May 17, 2008
The Index Fund Internecine Fight
The New York Times has discovered the index fight. Why? Because academics have come to calling each other names over the dispute. The fight itself is definitional. The traditional "index" fund is a fund that matches a well known market index (the S&P 500 or 100, the Wiltshire 5000). These indexes are "capital weighted", that is, the stock prices of component stocks are weighted by the total capital of the issuing company. The funds are based on reams of financial data that shows "managed funds" rarely beat the indexes over significantly long periods of time. Now come the new "index" funds trumpeted by academics that create funds "weighted" and chosen by different measures -- earnings or dividends or a combination of the two. The new funds are also "index funds" because they are based on formulas (indexed to the market). The traditionalists say, with good reason, that these are not index funds but old-fashioned ?managed" funds (they choose "value" stocks over "growth" stocks); they are not based on traditional indexes in widespread use. Using the new fund managers logic, all quant hedge funds are index funds. These are fighting words to the new fund purveyors because "managed funds" have such a bad name. The traditionalists are correct, of course, until an index based on earnings or dividends is created and widely used. But the entire debate is silly -- the proof will be in the pudding. Which funds out perform over time?? The new index purveyors look backward and claim the data is on their side. Many of the new index funds themselves, so far, have not outperformed traditional index funds however. It is an old-fashioned marketing argument for investors money. I welcome the competition and chuckle at the marketing.
May 16, 2008
Bubbles: Free the Shorts
The Wall Street Journal today has a wonder front page story on developments in the study of financial bubbles. (Justin Lahart does a marvelous job) The problem is in the recommended solution by the new scholars: More government interference. A better solution that fits their findings? They discovered that in volatile markets, defined by a wide divergence of opinion on a new event, the bears sit on the sidelines and the bulls buy -- leading to a buying frenzy. Why do the bears sit on the sidelines? It is hard to short. One of the reasons it is hard to short is government interference (which was recently reduced with the repeal of the up tick rule; Cramer and other want the rule back). Government should get out of the way of shorts--let the market devise cheaper ways to short (not the modern ultra short ETFs) and we might have fewer bubbles.
May 15, 2008
The Recession Scare
Now that the preliminary first quarter GDP data is in showing positive but small growth and the markets have indicated we have bottomed in all but housing prices (under which Congress is trying to put an artificial floor, a mistake) those who were screaming about a recession since last summer should be contrite. They are not, of course. Some continue to claim recession (the data is misleading... it will be corrected...unemployment is the real problem... and so on). Others are quietly disappointed!! (Shucks, we are not all going to starve; we are doing better than I thought.") My favorite group, the blamers, just pretends the data did not happen and is still screaming recession (they profit by blaming a targeted "bad" group). The exaggerated claims of recession serve to many constituencies: 1) political candidates who want to oust incumbents by scaring voting, 2) media outlets who want to get viewers and readers by creating false crises that give enhanced incentives to view or read, 3) left wing theorist who are fundamentally uncomfortable with capitalism and claim that it needs to be "softened" to minimize income inequality (and , fill in the blank with any other political claim of exploitation), 4) and, a new group, government officials who can claim to have solved the crises (those who put together the Bear Stearns bailout, for example, and the fed that lowered interest rates precipitously). Many of those in one group are also in another. This cultural pathology is added by our lack-of-pluck. We are not worried about food we are worried about whether we can upgrade our television sets (84 million were discarded last year) or drive our pickup trucks cross country. In the face of minor setbacks we wine and moan; what would happen if we truly faced a major setback?? Would we collapse in a puddle of urine??
Freddic Mac: What a Mess
Freddie Mac, one of two United States chartered companies that own or guarantee the bulk of home mortgages, recorded a net loss for the quarter that was reduced by accounting gimmickry. The true loss is close to $2 billion. Freddie Mac is 1) hemorrhaging money, 2) overleveraged, 4) gone through recent management behavior problems, and 4) will desperately need new capital soon to survive. In other words, this company is on the edge of insolvency. Yet Congress has increased Freddie Mac's ability to guarantee "gumbo" mortgages (the upper limit has been increased from $420,000 to $625,000 (or so) and Ofheo, its regulatory authority is considering lowering its capital requirements. Even more astonishingly the stock is trading at around $28 a share. The market is anticipating that Congress will bailout the company if it struggles even though there is no explicit promise or understanding that Congress must do so. This is a case study in moral hazard. Congress has two ways out of the mess -- neither of which it will take. Slaughter the pig rather than dress it up; or open its mortgage guarantee program up to any financial institution that wants to get in the market (make the pig compete for its supper).
GE Starts its Bust Up
GE, a company that should go through a classic series of spin-offs to focus on its core business, has started the process of divesting some of its units. The problem? It is divesting its appliance unit, its best known consumer brand. Many, many shareholders associate GE with appliances, even though the unit is a small part of its overall business. This could get interesting folks.
May 14, 2008
Three SEC Chairs for Obama
Three ex-Chairs of the SEC for Obama, the headlines scream. Two were Democratic appointees -- so what-- they are frontrunners. But one Donaldson, was a Republican appointee--is Obama better for the markets than McCain. No. Donaldson was a Republican appointee who on every major critical vote sided with the two Democratic Commissioners to outvote the two other Republican Commissioners. He is a major sufferer of "Guilt from Being Rich".
Univ. of Colorado and the new "Chair for a Conservative"
My old place of employment made the front page of the Wall Street Journal yesterday by announcing a new Chair for a Conservative Thinker. There are so few conservatives on campus that the provost has decided to use reverse affirmative action to recruit one to have around. The faculty is upset, for the wrong reasons, of course. There are very few conservative tenured professors on campus and those that do exist are not really true conservatives, they are moderates. Any real conservative -- anti-affirmative action, anti-abortion, Evangelical, anti-social programs -- would suffer constant abuse there. I was labeled a conservative when there and I was not -- I happened to be for smaller government. A real conservative, articulate and outspoken, would blow the place up. The solution is not affirmative action for conservatives, no good conservative would take the chair, but a re-evaluation of the slanted hiring process that brings only soft and hard left candidates to the faculty. The faculty has suggested that the Chair could hold a liberal who "studies conservatives" like Margret Mead studied the Samoans. Isn't that precious.
Colorado is not alone. My niece goes to a school on the east coast that had an announced "Be Good to a Conservative This Week" campaign. The general population has an inkling of the problem on many college campuses but no sense of its depth.
Icahn and Yahoo
Carl Icahn is threatening a proxy fight for some seats on the Yahoo board in an effort to restart the deal with Microsoft. The sad part is that he ought not to have to use the proxy fight avenue. He ought to be able to mount a takeover. But the country's state legislatures and state courts have effectively stopped hostile takeovers and we continue to pay for it.
Thanks Cox for Helping Me
I hold stock in Goldman Sachs, an investment bank that despite not getting caught holding bad mortgages has been hammered in the stock market (dropping from a high of 210 to a low of 165 or so). Recently sanity has prevailed and the stock has been climbing (up to 195 or so), until Cox and the SEC decided to help me. Apparently I do not have enough information on the bank. So in my best interest, Cox announced more investment bank disclosure rules. My stock dropped immediately on his speech and has flat lined ever since. If asked he will still no doubt tell me I am better off somehow.
May 13, 2008
Exxon Not Well Managed?
Exxon, a company that had over 12 billion dollars in profits last year (perhaps the highest in real dollars in modern history for any private company), raising howls of protest from Congress and the left, is apparently not well managed. By the way, Exxon paid 30 billion in federal taxes, more that the aggregate paid by close to forty percent of the country's entire population. Shareholders are sponsoring resolutions to separate the positions of chairman and chief executive officer (CEO) and to give them a vote on executive compensation. Apparently the company is --- not making enough in profits?? Who'd a thought it.
Foreign Companies Not Registering in the US
Wayne Carnall, Chief Accountant in the Securities and Exchange Commission of Corporation Finance confirmed May 1 what we all have suspected. Fewer foreign based companies are registering in the United States. Moreover, over many foreign companies listed in the United States are leaving. Over two-thirds of the European companies listed as of five years ago have left. Carnell attributed the losses to a change in exchange listing requirements that make it easier to leave. The SEC has hoped the change would encourage more to come as the decision to list in the United States would be less binding. Old companies left and new companies did not come. The new gainers?? Israel and the Cayman Islands! The SEC's solution, a new rules proposal (FIRE) that adds regulations for "large accelerated" foreign filers. Not good folks.
May 12, 2008
Congress to Regulate Oil "Speculators"
Congress is considering a bill that will apply CFTC regulations on oil futures speculators to a London based futures trading market -- the Intercontinental-Exchange (ICE). There are two problems: First, any regulations of this type will not affect international market prices, but will cut off United States traders from directly participating in foreign exchanges. Second, Congress ought not regulate "speculators" at all, other than to enforce rules against fraud (wash sales, touting and the like). Congress, if it gets involved, will damage United States futures markets.
May 11, 2008
Oh good gracious. Peter Bernstein article in todays NYT's Sunday business section ("When Should the Fed Crash the Party?") is so predictable it is a bore. He trots out all the cruel statements from "anti-interventionists" and then mentions all the governments successes when intervening in financial crises. He throws a bone to the problems of decision-makers in predicting what to do but concludes with typical flourish the consequences of not intervening would be "unthinkable." What drivel. The argument is flawed because intervention gets us into crises in the first place -- prompting Bernstein and others to then call for corrections and bailouts. At issue is how often our economic lurches are created in the first instance by intervention, not whether intervention "to correct" is always worth the effort.
Congratulations to the Moritz Class of 2008
Saturday was the graduation ceremony for the Moritz Law School Class of 2008. All those attending had a great time. Thanks again for the honor of selecting me to address you so that I would embarrass myself once again in public. Anyone in the class who wants a copy of my remarks can email me. Dale Oesterle