• Wall Street and the Family Feud
    Posted by on August 24th, 2007 at 10:05 am

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    From the Web site, the worst Family Feud Answers:

    Question: Name the worst kind of shoe to run a marathon in.
    #1 Answer: High heels
    Worst Answer: Scuba flippers
    Louie Anderson’s Response: If it’s up there… I’ll be surprised.

    There’s something fascinating about the game show the Family Feud. You don’t have to give the best answer, or the funniest answer. You don’t even need to give a correct answer. All you need to do is give the answer everyone else gives. The show rewards people for being exactly like the largest amount of other people. Anything exceptional is not only discouraged, it’s actively punished.
    I couldn’t help but think of the show as I read this WSJ article on why so many quant funds are having trouble:

    A number of quant funds, which use statistical models to find winning trading strategies, reported heavy losses this month. In many cases, the managers pointed their fingers at other quantitative hedge funds, essentially saying they all owned many of the same stocks and their models told them all to sell at the same time, driving down the share prices, hurting everyone in the process.
    In a letter to investors, Jim Simons of the hedge fund Renaissance Technologies wrote the quantitative funds behind the selling “undoubtedly share some signals in common with our own, and the result has been losses.” It didn’t help that quant funds are among the fastest expanding categories of hedge funds.

    In other words, a lot of folks are running down Wall Street in scuba slippers.

    Filings with the Securities and Exchange Commission show that as of the end of June, quantitative hedge funds often shared large positions in the same stocks. Renaissance held 1.1% of the shares outstanding of NVR Inc., a Virginia construction and home-building company. AQR Capital Management, another quant fund, held 0.9% of the company’s shares and quant fund Numeric Investors had a 1.6% stake.
    NVR stock, which closed yesterday at $571 a share, trades less than most companies of its size. The shares have bounced higher since the selloff, but they are off 8.4% over the past month.
    The overlap in quant funds’ positions wasn’t limited to NVR. Satya Pradhuman, director of research at Cirrus Research, which analyzes small and midsize stocks, found 148 other companies with market capitalizations between $2 billion and $10 billion where large quant funds owned 5% or more of the shares outstanding.
    As a whole, those companies’ shares underperformed the shares of other midcap stocks during the selloff. Mr. Pradhuman found 473 small-cap stocks, with market capitalizations of $250 million to $2 billion, where the quant funds owned 5% or more of the shares outstanding. These stocks also performed worse than other similar stocks.
    The midcap companies where quant funds held big stakes included packaging company Pactiv Corp., toy maker Hasbro Inc. and managed care provider WellCare Health Plans Inc. Small caps included printer Deluxe Corp., consumer-products company Russ Berrie & Co. and health-care equipment maker Zoll Medical Corp.

    The Life of Brian:
    Brian: Please, please, please listen! I’ve got one or two things to say.
    The Crowd: Tell us! Tell us both of them!
    Brian: Look, you’ve got it all wrong! You don’t NEED to follow ME, You don’t NEED to follow ANYBODY! You’ve got to think for your selves! You’re ALL individuals!
    The Crowd: Yes! We’re all individuals!
    Brian: You’re all different!
    The Crowd: Yes, we ARE all different!
    Man in crowd: I’m not…

  • Intangible Wealth
    Posted by on August 24th, 2007 at 9:49 am

    Reason has a fascinating interview with Kirk Hamilton on what really makes a country wealthy, its intangible wealth. This is from the intro:

    Oil, soil, copper, and forests are forms of wealth. So are factories, houses, and roads. But according to a 2005 study by the World Bank, such solid goods amount to only about 20 percent of the wealth of rich nations and 40 percent of the wealth of poor countries.
    So what accounts for the majority? World Bank environmental economist Kirk Hamilton and his team in the bank’s environment department have found that most of humanity’s wealth isn’t made of physical stuff. It is intangible. In their extraordinary but vastly underappreciated report, Where Is The Wealth Of Nations?: Measuring Capital for the 21st Century, Hamilton’s team found that “human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.”

  • Not a Good Day for Pro Athletes’ Investments
    Posted by on August 23rd, 2007 at 3:02 pm

    First, we learn that Joe Montana’s hedge fund was down 12% in August.
    Now, we hear that Latrell Sprewell had his 70-foot yacht seized. Apparently, he’s behind on his mortgage payments.

  • Spiers 2, Portfolio 0
    Posted by on August 23rd, 2007 at 2:58 pm

    Elizabeth Spiers takes a look at the second issue of Portfolio, and she’s not impressed (via DealBreaker):

    The second issue of Condé Nast’s big-budget business mag, Portfolio, arrived on newsstands last week and I plucked one from atop an enormous stack of them at the Union Square Barnes & Noble in New York. Between the weeks of media coverage citing long weekends, staff disagreements, reports of fewer ad pages in the second issue and more recently, the public firing of deputy editor Jim Impoco, the magazine has created enough internal melodrama to stoke curiosity–mine, anyway–about how well the second effort stacks up to the first. The temptation to speculate about the skyscraper stack of Portfolios being indicative of oversupply (the money and resources the company is pouring into the publication) or lack of demand (the target audience isn’t interested in reading it) lingers, but one retail outlet isn’t a legitimate sample size.
    And neither is one reader. But if Portfolio were a high-end business magazine, I’d be an enthusiastic subscriber. The problem is that it’s not. Press coverage has referred to it as a “Vanity Fair for business.” It’s not that, either.
    The unfortunate thing is that it could be both. Portfolio should be a magazine about power, specifically in the private sector: who has it, how they got it, what they do with it, and whether they’re using it for good or evil. (If you’re going to write about Cerberus, for example, I have less interest in how secretive Steve Feinberg claims the firm is than what sort of deals John Snow is cutting in China, with whom, and to what extent the Chinese government is involved–something that has wider-ranging implications than the notion that some hedge-fund managers play against stereotypes and drive pickup trucks.) The magazine should exploit the biggest major advantage that print has over the web and that monthlies can generally do better than weeklies–long-form narrative journalism. There are huge swaths of the private sector that aren’t materially covered right now. These are stories that existing mass-market business publications mostly bypass: They tend to cover large public companies; which are most relevant to the average investor. But that’s a very narrow view of the business world. It’s fine for The Wall Street Journal, which purposefully and usefully focuses on investors, but limiting for a general-interest business magazine.
    That Portfolio hasn’t taken advantage of its opportunity is probably a reflection of editor-in-chief Joanne Lipman’s background, which most famously consists of launching The Wall Street Journal’s “Weekend Journal,” a lifestyle-oriented section that had little to do with covering hard business stories. And Portfolio’s flaws seem to be rooted in its editor’s entrenched habits from doing a very different sort of journalism.

  • 45 Years Ago Today
    Posted by on August 22nd, 2007 at 4:31 pm

  • Wednesday Again
    Posted by on August 22nd, 2007 at 4:02 pm

    For the 21st time in the last 30 Wednesdays, the S&P 500 closed higher. This is also the 56th up Wednesday in the last 81.

  • Comparing 1998 and 2007
    Posted by on August 22nd, 2007 at 3:11 pm

    This chart has been making the rounds and it’s supposed to be telling us EXACTLY WHAT’S GOING TO HAPPEN!!!
    Honestly, I don’t see it but I’ll let you be the judge.
    The Dow from 1998 is the black line and the left scale; 2007 is the blue line and the right scale.
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  • FactSet Research Systems
    Posted by on August 22nd, 2007 at 12:36 pm

    FactSet Research Systems (FDS) is a company whose products most professional money manager are familiar with, but it’s the stock that’s been catching my eye lately.

    The story here is pretty simple: Wall Street is addicted to data and FDS is their dealer. The fundamentals are solid; fat margins, zero debt and nice history of churning out 20% EPS increases.

    I’ll warn you, FDS is expensive although it recently got a little less expense. The shares are off about 20% from their high. I think the market is concerned that many of FDS’ clients are these dearly departed hedge funds. I doubt that’s the case. FDS has a large diversified client base (2,000 clients and 33,000 users). This is a well-entrenched business.

  • The Financial Times: Don’t Cut
    Posted by on August 22nd, 2007 at 10:26 am

    Not everyone is on the rate-cut bandwagon. The Financial Times opines against one:

    Credit fuels the modern economy, and if the dislocation in the money markets lasts another month or two, investment, consumption and growth in the real economy will suffer. Central banks must restore confidence, but rather than cut interest rates they should extend liquidity operations to longer matur­ities, more collateral and possibly even different counterparties.
    Liquidity injections by the Federal Reserve and European Central Bank have brought down overnight interest rates, but longer-term borrowing is still unusually expensive, while US Treasury bills have been trading at panic levels of below 3 per cent. It is hard to borrow using collateral not issued or guaranteed by a government. Central bank intervention has not worked so far.
    This is not a recession panic, as in 1998, when the Long-Term Capital Management crisis coincided with weak economic data.
    Nor is it a panic caused by serious credit losses. Defaults on US subprime mortgages are miles off a level at which triple-A bonds backed by them would suffer losses. When they do trade, the prices can be reasonable: as part of its acquisition by Kaupthing last week, the Dutch bank NIBC sold its subprime portfolio for 78 cents on the dollar.
    The problem is that the bonds do not trade – the crisis is one of liquidity – and that has spread to short-term debt sold by investment vehicles that may be exposed.
    The futures market expects the Fed to cut interest rates aggressively, but unless the Fed expects harm to the real economy, that policy makes little sense. It is indiscriminate and so creates moral hazard in the markets, but there is also a good chance it would not work.
    The Fed has already pushed its main funds rate down well below its 5.25 per cent target, but the problem is not overnight liquidity at banks, it is perceived credit risk on three-month commercial paper. Giving cheaper money to banks might or might not change that perception.
    The lenders of last resort need to find ways to get money through the traditional banking system to the markets where the trouble is. They can do so by agreeing to lend against more securities (the Bank of Canada is already accepting commercial paper); by lending for a few months rather than overnight; and possibly by dealing with off-balance-sheet vehicles directly.
    There should be no handouts – lending should be at penalty interest rates – but what is needed to jump-start the credit markets is more targeted liquidity. Central banks should not crack and cut their policy rates while they have more suitable tools in the box.

  • Fed: Cautiously Optimistic!
    Posted by on August 22nd, 2007 at 10:20 am

    Great news! The WSJ reports:

    Federal Reserve officials are cautiously optimistic that the series of steps they have taken to stabilize markets have started to work.

    Ugh! “Cautiously optimistic” is one of the great all-purpose bullshit media phrases of all-time. It means nothing. It sounds thoughtful and sober, but it really communicates nothing. You can see why central bankers love using it.
    Neil Westergaard nailed the phrase a few years ago:

    What a great all-purpose, meaningless qualifier to keep from looking stupid. It’s much better than just saying “I don’t know.” It implies that that the person really does know something important, but is being conservative and careful in the distribution of information, holding back the unverifiable facts for the good of the republic.
    Or covering their behinds.
    “Cautiously optimistic.” If the economy goes into the dumper again, we can say our earlier caution was warranted. If things pick up, we were right to be optimistic and “knew it all along.”

    The Journal continues:

    Officials acknowledge conditions are far from calm, and markets could easily take a turn for the worse. But they cite stable stock prices, a pickup in issuance of jumbo mortgages and other factors as evidence that in recent days conditions have improved, though gradually, instead of worsened.
    Many on Wall Street are more pessimistic, and believe the Fed will still have to cut interest rates sharply, perhaps starting in the next week or two. But as long as Fed officials think things are getting better, they are less likely to feel pressured to cut interest rates immediately and more likely to wait until their scheduled meeting Sept. 18 to decide.

    Going by the futures market, I’d say the Federal Reserve will cut in September and again in October. I don’t think the Fed wants to break out of its pattern of only cutting rates at meetings. It could, but I don’t think it sees the current situation as being that drastic.
    One of my long-standing criticisms of mainstream market analysis is the centrality placed on the Federal Reserve. This is classic over-agency bias. Sure, the Fed is important, but it’s not that important. The Fed really can’t fight what the market wants. If the market demands a rate cut, well…sooner or later, it will get one.
    Another issue that I’ve noticed is that some observers are treating the market’s recent activity as some major come-uppance for speculators. The market’s decline is not very steep and the most severe pain is confined to a small number of stocks. Yet, people will use any decline as an excuse for public moralizing.
    Let’s keep in mind that equity valuations are still quite modest. Also, growth stocks have outperformed value stocks since the market broke. That’s hardly a come-uppance to irrational exuberance. Viewed from the long-term, this summer is barely a hiccup.
    I still think the risk/reward tradeoff greatly favors equity investors. You could even say that I’m cautiously optimistic.