett Ratio is back near its record high of 1.81 during Q1-2000. It is simply the US equity market capitalization excluding foreign issues divided by nominal GDP. It rose to 1.69 during Q4-2016. It is highly correlated with the ratio of the S&P 500 market cap to the aggregate revenues of the composite. This alternative Buffett Ratio rose to 2.00 during Q1 of this year, matching the record high during Q4-1999. It is also highly correlated with the ratios of the S&P 500 to both forward revenues per share and forward earnings per share. All these valuation measures are flashing red." Dave Chilton interview 06/04/17   Markets "We discuss business, investing, and writing." [audio] Revenue per employee 05/28/17   Markets "We found that Energy companies have the highest average Revenue per Employee, while Industrials and Consumer Discretionaries perform worst on this metric." Michael Mauboussin interview 05/21/17   Markets "He and his team have been prolific in the last six months, publishing several long research reports on the most interesting aspects of the investing landscape. In this conversation, we talk about business moats, industry analysis, and how to combine man and machine when building an investment strategy and portfolio." [audio] The big short and beyond 04/30/17   Markets "My guest this week is Danny Moses, who was directly in the middle of the biggest trades in market history, chronicled by Michael Lewis in his book the Big Short. Danny was the head trader on the Frontpoint team led by Steve Eisman, which was one of a small group of firms that figured out, in real time, the dire situation with mortgage-backed securities during the financial crisis, and how to build a portfolio to bet against the U.S. housing market. We cover his part in the Big Short story, but also lots of other interesting ground, including the state of sell-side research and financial markets." [audio] Winner takes all 04/16/17   Markets "The reason these music companies were able to control the industry for so long is because they had the scale to release such a high number of albums and incur those costs to allow the few winners to more than make up for it. But they also had little competition from new technologies, that is, until the MP3s and streaming came along." Diversification, adaptation, and valuation 04/09/17   Markets "To summarize: over time, markets have developed an improved understanding of the nature of long-term equity returns. They've evolved increasingly efficient mechanisms and methodologies through which to manage the inherent risks in equities. These improvements provide a basis for average equity valuations to increase, which is something that has clearly been happening." Let your winners run 03/12/17   Markets "Modern capitalism is built on the idea that as companies get big, they become fat and happy, opening themselves up to lean and hungry competitors who can underprice and overtake them. That cycle of creative destruction may be changing in ways that help explain the seemingly unstoppable rise of the stock market." The most broadly overvalued moment 03/12/17   Markets "Recall that the 2000 market peak was dominated by breathtaking overvaluation among a subset of very large capitalization stocks, while the broader market was less extreme, particularly among smaller capitalization issues. That didn't prevent the S&P 500 Index from losing half of its value, or the Nasdaq 100 Index from losing 83% of its value, but it did create the basis for a long period of relative outperformance by small cap stocks. By contrast, we presently observe, by far, the most extreme median valuations in history." Asset markets as banks 03/05/17   Markets "It's important to remember that as long as cash is yielding zero or something very low, there's no arbitrage to force asset prices lower, no dynamic to force them to conform to some historically observed level or average. They can go as high as they want to, and stay as high as they want to, provided investors are able to develop and retain the confidence to buy at those levels. Note that the same point doesn't hold as readily in the other direction, when considering how low prices can go. That's because financial assets have intrinsic value. Below that value, they're worth owning purely for their cash flow streams, regardless of the prices at which they can be sold. The market can take those prices all the way to down to zero, they'll still be worth owning as incoming cash flow streams." Buffett on valuation 03/05/17   Markets "The stock market has been overvalued in the eyes of many since the 1990's and hasn't reverted back to 'normal' levels in a long time. I think the error is that many look at raw P/E's and don't account for interest rates." Credit Suisse Yearbook 2017 02/26/17   Markets "Over the period since 1900, the average annualized real bond return across the 21 countries was just 1.0% per year, with disappointing returns in many countries. Yet, by the end of 2015, world bonds were level-pegging with world equities over the previous 34 years, giving the same annualized real return of 6.9%." Virality is a myth 02/12/17   Markets "Raymond Loewy [is] the father of industrial design. He designed the modern locomotive, the modern car, the livery, Air Force One and the interior habitat of the first NASA space ship. He basically designed the middle of the 20th century in America, and he had a rule for why people like what they like, MAYA: Most Advanced, Yet Acceptable." Do stocks outperform Treasury bills? 02/05/17   Markets "Most common stocks do not outperform Treasury Bills. Fifty eight percent of common stocks have holding period returns less than those on one-month Treasuries over their full lifetimes on CRSP. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed stocks. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness in long-horizon returns reflects both that monthly returns are positively skewed and the fact that compounding returns over multiple periods itself induces positive skewness. The results also help to explain why active strategies, which tend to be poorly diversified, most often underperform." Lessons from a short seller 01/02/17   Markets "Wilson managed a hedge fund - Wilson & Associates - that he launched in the late 1960s. During his career, his fund generated annualized returns of about 30%. His net worth peaked at $800 million, most of which he donated to charity." Be wary of surrendering liquidity 12/26/16   Markets "My main point is short and simple. Be wary of surrendering liquidity. If you can't clearly identify what you are gaining from giving up liquidity, don't make the investment. You are likely being hoodwinked. It's that simple." Better bubble theory 12/17/16   Markets "Glaeser and Nathanson's model makes one crucial assumption -- that investors rely on past prices to make guesses about demand, but fail to realize that other buyers are doing the exact same thing. When everyone is making guesses about price trends based on other people's guesses about price trends, the whole thing can become a house of cards. The economists show how if homebuyers think this way, the result -- predictably -- is repeated housing bubbles and crashes." Low volatility lottery 12/11/16   Markets "The abnormal returns associated with the beta anomaly are explained by a lottery demand factor. The beta anomaly exists only when the price impact of lottery demand falls disproportionately on high-beta stocks and is concentrated in stocks with low levels of institutional ownership." Small bets, huge payoffs 12/04/16   Markets "We discuss how a series of small bets can lead to disproportionally large nonlinear payoffs, in both life and markets." Predicting 60/40 returns 12/04/16   Markets "The result are likely forward real returns for a 60/40 portfolio in the 0-2% range pre-tax with more downside in my view than upside (post-tax - you can take off another 1-2%)." Low priced stocks no bargain 11/13/16   Markets "Low-priced stocks become most overpriced relative to high-priced stocks during high-sentiment periods, meaning the bulk of the strategy returns occur following times of high investor sentiment and, additionally, as sentiment decreases, high-priced stocks attain high returns relative to low-priced stocks." The next financial crisis 10/16/16   Markets "Where is the next financial crisis developing? How can investors protect themselves? Answers from two crisis experts, Robert Aliber, Editor Manias, Panics, and Crashes and Global Shocks author, Nicholas Sargen." [video] Backtesting with unrealistic data 10/16/16   Markets "I'm picking on this particular asset class to prove a point, but the same conclusion applies to a number of asset classes where Fama-French, Ibbotson, poorly matched mutual fund, etc. data is used. In many cases, that data does not remotely match up to anything that can be traded in today's market." Buyback bulls and bears 10/09/16   Markets "I expect buybacks to continue at high rates so long as interest rates continue to be lower than the earnings yields of companies, and will continue to garner accusations of CEOs of manipulating earnings and stock prices to line their own pockets. But the data offers stronger support for the claims that buyback programs on average generate long-term excess returns for shareholders, driven by the earnings of the companies" Financial crisis 10/09/16   Markets "Why have financial crises occurred with such dismaying regularity throughout history around the world? Perspective from renowned financial crisis expert Robert Aliber and leading Wall Street economist and strategist, Nicholas Sargen." [video] You don't have to play 10/02/16   Markets "US stock returns should be muted, but not negative. The good news? Many foreign markets are sitting on 3-5% dividend yields and CAPE ratios of 8-15. The equation works much better for those markets and we do expect double digit returns there." The bubble in Japan 09/25/16   Markets "Japan offers what I would consider the largest bubble in history, but people have a habit of forgetting about these things and assuming they can't happen again." Market charts 09/25/16   Markets "Once again, we've asked some of the sharpest strategists, economists, and reporters for one chart that's at the top of their minds right now." Overfitting 09/17/16   Markets "What we did was to demonstrate that given virtually ANY desired performance profile, one can devise a stock fund portfolio, constructed from S&P500 stocks, that achieves that profile, based on backtests. Do you want a steady 8% per annum growth, month after month, year after year? You can have it - or 10% or 12% or 15% (all based on backtests, over say a 15-year period). We even constructed portfolios that exhibit a stair-step or sinusoidal growth, just to demonstrate that any profile can be used." Uses of cash 09/11/16   Markets "Less recognized is that nearly half of S&P 500 revenues come from overseas. Therefore, a strengthening dollar can substantially hamper U.S. company earnings and long term competitiveness." Underperformance: not a bug, a feature 09/11/16   Markets "Berkshire Hathaway is a glaring example. If you look at Berkshire Hathaway on a daily, weekly, monthly, quarterly, or six-month basis over its entire history, an investor in Berkshire Hathaway would have underperformed the S&P 500 more than half the time. But despite that, an investor in Berkshire Hathaway would have made tremendously more money than an investor in the S&P 500." 11th sector a boondoggle 09/04/16   Markets "Real estate will become the S&P 500's 11th sector next month. Market historian and money manager Laszlo Birinyi isn't applauding." Times are ripe 08/28/16   Markets "Net profits are dependent on more than just business profitability. Net profit margins are also driven by economy-wide interest rates and corporate tax law." Breakdown of a diversified strategy 08/21/16   Markets "That thought experiment is really frightening to me. You followed very sound modern portfolio management advice back then and still in ten years your portfolio is gone. I don't think we are really learning the lessons of history, especially now that the global economy is so much more interconnected than it was before." Amazon arbitrage 07/31/16   Markets "But once everyone could comparison shop online, Bakos reasoned, every site would likely have to offer the same price. And yet, it turns out, many shoppers don't do the research." Beware 13Fs 07/24/16   Markets "Sadly, the bottomline is we should follow the SEC's own advice as it pertains to 13F filings: The reader should not assume that information is accurate and complete." The pitfalls of negative rates 07/10/16   Markets "Now, not everyone agrees with my view that central bankers have overused interest rates to solve the world's problems (the bank boosters point out that inflation is currently very low, which justifies lower rates), but I hope most of them would agree that by going negative, central bankers have introduced a whole new set of risks and unknowns. After all, the world economy is not designed to work with negative interest rates." Keep calm and carry on 06/26/16   Markets "The data shows that markets have on average swung 2 percent up or down once every 11 days since the year 2000. Those of you who may have been paying attention to this detail should not have been surprised by the great volatility markets saw last week - first to the upside as wishful thinking led traders to believe that Brexit was a non-starter, then down and down and down as the votes came in for leaving." Diversification disappoints 06/11/16   Markets "Viewed with the benefit of hindsight, diversification will always disappoint. To judge the outcome of diversification after the fog of uncertainty has lifted, however, misses the point: diversification provides us the incredibly important ability to admit we don.t know. We can be vaguely right instead of precisely wrong. Constant disappointment, then, might be the greatest indicator that we are well diversified." Mispricing isn't going anywhere 06/11/16   Markets "Investors can benefit from this knowledge by directly avoiding the purchase of stocks with well-known anomaly characteristics or by investing in long-only funds that screen out such stocks." Shareholders are disappearing 06/11/16   Markets "Under SEC rules, a company with fewer than 300 shareholders - or a bank with fewer than 1,200 - may choose to deregister with the federal securities regulator. The stock can still trade publicly, but the company is no longer required to file its financial statements and other disclosures with the SEC." Indexing and small-caps 06/04/16   Markets "the 15 most popular small-cap-heavy ETFs have traded 3.6 times more than the average dollar volume of the 100 largest members of the Russell 2000 small-cap index over the past three months" High multiples for sales 05/22/16   Markets "Current median price to sales multiples overall for DM Americas stocks are higher today than they have been at any point since 2001. The median price to sales ratio is 2.33x, which is higher than they highest point reached in 2007 (2.21x) and 2014 (2.27x)." The dead model 05/22/16   Markets "I think a better comparison is the earnings yield on the S&P 500 vs the yield on the Moody's BAA index if you're going to do something like the Fed Model. That's a better pair to compare against one another." 52 Pick-Up 05/15/16   Markets "The one trend that is clear...the largest capitalization stocks--known commonly as mega cap--consistently underperform. From 1964-2015, stocks with the largest market capitalizaitions underperform by 1.7% per year. These are the stocks you here about most often on CNBC and typically find themselves as Dow components." Defense wins championships 05/14/16   Markets "Let's say an investor's portfolio missed the 20% most profitable stocks between 1989 and 2015. Instead, he invested in only the other 80%. His total gain would have been 0%." The forgotten bear market 05/08/16   Markets "The market collapse of 1973-74 has been oddly ignored in the annals of investing. Yet it was truly epochal, and on a par with the 1930s." FCF/EV backtest 04/24/16   Markets "Average excess returns seem to increase in almost a linear fashion from the 1st quintile to the 5th quintile, which gives me more confidence that the FCF/EV ratio does have a direct relationship with 1-year stock returns." You can't beat all the chimps 04/16/16   Markets "The fact of the matter is that even a random number generator can, and will, outperform practically all mutual funds. Such random strategies may seem like a joke, and perhaps they are, but if a joke can outperform industry professionals we have to stop and ask some hard questions." Multi-factor badness 03/28/16   Markets "My argument would be that momentum and value mature at different rates. For example, positive momentum tends to be a short-term impulse while expensive tends to be a long-term drag. Negative momentum is a short-term drag while cheap is a long-term positive force. The measurement periods are totally different." When trading detracts from alpha 03/28/16   Markets "Whether you decided to invest in actively managed funds, or you were forced to invest in them (maybe because of limited choices inside of corporate retirement plans), you should choose funds not only with low expense ratios, but also with low turnover rates. Those choices will at least reduce the very high odds against generating alpha (risk-adjusted outperformance)." How unique is your portfolio? 03/26/16   Markets "If there is a lot of overlap between your portfolio and the market, there is only so much alpha you can earn. This is obvious. Still, when you visualize this potential it sends a powerful message. Active share - the preferred measure of how different a portfolio is from its benchmark - is not a predictor of future performance, but it is a good indicator of any strategy's potential excess return. As you'll see below, the higher your active share, the more extreme your performance can be, good and bad." Stocks you shouldn't own 03/13/16   Markets "We believe that in the age of indexing, active strategies should first work hard to remove the poorest quality stocks from consideration entirely, regardless of their weight in the index. Size alone - the driver of a stock's weight in SPY and other index funds - is not a sufficient reason for owning a stock." Smart beta gone wrong 03/12/16   Markets "Many of the most popular new factors and strategies have succeeded solely because they have become more and more expensive. Is the financial engineering community at risk of encouraging performance chasing, under the rubric of smart beta? If so, then smart beta is, well, not very smart." The case for stocks 02/14/16   Markets "And, so, what I actually say to people who ask my advice is this: Put as much money into the stock market as you can stand. One hundred percent is best, but even if you are very risk-averse, allocate at least 75 percent to stocks." Credit Suisse Global Yearbook 2016 02/14/16   Markets "The history of recoveries from these major deflationary shocks reminds us that rapid monetary policy normalization cannot be taken for granted. It also suggests that real bond returns will be close to zero over the next decade, with real equity returns around their longer run average of 4% - 6% per annum." Change in shares outstanding 02/07/16   Markets "The first quintile barely exhibited a positive annualized return. The stock of these companies that increased shares outstanding underperformed the market in 75% of the years in this 16-year test period. The average excess returns versus the S&P 500 equal weight benchmark were a negative 3.34%. In contrast, the 5th quintile outperformed the benchmark 81.25% of the time and produced average excess return of 5.54%." Situation Normal, All-FANGed Up 01/16/16   Markets "It is true that a few stocks bailed out the cap-weighted index last year. But it's also true in most years. It's always directionally true, that's just math, and in 2015 it was true by just about the average amount." Another financial crisis is looming 01/02/16   Markets "What makes you most nervous about the future? Debt. The idea that growth will remedy our debts is so addictive for politicians, but the citizens end up paying the price." Activists through the decades 12/26/15   Markets "The famed activist investors of today are fine-tuning 400-year-old tactics. Shareholder fights with management stretch back all the way to the very first publicly-traded company, The Dutch East India Co., when shareholders tried to fight against a restructuring in the 1622." Balance your portfolio With care 12/05/15   Markets "As for generating inflation-fighting returns, it's hard to see how bonds will do the job. A reliable predictor of future bond returns is the current yield. Today, that means a real return (after inflation) around zero. There will be periods when bond prices rise due to interest-rate declines and/or events in the corporate market, but their long-term returns are anchored by low yields." Tough decade ahead for stocks, says John Bogle 10/24/15   Markets "I think you can probably pretty accurately use a 2% inflation number for the next 10 years. So, all of a sudden, a 3.5% return becomes a 1.5% return." Automated strategies fueling tremors 09/05/15   Markets "If every risk-parity fund is dumping assets, and the selling is big enough, it increases the perceived volatility, or riskiness, of the assets. That, in turn, encourages even more selling as risk-parity funds try to bring their overall riskiness back into line." Mom and Pop win one 08/30/15   Markets "Here's a bit of role reversal for you: Mom and Pop were content to ride out the market's volatility this past month, more or less sitting tight. Meanwhile, the pros were driven to the point of near panic." Sell-off not a bad thing 08/23/15   Markets "the best response for most investors trying to grapple with the latest bout of volatility is to take a deep breath, appreciate the remarkable run-up of the last five years, and remember that if you panic at the thought of losing 6 percent of your money in a week, that money really shouldn't be invested in the stock market to begin with." Why not 100% equities? 08/23/15   Markets "We might, on the other hand, consider an all-equities portfolio. Whereas none of us have the centuries ahead of us that Yale can expect, we may have a time horizon of several decades--perhaps long enough according to both the historic performance figures of equities and to theories of their expected returns (shaky as they are), to justify having everything in stocks." Stock buybacks draw scrutiny 08/16/15   Markets "Is the government really going to outlaw buybacks, which over the past decade have become one of the business world.s favorite corporate finance tools? On its face, the issue may seem like a nonstarter. But a growing debate has emerged around the topic of buybacks that increasingly has Wall Street and corporate America worried." Inflation and market returns 08/16/15   Markets "On a nominal basis things look scary. On a real basis, not so much." A survey of equity valuation models 07/25/15   Markets "Our forecast for core U.S. equities is a 0.8% annualized real return over the next decade." How the dollar store war was won 05/23/15   Markets "The inside tale of how Carl Icahn and a bevy of billionaires brawled in the greatest activist contest of the millennium - for companies that sell panty hose and paper towels to discount shoppers." S&P 500 unhinged from reality 05/18/15   Markets "The concept is embodied in a measure known as the Q ratio developed by James Tobin, a Nobel Prize-winning economist at Yale University who died in 2002. According to Tobin's Q, equities in the U.S. are valued about 10 percent above the cost of replacing their underlying assets -- higher than any time other than the Internet bubble and the 1929 peak." Adopting factor investing 05/04/15   Markets "Over the years, academics have compiled an extensive body of research demonstrating the existence and characteristics of various factor premiums. But do their findings hold up in the real world, when factor strategies are implemented by mutual funds? This is a vital question for investors because, unfortunately, there's often a long way to go from theoretical returns (which don't include implementation costs) to realizable returns (which do)." The rich are getting richer 05/04/15   Markets "Profit margins have been steadily rising for huge companies, but margins have been stagnant or falling for smaller companies. Clearly, the large are getting richer. But viewed a slightly different way we see an even more exaggerated trend: the rich are getting richer." Tiny margins for tiny companies 05/04/15   Markets "The U.S. market's profit margin remains very high, but smaller stocks are suffering. While margins for the largest companies have remained well above their long-term averages, margins for the 40% of stocks in the market with smaller market caps have current margins well below their long-term average. This divergence highlights a broader key point: small caps provide unique opportunities and dangers, but are often lost in a market dominated by large caps." Seeing the future from the past 05/02/15   Markets "Across the board, consumer staples stocks have dominated. They've delivered the highest return, and the second lowest overall AND downside volatility. Technology has been the polar opposite, delivering lackluster and volatile returns to investors." The stock-bond disconnect 03/20/15   Markets "How should one understand the disconnect between the new highs reached by global equity indices and the new depths plumbed by real interest rates worldwide? Several competing explanations attempt to reconcile these trends, and getting it right is essential for calibrating monetary and fiscal policy appropriately." Get your income here 03/07/15   Markets "According to Citigroup, the dividend yield on the equity market is higher than the 10-year government bond yield in Australia, Canada, France, Germany, Japan and the UK. In the US, the two yields are neck-and-neck but equity investors can get an extra cashflow boost from buy-backs." 10-year expectations for asset class returns 01/31/15   Markets "Do we have convincing evidence that starting yields determine subsequent returns? Yes." Drivers of a profit margin explosion 01/31/15   Markets "In this piece, I'm going to show that the profit margin expansion seen in the U.S. corporate sector over the last two decades has been driven largely by gains in the financial and technology sectors. I'm then going to examine arguments for and against the sustainability of this shift." World CAPEs 01/31/15   Markets "The Shiller P/E can be used in a valuation context, by comparing the current multiple to the historical values. As the multiple gets stretched far beyond the average, reversion is expected to occur." Unloved stocks 01/25/15   Markets "Curiously, stocks with the fewest buy recommendations have been outperforming the broader market" Median P/Es at post-war record 01/25/15   Markets "Finally, rather than suggest an imminent bear market, the widespread overvaluation of the U.S. stock market mostly indicates vulnerability." Shareholder value is undervalued 01/12/15   Markets "Those who say maximizing shareholder value is something like 'the worst idea ever' are essentially saying markets are wildly inefficient - disastrously and obviously so - at setting prices. Now, one is free to believe this extreme hypothesis. One can believe that markets are horrifically bad no matter how much I, and the legion of evidence, may disagree. One is free to cite the handful of exceptions that actually prove the rule here (exceptional managers and exceptional times for markets) and believe market prices consistently have no toehold on reality. But one must acknowledge that the trendy denunciation of 'maximize shareholder value' is exactly this self-same extreme radical denunciation of markets themselves. If you believe maximize shareholder value is the 'worst idea ever' you aren't simply cynical about how well markets function. No, you go much further. You directly claim they are utter disasters and that you have a better way. Good luck with that. Of course, you could temper your view, perhaps rephrase as 'maximizing shareholder value is a pretty good though imperfect idea and here are a few suggestions for improvement,' but those articles are way less exciting..." Value and glamour returns 11/29/14   Markets "Did you know that the best performing glamour stocks outperform the best performing value stocks? Sounds exciting, right? Well it may be, but expensive stocks still stink. In this piece I visualize the performance of value and glamour stocks in a new way to make the point once more that value trumps everything." The value convergence 11/01/14   Markets "The valuation difference between the market's cheapest stocks and its most expensive has always fascinated me. Here are the EBITDA yields at different break points since the early 1960s." Avoid high beta stocks 10/19/14   Markets "Low volatility investing--either expressed via BETA or IVOL--does show promise. The simulation results are not as dramatic as those for value and momentum based strategies, but the results are certainly interesting." Do valuation shorts work? 10/03/14   Markets "In conclusion, it seems the poor reputation valuation shorts have is at least partially deserved. Even when we look at some of the best-known and most-memorable short campaigns of the past decade, valuation shorts significantly under-perform fraud shorts." Back testing investment strategies 09/28/14   Markets "Investment advice bombards us from many directions with little to support it but anecdote. Many times, a manager will give a handful of stocks as examples, demonstrating how well they went on to perform. Unfortunately, these managers conveniently ignore the many other stocks that also possessed the preferred characteristics but failed." The durable low volatility effect 09/13/14   Markets "One of the basic tenets of finance is that investors are compensated for taking risk. For equity markets, that means that high volatility stocks are expected to outperform low volatility stocks. But that hasn't happened. Low-risk stocks have historically outperformed high-risk stocks." Long-term returns boosted by illiquidity 07/25/14   Markets "The less liquid a stock is, the better it will perform in the long run, compared with more liquid stocks." Technical market indicators 07/18/14   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   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." U.S. stocks will be very disappointing 07/12/14   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   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   Markets "Price-to-book is the least impressive value factor I've tested, and ROE is the least impressive measure of quality/profitability." A critique of John Hussman's Ccart 06/14/14   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   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   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   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." The 5 year market metamorphosis 05/04/14   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   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   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." Getting around the CAPE 02/16/14   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." Is a smooth ride priced like a Cadillac? 02/08/14   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   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   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.'" My top 10 peeves 12/08/13   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   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." Never bubbles today 09/22/13   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   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 could still be underpriced by markets 08/04/13   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   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." The long cash squeeze 07/13/13   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." Saving investors from themselves 06/30/13   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   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   Markets "No one is happy with these answers. They are not what they want to hear, but often what they need to hear." Boring stocks can bring exciting returns 06/09/13   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   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   Markets "Are stocks cheap on the basis of the Fed model? It seems so. Should we care? No." Stock buybacks beat the market 05/05/13   Markets "Still, numerous studies over periods extending back more than three decades have found that the average buyback stock proceeds to outperform the market." Buffett and Hussman on the market 03/30/13   Markets "My point is that there are a variety of highly predictive, methodologically distinct measures of market-level valuation (I used the Shiller PE and Tobin's q, but GNP or GDP-to-total market capitalization below work equally as well) that point to overvaluation." Most large acquisitions are errors 03/24/13   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   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   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   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." The uncertainty of market returns 01/09/13   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   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." The illiquidity premium 12/29/12   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." The Insourcing Boom 12/22/12   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   Markets "AQR Capital co-founder on the fiscal cliff and why he sees challenging times ahead for the U.S. economy." Fitting factors into the formula 11/10/12   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   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   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." Merton vs. Low Vol 10/27/12   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   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   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   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   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   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   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   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   Markets "2012 UCLA Department of Economics Commencement featuring Dr. Michael J. Burry as keynote speaker" Q ratios and stock market crashes 06/04/12   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   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   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?" Predictability of the simple trading rules 05/28/12   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   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   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." When safe assets return 04/07/12   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   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   Markets "112 years of market data for 19 countries." Lower prices via new tech 01/18/12   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   Markets "High dividend yield strategies are a focus of this year's report." A small hedge fund manager's lament 02/24/11   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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." Complexity in financial systems 05/16/10   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   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   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   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   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   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   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   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." Collapse of complex business models 04/03/10   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   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   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   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   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   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   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   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   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   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   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." Tell me I'm wrong 01/24/10   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." Hoisington Q4 letter 01/18/10   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." The 'other' imbalance and the financial crisis 01/12/10   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 lost decade 01/02/10   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   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   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   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   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." Gold can make you poor 11/19/09   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." Paying a price for the thrill of the hunt 11/14/09   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   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." What is expert advice worth? 11/13/09   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   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   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   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." US bank charge-off rates exceed depression 10/26/09   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." Subprime mortgages: Myths and reality 10/25/09   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   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." The view from inside a depression 10/18/09   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   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   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   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   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   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." You can't handle the truth about stocks 09/16/09   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   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   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   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." Krugman wars with Ferguson over inflation 08/24/09   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   Markets "The Bank of England has released its June Financial Stability Report filled with the usual tip-top commentary and analysis." Obituaries offer short-sale tip sheet 06/15/09   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   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   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   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." The unreliability of beta 05/27/09   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." U.S. gas fields go from bust to boom 05/04/09   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   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   Markets Slides 26 to 31 and 33 are particularly interesting. Why Harvard is bad for Wall Street 04/29/09   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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." What are the odds of a depression? 03/04/09   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   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   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." The S&P gets its earnings wrong 02/25/09   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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." Why market forecasts keep missing the mark 01/30/09   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   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." Woefully misleading piece on VaR 01/07/09   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." U.S. Treasuries head toward wekly loss 12/26/08   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   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   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   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." US market may be past a bottom 12/21/08   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 it all over for stocks? 12/19/08   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   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   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   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   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   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   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   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   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   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   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   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." US stock market returns 12/04/08   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   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   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." Stock market finally at fair value 12/01/08   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   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   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." Treasury traders paid to borrow 11/24/08   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   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   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   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%." Diminishing ratios, booming yields 11/21/08   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   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   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   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." The perils of efficiency 11/17/08   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   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." Wall street lays another egg 11/14/08   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   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   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   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   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   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   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   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   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   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." All bets are off 11/02/08   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   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   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   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   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   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   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   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." Keep your money in the market 10/18/08   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   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   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   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   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." Defaults and a near-death experience 10/10/08   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." US open: happy anniversary 10/09/08   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." 3% days becoming the norm 10/07/08   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!" Pursuit of an edge 10/06/08   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   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   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." The 50-100 year storm has arrived 09/29/08   Markets Keen slides from a Fairfax presentation. Economists urge congress not to rush 09/25/08   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   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." Lessons from a 'lost decade' 09/22/08   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   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." Mathematicians predicted crash years ago 09/19/08   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   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   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   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   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   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%.] Skimming the froth 09/15/08   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   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." Fannie, Freddie credit-default swaps 09/08/08   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   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   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   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   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   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 giant pool of money 08/23/08   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   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." The wisdom of crowds? 08/13/08   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   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   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." SEC plans to broaden curbs on short sales 07/26/08   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   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   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   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   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." Are P-E's past their prime? 07/22/08   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?" SEC retrenches on new short-selling rules 07/18/08   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   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   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   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   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   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   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   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." Fannie Mae, Freddie losses make them 'insolvent' 07/10/08   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   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   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." We ain't got to show you no stinking credibility 06/16/08   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   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." How the finance gurus get risk all wrong 05/24/08   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   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." Beer may not be recession-proof 05/14/08   Markets "Miller CEO says cash-strapped beer drinkers are trading down to economy beers due to a slumping economy." Not so fast 05/12/08   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%." Has equity always earned a premium? 05/12/08   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." Foreclosure woes require action 05/06/08   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." One guy who has seen it all 04/28/08   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   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   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." A blunt former Fed chairman takes on Bernanke 04/12/08   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   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." Partying like it's 1929 03/24/08   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   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   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." Wall Street fears a big US bank is in trouble 03/12/08   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   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   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." How a bubble stayed under the radar 03/01/08   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   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   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   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   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." The subprime in the schoolhouse 12/20/07   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   Markets "How Nassim Taleb turned the inevitability of disaster into an investment strategy." Nassim Taleb Lecture: The Black Swan 06/24/07   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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   Markets The data shows that the big influenza epidemic of 1918 had little impact on the markets. Profiting from the unexpected 10/24/05   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   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   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   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   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   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   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   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   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   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   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   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   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   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   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." Threatening eBay's dominance 06/23/05   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   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   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   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   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   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   Markets "Companies are buying back their own shares in record quantities. In many cases, their shareholders should thank them for it" Venture capital: aftershock 04/01/05   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   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   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   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   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   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?" The Economist's commodity-price index 02/11/05   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   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." The Shiller interview 01/25/05   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   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." Wall on the Street 01/04/05   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   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   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 new kings of capitalism 12/01/04   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   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   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   Markets "Once again, investors are rushing to buy internet stocks. Will they never learn?" Sometimes they do ring a bell 11/13/04   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   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   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." Still blowing bubbles 10/25/04   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   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   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   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   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   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?" An alternative inflation index 09/09/04   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   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   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   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." Realistic rewards 08/20/04   Markets "The return on equities over the next decade is likely to be much lower than most investors expect" An eerie calm 07/23/04   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   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   Markets "Why is volatility so low in financial markets?" Please give me a housing bubble 06/19/04   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   Markets "A year ago, the Federal Reserve was worried about the spectre of deflation. Now it is concerned about the opposite" T.O. condos' foundation gets shaky 06/02/04   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   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."" Empty mansions 05/25/04   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   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" There goes the neighborhood 04/30/04   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   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   Markets "American banks continue to make vast profits. Will the good times end when the Fed raises interest rates?" Be braced for a bust as the bubble bursts 04/10/04   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   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   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   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   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." A risky world 03/09/04   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   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." Bearish options strategies 02/21/04   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   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." Greenspan blasted 01/29/04   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   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   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." Nightmare after Christmas 12/26/03   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   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."" Templeton feeling bearish 10/19/03   Markets "The legendary investor predicts the U.S. dollar will lose 40 percent of its value." Wall Street's dirty secret? 10/02/03   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." Look to the big picture to avoid history's pitfalls 09/30/03   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   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." Fame vs fortune: micropayments and free content 09/14/03   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." To have and to hold 08/28/03   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." Net worth steady despite stock fall 08/11/03   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   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." Stocks are cheap! 07/24/03   Markets "Professional investors think stocks are a great buy now. How worrisome." Of manias, panics and crashes 07/18/03   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   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   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   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   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   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   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   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." Insider selling hits 2-year high 06/04/03   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   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." Seriously, why buy stocks? 04/20/03   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   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." Reverse stock splits 03/25/03   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   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   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   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." Are top investors' brains wired for wealth? 01/13/03   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." Only at the right price 01/07/03   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?" Bill & Bill's excellent bull signal 12/18/02   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   Markets "Want one more reason why this rally might not be for real? Insiders sold in droves in November." Through the past, darkly 10/22/02   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." When bull returns, most won't believe it 10/08/02   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." Bracing for October 10/01/02   Markets "While September wins for worst historical performance overall, October is a scary month." When it comes to investing, we're dummies 09/21/02   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   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   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   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   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." Public Participation 09/02/02   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   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   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." Anatomy of a bubble 07/13/02   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   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   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."	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