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” Balance Sheets are like a bikinis: What they reveal is suggestive, but what they conceal is vital.”
Must Read Articles For All Weekly Visitors!!!
BP Gulf-Sized Spilling Occurs In Nigeria Annually, But Nobody Cares – via Consumerist – For America, the BP spill in the Gulf is a “tragedy that never should have happened,” requiring, “the largest environmental response in this country’s history. In Nigeria, they just call it “Thursday.”
Must Read: Vaclav Smil, The Man Who’s Tutoring Bill Gates! - via Globe & Mail – The most-published and least-known thinker in Canada doesn’t want to be interviewed. He says he has 77 deadlines to meet (perhaps an exaggeration, but probably not) before he flies off to a scientific conference in Europe. Besides, he thinks media interviews are pointless. He detests our sound-bite culture, which shrinks enormously important and complex subjects into meaningless bits of info-kibble. “All I want is to be left alone to write my books,” he insists.
Meantime, he argues, there’s plenty we should do to reduce demand. North Americans are the energy hogs of the world. Our industries are super-efficient, but our lifestyles are ruinous. “Most of the energy in North America is just consuming – Wal-Mart, shopping centres, government offices – or personal consumption: houses, cars, flying to Hawaii, gambling in Las Vegas,” he said during a recent appearance at Canada’s Perimeter Institute. “We could live affluent lifestyles with half as much energy. Are people so unhappy in Kyoto or Lyons? Is it such a terrible punishment to live in Bordeaux?” He himself drives a modest car and lives in a super-energy-efficient house. “If the world wants to replicate the two biggest wasters in the world, the U.S. and Canada, there is no hope for anybody.” What is the likelihood that people will cut back voluntarily? “Very slim.”
When Do Analysts Add Value? Evidence from Corporate Spinoffs – via HBS – The impact of financial analysts on capital market efficiency has been much debated in academia and in practice. A large body of academic research finds that analysts act as important information intermediaries who contribute to the overall efficiency of capital markets. Other research, however, has identified contexts in which the value of analyst coverage may be relatively more limited, such as when analysts face possible conflicts of interest, or when the company or situation they are presented with is especially complex. Still other research questions the informativeness of analyst recommendations in light of regulatory changes. In this paper, HBS doctoral graduate Emilie Rose Feldman and professors Stuart C. Gilson and Belén Villalonga examine 1,793 analyst reports written at the time of corporate spinoffs to determine how much value analysts create as information intermediaries in this setting. Spinoffs provide an interesting context for this purpose because the degree of information asymmetry between corporate insiders and investors is especially high. The paper is one of the first to provide very fine-grained detail on the quantity and types of analyses included in analyst reports.
Key concepts include:
1. Analysts pay relatively little attention in their reports to the subsidiaries that will be spun off, even though subsidiaries generally account for an economically significant share of firms’ operations before the spinoff.
2. The complexity associated with forecasting earnings and stock prices in the context of corporate spinoffs, combined with analysts’ apparent disregard for subsidiaries in their analysis of corporate spinoffs, seem to limit analysts’ ability to add value as information intermediaries in this setting.
3. The potential for analysts to add value in this situation is especially high because while the new entities created by the spinoff have no stock price history—similar to an IPO—analysts may have been following the businesses of the parent and subsidiary for an extended time, giving them a comparative advantage in forecasting both entities’ future financial
Exclusive Interview: With The Super Investors @ Greenstone Value Opportunity Fund - via Distressed Debt Investing – A few months ago, I received in my inbox the 1Q 2010 letter for the Greenstone Value Opportunity Fund. Not only were their returns spectacular but also their largest position at the time was Tronox, a company we did a distressed debt research piece on earlier in the year. Needless to say, with their candor, their value investing mindset, and their ability to see the forest through the trees in a number of highly complicated situations, I was incredibly impressed. I reached out to founders Chris White and Tim Stobaugh, and asked them a number of questions in the interview below. I was split the interview into two parts, and will post the second part later in the week. Enjoy!
Why It’s Different This Time for Housing – via Barrons – Not this time, even after the biggest financial and economic crisis since the 1930s. Notwithstanding 30-year fixed-rate mortgage rates below 5%, sharply reduced house prices and government incentives such as tax credits for first-time and certain other homebuyers, sales of new homes are depressed while those of existing dwellings also remain in the doldrums. Moreover, the Fed bought $1.25 trillion of mortgage-backed securities to help bolster the supply of mortgage credit.
U.S. Identifies Vast Mineral Riches in Afghanistan (Think 1 Trillion) - via NYT – The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.
Are Rubber Bands Called Silly Bands The New Bubble (in Children’s Toys)? -Via Gametheorist – It was a marvel to me. The company that created Silly Bandz was Brainchild products; specifically, Robert Crock according the website. They had clearly stumbled across massive profitability and it is hard to understand how. But all these elementary school kids are walking around with 30 rubber bands on each wrist. It is both ridiculous and ingenious at the same time.
Does marriage really make people happier? - via Bakadesuyo – No. Good marriages make people happier. Bad marriages make people miserable. Sounds obvious but our culture is loaded with pro-marriage propaganda.
The propensity to plan is good for your wallet – via Decision Science News – Planning has pronounced effects on consumer behavior and intertemporal choice. We develop a six-item scale measuring individual differences in propensity to plan that can be adapted to different domains and used to compare planning across domains and time horizons. Adaptations tailored to planning time and money in the short run and long run each show strong evidence of reliability and validity. We find that propensity to plan is moderately domain-specific. Scale measures and actual planning measures show that for time, people plan much more for the short run than the long run; for money, short- and long-run planning differ less. Time and money adaptations of our scale exhibit sharp differences in nomological correlates; short-run and long-run adaptations differ less. Domain-specific adaptations predict frequency of actual planning in their respective domains. A “very long-run” money adaptation predicts FICO credit scores; low planners thus face materially higher cost of credit.
Cognitive changes caused by single exposure to a placebo – Deric Bownds – Given the mention of placebo responses in today’s other post on acupuncture, I thought I would pass on this interesting bit in Neuropsychologia from Morton et al., showing that the cognitive effects of a single placebo intervention can persist for six weeks:
Miguel’s Weekly Favorites
On Tail Risk and the Winner’s Curse - via Rajiv Sethi – By the same token, when firms like BP and AIG are revealed to have underestimated the extent to which their actions exposed them (and numerous others) to tail risk, one ought not to presume that they were acting under the influence of a psychological propensity to which we are all vulnerable. Those who had more realistic (or excessively pessimistic) expectations regarding such risks simply avoided them, and by doing so also avoided coming to our attention.
Testosterone decreases trust. - via Deric Bownds – Fascinating observations from Bos et al., who tested the effect of testosterone in regulating womens’ rating of the trustworthiness of a series of men’s faces shown in photographs. It is essentially an antidote to oxytocin, which has been shown to increase judgments of trustworthiness. Their abstract:
Are Overconfident CEOs Better Innovators? – via Ideas.Repec – Using options- and press-based proxies for CEO overconfidence (Malmendier and Tate 2005a, 2005b, 2008), we find that over the 1993-2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development (R&D) expenditure. Overconfident managers only achieve greater innovation than non-overconfident managers in innovative industries. Overconfidence is not associated with lower sales, ROA, or Q.
Other People’s Money: The Unrealized Conflicts of Securities Lending – via Harvard Law – The primary goal of most institutional investors, such as public pension funds, is to prudently invest their assets and develop a portfolio that will accommodate long-term financial needs. Accordingly, these investors typically hold large blocks of individual securities in their portfolio, hoping that the value of those securities will appreciate over time. Over the past twenty years, institutional investors and other large stock holders have increasingly used these long-term holdings to reap short-term profits through “securities lending” programs.
Forecasting Uncertainty - via Columbia.edu – Treasury bonds are typically viewed as among the safest investments, providing lower returns than the stock market but avoiding high degrees of risk and volatility. But no investor can escape uncertainty altogether, and bond investors use GDP and inflation forecasts as rough barometers for term structure, or bond prices and yields. Dozens of forecasters provide quarterly estimates of how much inflation and GDP are likely to change in the short term, providing bond investors a means to gauge future yields. But when forecasts vary significantly, investors are left to determine which of these conflicting stories represents the best estimate. All forecasts can’t be correct, and few are ever spot-on, so what’s a savvy investor to do?
Why Does Academia Treat Its Workforce So Badly? – via Megan McArdle – A piece on adjuncts in Inside Higher Ed has been attracting a lot of attention among academics of my acquaintance. Its description of academic life is shockingly brutal–shocking even to me, who knows enough PhDs to be acquainted with the dismal facts:
Video: The Search For Hidden Dimensions – via Open Culture –
Obesity linked to brain shrinkage and dementia - via Science Blogs- The dangers of obesity are very well known. Being overweight is associated with an increased risk of coronary heart disease and stroke, the two leading causes of death in the Western world. Gout is more common in overweight people, with the risk of developing the condition increasing in parallel with body weight. Obese people are twice as likely to develop type 2 diabetes as those who are not overweight, and being overweight is also associated with several types of cancer. The list goes on…
The Truth About the Polygraph (According to the NSA) - via Youtube -
Insight into the Oil Industry – Books for Understanding – via Princeton U – The impact of the oil spill in the Gulf of Mexico will be felt in the region and around the world for a long time. The Association of American University Presses has compiled a list of books from 23 AAUP members to offer insight and understanding about the role of oil–in economic, technological, and political development, in international relations, and in global environments.
Insects Inspire Robot Design - via NSF – Oregon State University professor John Schmitt and his colleagues look to nature’s running machines as locomotion models for future robots that can easily run over rough surfaces
Researchers Use Science to Identify Soccer Stars - via NSF – Until now, rating the world’s best soccer players was often based on a fan’s personal sense of the game. But researchers at Northwestern University in Evanston, Ill., recently developed a computer program that, for the first time, measures player success based on objective assessments of performance instead of opinion. Luis Amaral, an associate professor of chemical and biological engineering at Northwestern, says that while basketball and baseball offer a wealth of statistical data to gauge the performance of individual players–such as runs batted in, strikeouts, steals and rebounds–this isn’t the case with soccer.
On Retirement: The 15 Minutes that Could Save Five Years - via HBS – If you’re over 60 years old and reading this post, it’s probably too late. Good for you if you’re under 30. You’ve got a better chance if you’re younger. Age discrimination? No. The end of retirement as we know it — an emerging unpleasant reality that will (re)shape the quality of life and standard of living for billions. Start dealing with it. Now.
Don’t Tell Me What to Do, Tell Me Who to Follow! – Field Experiment Evidence on Voluntary Donations - via GUPEA – We conducted a field experiment in a protected area to explore the effects of conformity to a social reference versus a comparable, but imposed, suggested donation. As observed before, we see visitors conforming to the changing social reference. On the other hand, the treatment in which we suggested a donation resulted in lower shares of visitors donating, compared to the social reference treatment, and lower conditional donations even compared to the control. We concluded that visitors look at … more their peers as a reference to conform to, but partially reject being confronted with an imposed suggestion on how to behave.
“Identity economics” explains why people don’t always make selfishly rational economic decisions. - via Reality Base – When we examine people’s decisions from the perspective of their individual identities and social norms, we get new answers to many different economic questions. Who people are and how they think of themselves is key to the decisions that they make. Their identities and norms are basic motivations. We call this approach identity economics.
Video & Song “a simple song for Israel” - via Mitch Julis -
Exclusive Picks + Financial Topics
Austerity is stupid, stimulus is dangerous, lying is optimal, economic choices are not scalar - via Interfluidity – Austerity is first-order stupid whenever there are people to whom the opportunity cost of providing goods and services that others desire is negative. To some economists, that sentence is a non sequitur. After all, nothing prevents people from providing goods and services for free, if doing the work is more beneficial to them than alternative uses of their time right? Economists who make this argument need to get out more. Doing paid work has social meaning beyond the fact of the activity, and doing what is ordinarily paid work for free has a very different social meaning. It is perfectly possible, and perfectly common, that a person’s gains from doing work are greater than their total pay, so that in theory you could confiscate their wages or pay them nothing and they would still do the job. But in practice, you can’t do that, because if you don’t actually pay them, it is no longer paid work. The nonmonetary benefits of work are inconveniently bundled with a paycheck. Under this circumstance, having the government pay for the work is welfare improving unless the second-order costs of government spending exceed both the benefits to the worker in excess of pay and the benefit to consumers or users of the goods and services purchased.
Alan Greenspan: U.S. Debt and the Greece Analogy - via WSJ – An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading. Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences. The roots of the apparent debt market calm are clear enough. The financial crisis, triggered by the unexpected default …
Just Say No to Wall Street: Putting a Stop to the Earnings Game - via Harvard Law – This requires that CEOs reclaim the initiative by avoiding earnings guidance and managing expectations in such a way that their stocks trade reasonably close to their intrinsic value. In place of earnings forecasts, management should provide information about the company’s strategic goals and main value drivers. They should also discuss the risks associated with the strategies, and management’s plans to deal with them.
Monsters in the Market - via Atlantic – On the third floor of Citigroup’s Manhattan headquarters, at the far end of a trading floor overlooking the Hudson River, Young Kang, Citi’s global head of algorithmic products, leans over a terminal and monitors the progress of a canny and powerful beast named Dagger. Bred and trained in secret by Citi’s financial engineers, Dagger can stalk through more than 20 markets, public and otherwise—hunting for anomalies, buying and selling, prowling through mountains of historical data—all at the behest of Citi’s clients. Amid the trading-floor din, Dagger fulfills its duties in flickering silence, with a speed and acuity no human can match. “It’s self-learning,” Kang says. “The numbers keep updating, the strategy keeps adjusting itself. It gets smarter.”
More Than 90 Banks Miss TARP Payments -via My Investing Notebook – The number of banks missing their TARP payments rose for the third straight quarter. In February, 74 banks deferred their payments; 55 deferred last November. SNL Financial’s analysis found 20 banks have missed four or more payments since the program began in 2008, while eight banks have missed five payments.
Wealth Depends on History Not Geography - via PsyFi Blog – Jared Diamond in his superb book Guns, Germs and Steel outlined a theory of human economic development that regards Western Europe’s original pre-eminence in this regard as being contingent on geography combined with a large slice of luck. Great book though it is more recent work casts doubt on the main findings. Increasingly it looks like success in economic terms depends less on geography and more on history. Quite how history impacts differential economic development as seen in the world today is a booming and fascinating area of research. Teasing out the relevant factors from a jumble of data is a difficult and delicate art but one theme seems to be increasingly prevalent. It rather looks like current economic success and failure is predictable from the robustness or otherwise of institutions established hundreds of years ago. History casts a long financial shadow it seems.
Dark Pools and Adverse Selection- Via PsyFi Blog – Scientists believe that a great deal of the universe is in hiding, being made up of dark matter which, rather inconveniently, refuses to interact with anything else and is therefore almost undetectable. In a similar fashion many stockmarket trades are now being carried out in so called dark pools, where they’re supposed to be similarly undetectable. Unfortunately, despite what many users of them think, you don’t need to construct a super-collider to detect trades in dark pools. These dark pools are one way for investors to move large blocks of stock without alerting others to what they’re doing. They’re anonymous trades of indeterminate volume carried out in murky corners of the securities industry. As usual the industry argues that it’s doing investors a favour. That’s “favour” in the same way that a highwayman saved his victims from having to carry heavy bags of money about .
China’s high saving rate: myth and reality - via BIS – he saving rate of China is high from many perspectives – historical experience, international standards and the predictions of economic models. Furthermore, the average saving rate has been rising over time, with much of the increase taking place in the 2000s, so that the aggregate marginal propensity to save exceeds 50%. What really sets China apart from the rest of the world is that the rising aggregate saving has reflected high savings rates in all three sectors – corporate, household and government. Moreover, adjusting for inflation alters interpretations of the time path of the propensity to save in the three sectors. Our evidence casts doubt on the proposition that distortions and subsidies account for China’s rising corporate profits and high saving rate. Instead, we argue that tough corporate restructuring (including pension and home ownership reforms), a marked Lewis-model transformation process (where the average wage exceeds the marginal product of labour in the subsistence sector) and rapid ageing process have all played more important roles. While such structural factors suggest that the Chinese saving rate will peak in the medium term, policies for job creation and a stronger social safety net would assist the transition to more balanced domestic demand.
Ridleyed With Errors - via Monbiot – A couple of weeks ago, I wrote a column for the Guardian exploring the contrast between Matt Ridley’s assertions in his new book The Rational Optimist and his own experience(1). In the book Ridley attacks the “parasitic bureaucracy” which stifles free enterprise and excoriates governments for, among other sins, bailing out big corporations. If only the market is left to its own devices, he insists, and not stymied by regulations, the outcome will be wonderful for everybody.
The Secret Lives of Professors - via Volatile & Decentralized – I came to Harvard 7 years ago with a fairly romantic notion of what it meant to be a professor — I imagined unstructured days spent mentoring students over long cups of coffee, strolling through the verdant campus, writing code, pondering the infinite. I never really considered doing anything else. At Berkeley, the reigning belief was that the best and brightest students went on to be professors, and the rest went to industry — and I wanted to be one of those elite. Now that I have students that harbor their own rosy dreams of academic life, I thought it would be useful to reflect on what being a professor is really like. It is certainly not for everybody. It remains to be seen if it is even for me. To be sure, there are some great things about this job. To first approximation you are your own boss, and even when it comes to teaching you typically have a tremendous amount of freedom. It has often been said that being a prof is like running your own startup — you have to hire the staff (the students), raise the money (grant proposals), and of course come up with the big ideas and execute on them. But you also have to do a lot of marketing (writing papers and giving talks), and sit on a gazillion stupid committees that eat up your time. This post is mostly for grad students who think they want to be profs one day. A few surprises and lessons from my time in the job…
Academic Research Worth Reading
How budget constraints impact consumers’ response to discount presentation formats - via Chicago- The research extends previous findings derived from the psychophysics of pricing. It demonstrates that, although it is believed that the attractiveness of an absolute discount is inversely proportional to the objective price, such evaluations are also influenced by the presence of budget information. Specifically, consumer budget interacts with discount formats such that the $-off versus percent-off discounts may not be appropriate for expensive or inexpensive products respectively, as shown in past research. Instead, the value of the discount in proportion to the available budget may play a significant role in deal evaluation. Therefore it is an important issue retailers should consider when deciding what discount presentation format to use.
Is There a Correlation between World Cups and S&P 500 Performance?-Via Finance Professor – …using data from 1950 to 2006, it was shown empirically that the S&P 500 Composite Index has an expected return of -2% over the period of a FIFA World Cup tournament. This relationship could be classified as a subset of the calendar effect class of behavioral finance anomalies.”
The Birth Of Modern Economic Science - via ICER – The 1870s have always held a special attraction for specialists in the history of thought. For economic theory these are the years of the Great Crossroads when economic theory was at critical breaking point, after which several powerful theoretical streams emerged that were to determine later on the overall course of the evolution of economics. The book by the French economist and philosopher Gilles Campagnolo is an attempt to find out exactly what happened in the years of the Great Crossroads. It offers not only factual and historical reading, but also theoretical interpretation to explaining the evolution, mutual influence and intermingling of the above individual schools of thought in the economic science. The present paper is a review essay on Gilles Campagnolo’s new book.