Capital Markets - News and analysis

Keywords: Corporate Profits, GDP, Growth

Forbes: The Cyprus Bank 'Bail-In' Is Another Crony Bankster Scam, May 3, 2013

..."I have been an advocate of restructuring insolvent banks according to these basic capitalistic principles, which requires no public funds.

The difference with the “bail-in” is that the order of creditor seniority is changed. In the end, it amounts to the cronies (other banks and government) and non-cronies. The cronies get 100% or more; the non-cronies, including non-interest-bearing depositors who should be super-senior, get a kick in the guts instead.

Here’s what it looked like in Cyprus:"

read more in Forbes

Keywords: Cyprus, Bail Outs

Keywords: Long Term View, Focus, Value Investing

Kimbro, Marinilka Barros and Xu, Danielle, Should Shareholders Have a Say on Executive Compensation? Evidence from Say-on-Pay in the United States (February 2013). Available at SSRN: http://ssrn.com/abstract=2209936 or http://dx.doi.org/10.2139/ssrn.2209936

Abstract:

"This paper examines the SEC 2011 regulation requiring an advisory (non-binding) shareholder vote on the compensation of the top five highest paid executives – “say-on-pay” (SOP). Using a unique dataset of the first two years of SOP votes from the Russell 3000, we find approval (reject) votes are associated with firms that have: better (lower) financial performance, higher (lower) market returns, lower (higher) returns volatility, lower (higher) total compensation, lower (higher) abnormal CEO compensation and lower (higher) abnormal accruals. We also find evidence to suggest that firms that receive a high level of SOP rejection votes subsequently reduce the growth of executive compensation levels. This study contributes to the literature in two ways. First, it is the first to empirically examine the first two years of SOP votes in the United States. Second, our analysis provides evidence of shareholder efficiency in identifying excessive CEO compensation and poor financial performance, thus suggesting that shareholder voting rights are an effective mechanism of corporate governance that addresses the problem of incomplete contracts and management rent extraction. The first two years of SOP votes in the US votes show a great degree of shareholder sophistication in recognizing the monitoring and reward tools that need to coexist between the owners and firm managers."

Keywords: Say on Pay, Corporate Governance, Executive Compensation, Voting Rights

Fusionmarketsite: Exclusive interview with Felix Zulauf, Jan. 2013

We recently sat down with world-renowned money manager Felix Zulauf to get his view on global markets. Felix discusses the European debt crisis, the rebound in Chinese equities, the recent Japanese election and its impact on their markets, the U.S. markets in light of our fiscal issues, and much more. read more on Euromarketsite

Keywords: Felix Zulauf, Euro, Global Economy, China

Keywords: US Economy, Eurozone Economy, S&P, Euro Stoxx

Keywords: S&P, Tech Stocks

Conrad, Christian and Zumbach, Klaus Ulrich, The Effect of Political Communication on European Financial Markets During the Sovereign Debt Crisis (December 12, 2012). University of Heidelberg, Department of Economics, Discussion Paper No. 536. Available at SSRN: http://ssrn.com/abstract=2188358

Abstract:

"We quantify all statements by major European politicians reported by Reuters during the August 2011 to December 2011 period and show that political communication significantly affects European stock and bond markets as well as the EURUSD exchange rate. Communication with respect to Italy induces the strongest market reactions. Financial markets consider the German bond market a safe haven."

Keywords: Political Statements, Capital Markets, High-Frequency Response

Keywords: Fed, Quantitative Easing, Fed Balance Sheet

IndexUniverse: Malkiel: Cheap Money Advice For The Wired, Dec. 10, 2012

Burton Malkiel, the Princeton economics professor and author of the index investing classic “A Random Walk Down Wall Street,” has a new gig that’s worth taking measure of. The legend of passive investing is now chief investment advisor of Wealthfront, a Silicon Valley-based financial advisory firm that is serving up a dirt-cheap online approach to money management. read more on IndexUniverse

Keywords: Indices, Index, Index Investing, Online Money Management

Just How Wise is the Sage of Omaha? by Megan McArdle, Dec. 6,2012

Say you have a million people stand in a row and flip coins a million times. Each time they get heads, you give them a dollar. Each time they flip tails, you take a dollar from them.


On average your total payout should be zero*: the tails should cancel out the heads. But that doesn't mean everyone ends up with nothing more than what they started with. Some people will be horrific losers, mortgaging the house to cover what they owe you. Others will be rich. And at least one will have a run so phenomenal that you'll think it can't be luck. He must have some sort of secret skill--the Warren Buffett of coin flippers. read more on The Daily Beast

Keywords: Return on Investing, Value Investing

Study: At most a third of us show a consistent approach to financial risk; Empirically rich new study finds most people alter their risk-management approach depending on the type of financial decision, by Peter Dizikes, MIT News Office

Take a moment to consider some of the financial choices you’ve made in recent years. Do you have a consistent approach to your money, either by playing it safe or having a willingness to take risks? Or do you not have a set philosophy, and instead make your financial decisions independently of each other? read more on MIT News

Keywords: Risk Behavior, Financial Decision

Year end is the time for (not often very competent) stock market predictions.

It could be wise to challenge such predictions with more fundamental considerations of proven cracks in the field of value investing.

Such as Warren Buffett:

This "value investing checklist" is also quite useful.

40 Point Stock Checklist

Keywords: Value Investing, Fundamental Company Value

Keywords: Media, Information Business

Pimco: Today’s Global Credit Markets: Where Is the Value? Nov. 2012

...."For example, the Barclays U.S. Credit Index yielded just 2.57% in mid-October. With inflation expectations, as reflected by the breakeven inflation rate on 10-year Treasury Inflation-Protected Securities (TIPS), hovering between 2.5% and 2.6% as of mid-October, investors are barely being compensated for inflation risk – let alone default, liquidity or term-structure risk. So while there are many opportunities out there, being selective – and well-informed – is critical."...

read the whole interview with Marc Seidner, head of PIMCO’s global credit team, here

Keywords: Credit Markets, Inflation Risks, Quality of Projects

Keywords: Investing, Speculation

from bubbles to "free lunches" through appreciation to defaults.. interesting new paper ... where are various markets in right now?

Kakarot-Handtke, Egmont, Make a Bubble, Take a Free Lunch, Break a Bank (October 26, 2012). Available at SSRN: http://ssrn.com/abstract=2167234

Keywords: Bubble Economics, Investment Cycles

Dear Mervyn
....
Best Wishes, George

Letter from the Chancellor to the Governor, Nov. 9, 2012

Keywords: Central Banking, Central Bank Independence

A new paper shows the global multi-asset market portfolio 1959-2011. It represents the views of the market crowd with respect to the pricing and value of all asset classes. In 2011, for the first time in the observation period, equities no longer outweigh government bonds.

Doeswijk, Ronald Q., Lam, Trevin W. and Swinkels, Laurens A. P., Strategic Asset Allocation: The Global Multi-Asset Market Portfolio 1959-2011 (November 2, 2012). Available at SSRN: http://ssrn.com/abstract=2170275

Abstract:

"The portfolio of the average investor contains important information for strategic asset allocation purposes. This portfolio shows the relative value of all assets according to the market crowd, which one could interpret as a benchmark or the optimal portfolio for the average investor. We determine the market values of equities, private equity, real estate, high yield bonds, emerging debt, non-government bonds, government bonds, inflation linked bonds, commodities, and hedge funds. For this range of assets, we estimate the invested global market portfolio for the period 1990-2011. For the main asset categories equities, real estate, non-government bonds and government bonds we extend the period to 1959-2011. To our understanding, we are the first to document the global multi-asset market portfolio at these levels of detail for such a long period of time." Source: SSRN

Keywords: Strategic Asset Allocation, Optimal Portfolio

Strong Share buy back activity is a logical consequence in an environment of shareholder value maximization and modest innovation. Consequently, we need policies which foster quality innovation and not The Great Stagnation.

Jay Ritter has some insights on the relationship between economic growth and investor returns:

Ritter, Jay R., Is Economic Growth Good for Investors? (Summer 2012). Journal of Applied Corporate Finance, Vol. 24, Issue 3, pp. 8-18, 2012. Available at SSRN: http://ssrn.com/abstract=2161183 or http://dx.doi.org/10.1111/j.1745-6622.2012.00385.x

Abstract:

"When measured over long periods of time, the correlation of countries' inflation-adjusted per capita GDP growth and stock returns is negative. This result holds for both developed countries (for which the correlation coefficient is ¨C0.39 using data from 1900¨C2011) and emerging markets (the correlation is ¨C0.41 over the period 1988¨C2011). And this means that investors would have been better off investing in countries with lower per capita GDP growth than in countries experiencing the highest growth rates. This seems surprising since economic growth is generally assumed to be good for corporate profits. In attempting to explain this finding, the author begins by noting that economic growth can be achieved through increased inputs of capital and labor, which don't necessarily benefit the stockholders of existing companies. Growth also comes from technological advances, which do not necessarily lead to higher profits since competition among firms often results in the benefits accruing to consumers and workers. What's more, it's important to recognize that growth has both an expected and an unexpected component. And one explanation for the negative correlation between growth and stock returns is the tendency for investors to overpay for expected growth. But there is another - and in the author's view, a more important - part of the explanation. Along with the negative correlation between long run average stock returns and per capita growth rates, the author also reports a strong positive association between (per share) dividend growth rates and overall stock returns. Such an association is not surprising since unusual growth in dividends is a fairly reliable predictor of increases in future earnings. But another effect at work here is the role of dividends - and, in the U.S., stock repurchases too - in limiting what might be called the corporate overinvestment problem, the natural tendency of corporate managers to pursue growth, if necessary at the expense of profitability. One of the main messages of this article is that corporate growth adds value only when companies reinvest their earnings in projects that are expected to earn at least their cost of capital - while at the same time committing to return excess cash and capital to their shareholders through dividends and stock buybacks." Source: SSRN

Keywords: Economic Growth, Returns