• The 10 Interception Limit
    Posted by on December 28th, 2009 at 7:20 pm

    What is it about 11 interceptions? Since 1981, no defensive back has made it to 11 inceptions in one season even though 11 different players have made it to 10. Another 28 players have made it to nine, including three this year. You can add another 45 players who have made it to eight. Talk about thin tails, this data set seems to have no tail at all.

  • Tiger Woods Destroyed $12 Billion in Market Value
    Posted by on December 28th, 2009 at 2:51 pm

    If academics say it, then it must be true:

    More difficult to determine, though, is how the scandal would hit his corporate sponsors. So Victor Stango and Christopher Knittel, two economic professors at University of California, Davis, decided to take a stab at quantifyiung the effect–performing what is called an “event study.” To do this, the professors looked at the nine sponsors for which stock price data was available and compared stock returns for those companies for the 13 days after the accident, both to the entire stock market and a group of competitors. The market value of the sponsors fell 2.3%.
    The ones hit the hardest? The three sports-related companies–Gatorade (owned by PepsiCo), Nike and Electronic Arts. Those companies experienced a 4.3% decline in stock value. Meanwhile, consulting firm Accenture “experienced no ill effects.”
    Overall, the pace of the losses slowed by Dec. 11, the day Woods announced he would take a leave from golf, but as of Dec. 17, shareholders had not recovered their losses, according to the study.

  • The Perils of Economic Stats
    Posted by on December 28th, 2009 at 1:25 pm

    Coming on the heels of Robert Shiller’s idea for securities based on national GDP, consider the problem of constant revisions. GDP growth for the third quarter of 1983 has been revised ten times, including once this year.

  • CEO Pay Is Negatively Correlated to Share Performance
    Posted by on December 28th, 2009 at 10:48 am

    I can’t say this is much of a surprise:

    It turns out that the bigger the CEO’s slice of the pie, the lower the company’s future profitability and market valuation. “These CEOs,” says Prof. Bebchuk, “seem to be trying to grab more than they should.”
    Finance professor Raghavendra Rau of Purdue University and two colleagues looked at CEO pay and stock returns for roughly 1,500 companies per year from 1994 through 2006. They found that the 10% of firms with the highest-paid CEOs produce stock returns that lag their industry peers by more than 12 percentage points, cumulatively, over the next five years.
    Companies at the top of the pay pile, Prof. Rau concluded, award their CEOs an annual average of $23 million—but leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO’s pocket takes $100 out of shareholders’ pockets.

  • The Decade In One Graph
    Posted by on December 28th, 2009 at 12:24 am

    Here’s the decade version of the chart I posted last week.
    image883.png
    This is the relative strength of ten S&P industry groups set to 100 ten years ago. The big winner has been energy. Interestingly, financials were in the lead until mid-2004.

  • Did the Immigration Protests Burst the Housing Bubble?
    Posted by on December 27th, 2009 at 10:47 pm

    Steve Sailer has often called the recession the “diversity recession” due to the concentration of the subprime mortgage market within minority homeowners. The numbers are hard to come by, but the figures that do exist support much of what Steve has said.
    I was curious to see what happened at the peak of the housing market and it seems to have coincided with many of the immigration reform protests in the spring of 2006. The largest events were the mass rallies on April 10 and the Day Without An Immigrant on May 1. There were also many other rallies in March and April (here’s a rundown).
    Here’s a look at peak price dates for the 20 different metro areas in the Case-Shiller Index. These are the seasonally adjusted numbers. I also included how much the index is down from the peak price to the most recent data point.
    Metro…………………………….Peak…………………………..Decline
    Boston…………………………..Nov-05……………………….-15.2%
    Cleveland……………………….Jan-06……………………….-15.5%
    San Francisco………………….Feb-06……………………….-39.5%
    Detroit……………………………Feb-06……………………….-44.0%
    San Diego……………………….Mar-06……………………….-39.3%
    Denver……………………………Mar-06……………………….-8.5%
    Washington…………………….Mar-06……………………….-29.2%
    Phoenix………………………….Apr-06………………………..-52.6%
    Los Angeles…………………….Apr-06……………………….-39.4%
    Minneapolis……………………..Apr-06……………………….-29.2%
    Las Vegas……………………….Apr-06……………………….-56.1%
    Tampa…………………………….May-06……………………….-40.8%
    New York…………………………May-06……………………….-19.5%
    Miami………………………………Dec-06……………………….-46.6%
    Chicago…………………………..Feb-07……………………….-22.8%
    Atlanta…………………………….Apr-07……………………….-19.0%
    Dallas………………………………Apr-07……………………….-5.3%
    Portland…………………………..May-07……………………….-20.2%
    Seattle…………………………….May-07……………………….-22.8%
    Charlotte………………………….Aug-07……………………….-11.5%
    Eleven of the 20 markets peaked between February and May 2006. I’m not saying that the immigration protests caused the housing bubble. That was forming for a long time. The bursting of the bubble’s was long overdue and perhaps the dislocation in the housing sector brought on by the protests impacted the markets. Then, once the slide started, it couldn’t be stopped.
    This evidence is very circumstantial but I think the hypothesis has merit. As they say, more research is needed.

  • Sunday Links
    Posted by on December 27th, 2009 at 5:54 pm

    Here are a few items I’m reading.
    William Voegeli on the disaster that is California
    Phil Birnbaum on the performance of pitchers.
    Dave Barry’s brilliant take on the year 2009.
    James Altucher comes out against homeownership.
    Kid Dynamite on mean-reversion and momentum investing.
    Finally, here’s the 2010 Bespoke Roundtable which I participated in.

  • The Trill Is Gone
    Posted by on December 26th, 2009 at 11:40 pm

    Professor Robert Shiller floats the idea of national governments using equity financing. The idea would be to issue equity shares called trills, a one-trillionth equity stake in a national economy, that pay quarterly dividends that are tied to the gross national product.
    Equity, however, is quite different from debt in that equity represents a legal claim on real assets. Debt is simply renting capital. When the renting is done, so is the cash flow. But equity is forever and with it comes a having a say in how the enterprise is run. So would trill holders get to vote in how the country is run?
    I’m not so sure if that’s constitutional (but I could be persuaded that we need a new electorate). Or possibly these would represent a form of non-voting shares. Could the Iranians buy them on the open market? Shiller doesn’t say. Bear in mind that we would never let China buy, say, one of our major aerospace companies.
    Shiller thinks that one trill could go for around $1,400 which would represent a yield of 1% based on its $14 dividend. This is, of course, completely insane. It would value the entire United States at $1.4 quadrillion. That comes to about $4.7 million for every person in the United States, including children.
    How does that stack up against other studies? In the book, From Poverty to Prosperity, authors Arnold Kling and Nick Schultz include a chart on page 38 which lists per-capita wealth of different countries. For 2006, the U.S. is listed at $512,612 (the data is from the World Bank).
    Shiller writes:

    The Standard & Poor’s 500-stock index now has a dividend yield of 2.3 percent. The dividend yield on trills might be much lower, reflecting the substantially higher long-term growth rate of G.D.P. relative to S.& P. dividends — in real terms, 3.1 percent versus 1.1 percent a year, respectively, since 1957.

    Shiller makes a few mistakes here. First, dividends are paid out of earnings. They’re not the whole thing. GDP is basically equivalent to national earnings. In other words, he’s saying that America’s P/E ratio could be around 100.
    Secondly, there’s no economic reason why dividends need to continue to grow slower than GDP. That’s simply a preference of corporation’s payout ratio, which is often tied to tax policy. It all comes out of the same source. Corporate profits usually make about 10% of GDP. It fluctuates +/-2% or so but 10% seems to be the mean.
    Plus, Shiller’s numbers are misleading. Dividends are unusually low right now thanks to the TARP restrictions and the recession. Looking at Shiller’s website we can see that real dividends grew by 2.23% annualized from 1945 to 2007 which encompasses a drop in payout ratios from about 80% to 40%.
    The trill idea is basically to have a payout ratio of 100%, but simply calling this a dividend doesn’t mean it will be valued like a dividend. If the cash flow necessary for dividends grew by just 1.1%, then the dividend yield would be much higher than the S&P 500 not lower. Shiller gets it backward.
    Finally, even if these trills were possible, they’re a terribly idea. The struggle in corporate financing is between equity and debt. The game isn’t hard to understand. You issue debt when yields are low and you sell stock when shares prices are high. It’s that simple. The U.S. benefits enormously by being the reserve currency of the world. Short-term yields are microscopic.
    Put it this way: If you lend Uncle Sam $100 right now, at the current rates, you’ll make a profit of one penny in three months’ time. That’s a great deal for us. Once people stop lending us money, then we can sell off the Liberty Bell. Until then, we have no use for trills.
    David Merkel and Robert Wenzel have more.

  • The Talented Mr. Buffett
    Posted by on December 26th, 2009 at 8:08 pm

    Felix Salmon highlights Warren Buffett’s ability to be the good guy even when his companies’ practices are rather ruthless. Berkshire Hathaway has eliminated 21,000 jobs and it won’t impact Buffett’s nice guy image one bit. Felix quotes Alice Schroeder that Buffett is good at hiring bad cops to do the dirty work and protect him from any blowback.
    It’s hard to imagine but Buffett wasn’t always seen as the good guy. In the 1970s, before they were well known, Buffett and Munger bought the Buffalo Evening News. The Buffalo Courier-Express, a rival newspaper, did everything they could to make them seem like an evil out-of-town heartless capitalists. Buffett was beat up hard in the press and I think that episode has stayed with him ever since.

  • 2009 In One Graph
    Posted by on December 26th, 2009 at 1:29 pm

    I apologize for the crowdedness of this chart, but it shows the relative strength of the ten S&P 500 industry groups for this year.
    image882.png
    Here are a few items I noticed. I’m surprised to see the continued strength of tech stocks this year. The trend hasn’t let up. Financial stocks had a huge turnaround since the March bottom, but peaked in mid-October and have been trending lowering ever since. I’m surprised how weak utility stocks have been this year.