Friday, September 30, 2005

Forecast For Blogging: Light

The Finance Academic Nerds' annual meeting (actually, the Financial Management Association) is just around the corner. As usual, I'm up against the deadline on on a paper I'm presenting there. In addition, I've been working on various committee-related bits of nonsense, referee reports, and so on.

So, blogging may be light for the next week or so.

Wednesday, September 28, 2005

This Week's Carnival Of The Capitalists

It's a bit late to mention it, but this week's Carnival of the capitalists is up at AnyLetter as usual, here are my picks of the week:
Sarah Lewis has a nice piece on tax-lien certificate investing. It's good, because she lays out both the advantages and disadvantages very well.

Political CalculationsIron Man talks about a recent post by Barry Ritholtz that discusses the performance of various sectors (particularly energy). Iron Man's piece, titled how you look at it disagrees with Ritholtz, and that's good (not that I have anything against Ritholtz, but seeing an issue from multiple perspectives appeals to the academic in me).

I've mention this previously, but anything by Steve Bainbridge on insider trading is worth listening to. This time he discusses the Senator Frist/HCA Insider Trading Controversy.

Consumerism Commentary talks about Raising Your FICO (credit) score. Nuff said.

Barry Ritholtz from the Big Picture tells us There's No Inflation Except Inflation. Sounds like Barry's been watching The Matrix.

Patri Friedman of Catallarchy works at Google. He describes how Google's using internal prediction markets. It's a very clever application of how to use markets to extract information from a diverse (and dispersed) group.

Brian of Financial Reference gives advice on overcoming the fear of investing during recent market conditions.

Since it's not a week at Financial Rounds unless we mention SOX, George at Fat Pitch Financials focuses on the recent SEC vote allowing small companies more time to comply with Sarbanes-Oxley requirements. He talks about possible investment opportunities from firms going private to avoid SOX.
As always, these aren't all the posts, just the ones that caught my eye. Look around, since your tastes are probably different from mine (if they don't, that's a very, very scary thought, and you should seek professional help - quickly.)

Monday, September 26, 2005

Frist, HCA, and Insider Trading

First off, sorry for not posting the last few days. The Unknown Son turns 7 on Tuesday, and we had his birthday party at Chucky Cheese (a.k.a. "Chucky Disease" - if you're a parent, you get the joke) on Saturday since I teach on Tuesday. And, I'm behind deadline on a paper I'm presenting at an upcoming conference.

In any event, there's been a bit of a spotlight this week on Senate Majority Leader Bill Frist's trades in Hospital Corp of America (HCA) stock. According to the story, Frist unloaded shares of HCA held in a "blind trust" just before the company released some disappointing earnings numbers. Since he has family connections to the firm, there's the possibility that he was trading on "inside" information. Given his visibility as Senate Majority Leader, this will be in the news for a while. Here's a roundup from the old (and new) media on some of the major points:
Business Week has a story titled What Did Frist Know---And When. Frist's stock was held in a "blind trust". However, as Inigo Montoya said in The Princess Bride, "You keep using that word. I do not think it means what you think it means."

Tigerhawk presents an interesting argument that Frist was doing the right thing with his actions. Warning- the comments following the post are pretty politically charged - not surprising given Tigerhawk's own strong views on things political.

Steve Bainbridge (who may know more about the legal aspects surrounding insider trading than anybody else around) makes an argument that even if Frist had material nonpublic information, he might not be liable under rule 10b-5 (the applicable statute).

Saturday, September 24, 2005

Intro To Exchange Traded Funds

I just came across this excellent introduction to and analysis of exchange traded funds from the Wharton School of Business. For the uninitiated, an ETF is similar to an index fund, but is traded more like a stock. In an index fund, Net Asset Values are calculated at the end of the day as the portfolio is values. In contrast, the values of ETFs change throughout the day. They have lower management fees than actively traded mutual funds, but buying or selling shares in an ETF involve commissions (like trading a stock).

Hat Tip to Michael Covell for the link.

Thursday, September 22, 2005

Economic Literacy (via Econolog)

Arnold Kling at EconLog has a nice post on Economic Literacy. He links to the most recent Wall Street Journal Econblog - a discussion between Russell Roberts and William Polley , titled "Knowledge Deficit". In it, Roberts says,
...I break economic literacy into two components -- factual and conceptual. Alas, most well-educated Americans are illiterate in both areas.

What is the essence of the economic way of thinking? A good starting point is Frederic Bastiat's idea that what is seen, the direct effect of a policy, is often just the beginning of its impact. Equally or more important is what is not seen. The world would be a better place if people understood that the intention of a policy (no price gouging after a hurricane, for example) does not capture the full effect on our well-being.
Kling goes on to ask his readers how they would devise a lesson to teach first-year Econ students how to understand the role of markets in addressing supply disruptions caused by Katrina. The commenters present some excellent and creative ideas.

The WSJ EconBlog authors mention that they think one of the problems is the "mechanical" way that Econ is still sometimes taught at the intro level. Arnold's commenters' suggestions are pretty much anything but.

However, I think that the real problem in teaching Econ (and Finance, too) is something I recently wrote about - trying to cover too much material in the course of a semester. You can take the top inch off ten square miles of territory, or you can take a one-foot wide core that goes down a couple of miles, but not both. Actually, somewhere in-between is probably best, but I think educators all too often err on the side of "but we have to cover all these topics."

The other advantage of covering a smaller number of topics is that you can tell more stories, use more analogies, and engage the students in more give and take (and do more stuff like Arnold's commenters suggest).

Monday, September 19, 2005

Accountability Check

On September 9, I wrote that I'm trying to become more productive in my research. To that end, I planned on:

1) getting up at 5:30 each morning, and
2) Working on research at least 30 minutes each day.

These goals were inspired by the piece I commented on in the September 7th post. In it, I described the work done by one professor on research productivity. He found out that keeping a journal of how much time you spent writing every day AND SHARING IT WITH SOMEONE ELSE resulted in a phenomenal increase in productivity. So, my hope is that if can get my butt in the chair and my fingers on the keyboard every day, everything else will work out just fine.

In addition, just this last Friday, I recommended the same strategy to a student of mine who was having trouble writing her dissertation. She's supposed to report to me on her "journal", so I figured it's only fair that I do the same with her.

But, as I promised, I also have to report to y'all as to how I did. Overall, I'd give myself a C or a C+.

First, on getting up: I still haven't managed to get up by 5:30, but I did get up by 5:50 for 7 of the last ten days. On three mornings, I was up past midnight the night before (one with the Unknown Son, who had a respiratory infection that required an Albuterol inhaler treatment every three hours), and I just couldn't cut it. I'm still a night owl, so it'll take time.

As for the research and writing, I did manage to write at least something on seven of the last ten days, with an average of 2 hours daily on the "writing" days. Of course, some of this was driven by an upcoming conference deadline, but I'll still take it. As my advisor once said, "I may not work well under deadlines, but without them, I often don't work much at all."

A few days, it worked just as I hoped - I got up before 6:00, and got in an hour or so of work before the Unknown Son came down to join me for breakfast. Ya just gotta love it - an hour to myself for writing before anything else gets in the way, followed by some serious male bonding - cereal for him and coffee for me.

Next week, I'll give a more detailed report as to how I did.

This Week's Carnival Of The Capitalists

This week's COTC is up at Willisms. This week's group of posts has a lot of interesting finance/econ related material. My picks of the week are:
Ironman at Political Calculations blog presents Financial Markets in a Catastrophe. He has some interesting theories about why markets went up slightly during the week of the storm.

Barry L. Ritholtz at The Big Picture presents Gas Futures -- but not retail prices -- Returns to Pre-Katrina Levels. His short explanation - it's your (the consumer's) fault.

THC at The Happy Capitalist presents Widgets and free credit reports. It's a good reminder - check your credit report regularly.

James Hamilton at Econbrowser has a nice piece on Who cares about core inflation?

Dan Melson at Searchlight Crusade presents Lender Discrimination and Shopping for a Home Loan. The article he bases his piece on has gotten a lot of credit. He gets one point right - credit scores differ a lot between people with the same income levels, and the study didn't correct for credit scores.

Brian at Financial Reference talks about how Dividends affect investment strategy.

Mike Landfair at Mover Mike talks at length on What's Wrong with Fiat Money? It looks like he's already getting some lively comments.
As usual, look around. You and I probably have different tastes, so there's also other things you might enjoy that didn't quite do it for me.

Saturday, September 17, 2005

Derivatives Pricing and Derivatives Markets

I've been working my way through Perry Mehrling's book on Fisher Black. The first part focuses on his approach to and impact on the field of finance. I just finished the part of the book that recounted the story behind the development of famous option pricing formula (the Black-Scholes formula). As a result of the pricing model, the options markets exploded in volume. This isn't surprising - once you have a better model for pricing a security, you're more wiling to trade the security. This benefits everyone, since more trading means that risk is traded (reallocated) at a greater pace.

The Wall street Journal recently had an interesting article that shows how a similar development took place in the market for credit swaps. Back in the late 90's, a banker named David Li came up with credit derivatives pricing model that incorporated the concept of "correlated default risk". This model incorporated not only the chance that an individual debt security would default, but also the risk that all (or at least, many) of the securities in a given basket would default at the same time.

This solved a big problem for issuers and purchasers of collateralized debt obligations (CDOs). In a CDO, the issuer takes a basket of debt obligations (bonds, mortgages, or whatever) and turns the basket into a new set of securities. He does this by selling various rights to receive cash flows from these pools. The cash flow rights get sliced up into "tranches", which give the holder the right to various bands of seniority of cash flow. For example, there might be a tranche that gets the right to the first million dollars of cash flows generated by the pool, or to the second, or so on. The lower seniority bands are affected much more by the risk that some of the bonds in the underlying portfolio might default. As a result, the lower-seniority tranches would have to pay a higher return.

This is where a credit default swap comes in. A default swap is a "derivative" security. In other words, its value is based on what happens to another security (in this case, a debt instrument). A default swap is essentially an insurance policy that pays off when the underlying debt instrument defaults. Because of Li's new, improved model for pricing default swaps, the market for these instruments took off. This improved market has been a boon for the residential real estate market.

Here's my reason for m,making this statement. Because of the increased ability to value default swaps, people are better able to transfer (buy and sell) risk. As a result, CDOs become more attractive as an investment (the purchaser can transfer some of the risk through a swap). So, because of the more active market for CDOs, banks and other mortgage issuers can sell off their mortgages more easily. This allows them to free up their cash and write more mortgages. As a result, the mortgage market has a greater supply of money for borrower.

This is not to say that the increased use of credit derivatives hasn't had downsides, but it is a pretty cool development.

Friday, September 16, 2005

The Unexpected Costs of Sarbanes-Oxley

It's been a while since I beat up on Sarbanes Oxley, and it's a slow Friday. So, here we go again. Grant Thornton recently mailed out questionnaires to CFOs, treasurers, and controllers. Based on the 101 responses they received:
sixty-five percent of senior financial executives of public companies surveyed say it’s more difficult today to recruit corporate directors because of the three-year-old federal Sarbanes-Oxley corporate-disclosure law and concerns about higher director liability
....“Sarbanes-Oxley was a needed watershed event in corporate governance, but along with the greater protection of investors, there are increased time requirements for directors,” says Ed Nusbaum, Grant Thornton LLP chief executive officer. “But an even greater obstacle is the fear of litigation.”
Click here for GT's press release.

In retrospect, it's not that surprising - if you increase the "cost" of an activity, you will generally see less of that activity.

Unfortunately, regulators tend to have a static view of the world. By this, I mean that they act as though they can change one part of the rules, and none of the "players" in the system will change their behavior.

Thomas Sowell has a great book that's based on this principle: "Applied Economics: Thinking Beyond Stage One". The title of the book is based on a class he took where the professor gave a scenario to the class and then asked the students what would happen. After Sowell's initial response, the prof then asked

"And THEN what would happen?".

Once Sowell answered this question, the proff then asked again,

"And THEN what would happen?".

It's a good lesson - or every time there's a change in the "rules"that affect the costs, or benefits associated with an action, the players in in the system will change their actions in response. Then, the players will change their actions in response to the players' initial canges, and so on.

Unfortunately, the regulators/politicians who made the initial rule change have often moved on before all the effects of the initial change are played out. Sarbanes himself is a perfect example - he's retiring this year, and we still have barely scratched the surface on the effects of SarbOx.

Wednesday, September 14, 2005

Quirky Academics (via the Chronicle of Higher Education)

Mikita Brottman has a piece in the Chronicle of Higher Education that discusses some of the quirks of academics. She writes:
...Indeed, many of us may have known, and possibly worked with, someone who fits the stereotype of the absent-minded professor -- the kind of person who can mentally calculate to three decimal points but seems unable to match her own socks. Talented thinkers with strange personalities often find a home in academe. On campuses, people are usually willing to overlook the odd behavior of their colleagues, or to accept it as part of the intellectual package; students generally find such characters quirky and lovable.

The absent-minded professor becomes more difficult to handle, however, when his behavior verges on the dysfunctional. All vocations attract certain personality types; academe appeals particularly to introspective, narcissistic, obsessive characters who occasionally suffer from mood disorders or other psychological problems. Often, these difficulties go untreated because they are closely tied to enhanced creativity, as can be the case with obsessive-compulsive disorder, major depression, bipolar disorder, and the kind of high-functioning autism known as Asperger's syndrome.

Click here for the whole thing, and a tip-o-the-hat to Kieran Healy at Crooked Timber for the link.

I'd have to agree that our "tribe" definitely has a higher concentration of quirky characters than found in the general public. The pool of of finance academics seems to actually be comprised of several sub-groups. The theoreticians are more like mathematicians. I recall one professor from grad school (probably the best theoretician I've ever met) that would regularly forget to put the cap back on his fountain pen before he put it back in his shirt pocket. More than once, it would be a couple of days before he noticed.

However, the empirical researchers are usually a bit more normal. Of course, since I'm in this camp, I might just be reflecting my biases. Because empiricists are by the nature of their work connected to the "real" world, they seem to be better grounded. There are exceptions to the rule, but at least in my experience it's been true.

However, I'd have add that many (not all, but more than a few) of the most successful academics exhibit what I call "intermittent minimal functional autism". By that, I mean the ability to shut out the external world and focus on the problem at hand with a sort of tunnel vision until they're done. I recall a couple of my grad school professors (one being the aforementioned "Dr. Fountain Pen"). If they were thinking about a problem, you could probably remove most of their furniture from under their nose and they wouldn't notice it until they came up for air. Of course, they have better publication records than me...

It reminds me of the old joke:

Q: How can you tell an extroverted finance professor?

A: He looks at YOUR shoes when he talks to you!

Monday, September 12, 2005

This Week's Carnival Of The Capitalists

This week's COTC is up at Crossroads Dispatches. There are a lot of interesting posts in a wide varitety of areas. However, here are my picks:
Brian Gongol at uses Hurrincane Katrina to examine cost-benefit analysis' evaluation methods. It points out some of the differences between expected-value and minimaz analyses.

James Hamilton at Econbrowser assesses the economic damage from Katrina in calm after the storm.

Kim Snider at Kimmunications suggests five personal finance lessons the average person should learn from the aftermath of Hurricane Katrina. Read the comments, too.

Anita Campbell at Facteon explains why small businesses often run out of cash in "Cash Flow is the Only Game."

The Real Returns looks at the correlation between inflation and home prices.

As always, look around. Your tastes are probably different from mine.

Welcome Home, Alex

Let's celebrate with Alex Tabarrok. We're fortunate to have him with us.

Sunday, September 11, 2005

Gas Blogging

Here's some encouraging news from the Wall Street Journal:
The weekly difference between the average retail gasoline price published by automotive club AAA and gasoline futures on the New York Mercantile Exchange hit $1.078 Friday, the widest spread since January 2000, when the driving club began publishing data collected through the Oil Price Information Service, a New Jersey-based industry-research firm. Since then, the spread has averaged 62 cents, with the futures trading at a discount because they essentially represent a wholesale price that excludes taxes, transportation fees, service-station markups and other costs.
Click here for the whole article (online subscription required).

For the unitiated, a futures contract is a contract to buy (or sell) a commodity at a predetermined price at some ficed date in the future. So, they give a good indication of expected future prices of some commodity. The fact that gas futures prices are trading an increasing discount to current (i.e. "spot") gas prices could be an indication that prices are in for a fall. It might not be a big one, but it's still encouraging.

Friday, September 09, 2005

Publishing And The Power of Accountability

One of the blogs I recently came across if one called The Program. It's just been added to the blogroll, and I'd recommend it to any academics in the audience.

In it's latest post, the author has collected a list of materials on being a more productive writer. While geared primarily towards academics, its advice is worthwhile for writers of all stripes. Here's the most compelling part:
  1. Write daily for 15 to 30 minutes. Many scholars believe that writing requires big blocks of time. They're wrong. Research shows that scholars who write daily publish far more than those who write in big blocks of time. The problem with big blocks of time is that they're hard to find. In contrast, when you write daily, you start writing immediately because you remember what you were writing about the day before. This leads to impressive production. In one study participants who wrote daily wrote only twice as many hours as those who wrote occasionally in big blocks of time but wrote or revised ten times as many pages (Boice 2000:144).
  2. Record time spent writing daily, share records weekly. Writing daily increases your productivity as a writer. But to write daily you will need to keep a daily record of your writing, and share those records with someone weekly. What difference does keeping records make? Robert Boice led a series of workshops for scholars who sought to improve their writing productivity. Boice stressed the importance of writing daily, keeping a record of the minutes spent on writing, and being accountable to someone weekly. Participants were divided into three groups: (a) The first group ("controls") did not change their writing habits, and continued to write occasionally in big blocks of time; in 1 year they wrote an average of 17 pages; (b) the second group wrote daily and kept a daily record; they averaged 64 pages; (c) the third group wrote daily, kept a daily record, and held themselves accountable to someone weekly; this group's average was 157 pages (Boice 1989:609).
Without records and someone to share them with it is too easy to convince yourself that you will write "tomorrow." But "tomorrow" never comes-or at least it doesn't come very often.
There's lots of other good advice - click here for the whole thing.

The second item is truly astounding - an almost ten-fold difference in productivity (157 pages vs. 17). As I read it, I realized that I need to get a "writing buddy" that I'm accountable to.

Then I thought, "I don't need a buddy, I've got a blog". I know that authors of personal finance blogs often open their finances up to their readers. I'm not all that comfortable with doing that (although hearing how we at the Unknown Household do things might be the Finance equivalent of the Jerry Springer Show - even though there's no dwarves involved, it'd at least make you feel better about your own circumstances). Instead, I'll do it with my writing. So, each week I'll give a short report on the daily time spent writing.

This should fit in well with my goal of getting up earlier. While other stuff got in the way for a while, I've been back on track since school started back up. Although I'm not there yet, my goal is to get up at 5:30 daily and work until 7:00. At that point, it's breakfast with the Unknown Son - our time for male bonding - talking about school, boogers, and whatever else is on his little mind.

Not bad - increased productivity, more to blog about (and talking with my son). Such a deal!

Thursday, September 08, 2005

Iraqi Gasoline Price Controls

I recently posted a short piece on price controls. Now I have a current real-world example of what happens when you artificially cap prices. This article from Reuters talks about price controls on gas in Iraq. It demonstrates many of the classic problems associated with this "solution" to supply shortages - black markets, increased demand, etc...

Remember - you can't repeal the laws of supply and demand with the stroke of a pen.

Wednesday, September 07, 2005

Oil Prices vs. Agricultural Commodity Prices

While driving yesterday, I came across a Senate hearing where they were grilling some official of the CFTC (the Commodity Futures Trading Commission). There was the usual noise about gas and oil prices being too high and about "speculators").

I mentioned this to a former colleague of mine who was a fairly highly placed economist at the CFTC some years back. He made an interesting observation - politicians make noise when oil and gas prices are too high, but they also squawk when corn, wheat, or other agricultural commodity prices go too low. It all depends on who their constituency is.

Tuesday, September 06, 2005

This Week's Carnival of Personal Finance

This week's Carnival of Personal Financeis up at Savvy Saver. Some posts of note are:
The Real Returns has a chart that shows median house prices across the U.S. back to 1963.
Fat Pitch Financials talks about his experience with "special situation" investments".

Finally, given the recent New Orleans tragedy, The Happy Capitalists talks about how to make sure you can get your hands on your important financial information in 10 minutes.
As usual, look around. You might find something else that strikes your fancy.

Monday, September 05, 2005

Grey vs. Pink

All I can say, is WOOF! A must read.

Should Oil and Gas Prices Be Capped?

Now that Katrina has passed, a significant portion of our nation's refining capacity has been taken off line at least temporarily. As a result, gas prices have increased significantly (who thought we'd be nostalgic about gas at $2.50 per gallon). For example (using the gas station on the corner I drive past each day), on Wednesday a gallon of regular was in the mid-$2 range. On Thursday morning, it jumped to $2.99, and was up to $3.49 by Thursday afternoon (it's stayed around there since).

Let the public outcry about "price gouging" begin. For a few examples, see here (San Diego) here (Wisconsin) and here (randomly picked blogosphere rant).

I'd expect that people who read finance/econ blogs are a bit more knowledgeable about prices, supply and demand than the average moonbat. But just in case, Steve Verdon at Outside The Beltway has a great piece titled "Elementary Economics - The Price As A Rationing Mechanism". He does an excellent job of explaining that 1) There's not enough gas for everyone to use unlimited amounts, 2) As prices rise, demand for gas drops, and 3) As prices rise, supplies of gas will increase.

Click here for the whole thing.

I'll add a few points:

1) Gas is a "scarce" resource". That means there's not enough gas to satisfy all demands for it. In other words, if gas were free, there wouldn't be enough to go around.

2) This means we have to have some mechanism to allocate the available gas among the people who want it. You can do it by lottery, by government fiat (i.e. you get a "ration card"), by random chance, by staying in line, or by market mechanisms (i.e. prices).

2) There are always alternative uses for any resource. For example, if there's limited amounts of gas, it can be used to drive your car 100 miles to visit your favorite restaurant, or it can be used for driving someone else for work. If supply decreases (say, following a hurricane), prices rise. If they rise high enough, you might decide that it's not worth it to drive to your favorite restaurant, and instead you might choose to drive to one closer so that you have more money to spend on other things. This leaves more gas available to the folks who place a higher value on it.

3) As article above explains, Demand and Supply aren't fixed - they're tied to price. In other words, as prices increase, the demand for gas drops (people drive less). More important (at least as far as the current gas situation goes), as prices increase, supply increases. So, higher prices give gas producers greater incentives to bring refineries back on line faster.

The end result of the effect of supply and demand is that prices give signals to suppliers (to produce more) and demanders (to drive less, unless it's really, really important) that make them change their behavior. As a result, things correct over time.

Of course, there will be many calls for government to "do something about gas prices". Those making these calls have probably forgotten the not-so-good old gas rationing days of the Carter years. A little history shows that if the government sets prices lower than the "market clearing" price, it messes up both the demand and supply sides of the equation.

From the demand side: since the price is "low", there will be excess demand. In other words, people will want more gas than is available. So, there has to be some way to allocate the available gas (government rules, "first come, first served", etc...).

From the supply side: there will be less gas supplied than there would be at a higher price. In the Carter years, there was little incentive for the producers to make a lot of gas available, since it would sell at a lower price. The supply of gas isn't fixed - just "fixed at a given price". In other words, some oil can be refined into gas at at a cost below $1 a gallon. So, this gas can be sold at a profit at $1+ per gallon, but not below that point. Some oil can't be refined into gas at a cost below $2 per gallon. So, this gas wouldn't be produced unless it could be sold for more than $2, and so on.

One last thing to think about - once the Carter price controls were rescinded (following Reagan's election), supplies increased and prices quickly fell.

Or, as Santayana said, "Those that forget the lessons of history get to enjoy them all over again."

Sunday, September 04, 2005

Is a Hedge Fund Shakeout Coming Soon? This Insider Thinks So (from the New York Times)

The NYT just had a very interesting article on risks associated with hedge fund. This piece, titled "Is a Hedge Fund Shakeout Coming soon? This Insider Thinks So" highlights some of the work done by Professor Andrew Lo of MIT. Professor Lo has done a lot of work with hedge funds and is involved on the practitioner side. His paper (available here) details some of the risks associated with these vehicles (caution: it's an academic paper and is written for "quant jocks", so its' pretty mathematically dense).

One of the key points of the NYT article is that hedge funds' returns are associated with risks that aren't nearly as common in other alternative investments. One of the major ones is "liquidity risk". A lot of the assets traded by hedge funds are infrequently traded. So, the reports issued by hedge funds profiles are either based on "stale" prices (if they don't trade, you don't have "market" prices), or are based on estimates of asset values made by the hedge fund sponsor. This makes allows the sponsor to make the hedge funds' reported returns appear much "smoother" than they actually are.

There are additional problem associated with liquidity risk. One of hedge funds' greatest appeals is that they are relatively uncorrelated with the market as a whole. However, this 'uncorelatedness" may not hold in times of market stress. In particular, their returns may become highly correlated in the event of an exodus of investor capital from these funds. This effect is driven by the same illiquidity of hedge fund assets - if you have to sell an illiquid asset, you have to accept a big discount to unload it quickly.

The article finishes by listing a number of factors that could trigger a hedge fund meltdown - like oil over $100 a barrel (I think the article was written before Katrina) or a tightening of rules at Fannie Mae.

All in all, a piece worth reading - click here for the whole thing.

Saturday, September 03, 2005

Off To Sesame Place

Blogging will likely be light today - we're taking the barbarians (the Unknown Son and the Unknown Daughter) to Sesame Place. It's a couple of hours each way, so I doubt I'll put anything up until late tonight (if at all).

Update: We're back - kids loved it (except for the roller-coaster - they were still a bit young). There are few things better than seeing your kids faces when they get a hug from Cookie Monster or Elmo.

Friday, September 02, 2005

This Is a Show I'd Like To See

I'd clear my schedule for this show:
Here are a few highlights from the hottest Hollywood script you will most likely never see produced on a television or movie screen: • Abu, Ahmed, Musab and Salar, a cell of Islamic terrorists sent to Chicago by a nefarious network resembling Al Qaeda, are getting chewed out by their murderous boss, just in from Afghanistan. (They have been spending the organization’s money like crazy but haven’t blown anything up.) Just then, two deliverymen knock on the apartment door, bearing a huge flat-screen TV.
HT: Scott Scheule at Cattallarchy.

File Synchronization Software

I usually work on my laptop, but from time to time, I also use the desktop in my office, and (since the antenna in my house has on the fritz), my home desktop. As a result, I spend a lot of time shuffling files from one computer to another.

Most of you probably are aware of this, but there's file synchronization software that automatically synchronizes selected folders over the internet. Thursday's Wall street Journal (subscription required for online access) has a good article on two programs - FolderShare and BeInSync. When installed, updating a file in one of the "synchronized" folders results in it automatically being updated on the others over the internet. Pretty cool.

This looks like just the ticket. I recall all the grief I went through when my laptop went down (and the last time the College techies "upgraded" my office computer). I had backups (I am, after all, neurotic), but it was still a pain in the you-know-what, and I had to do too much needless running around.

The article favors FolderShare, but if any of you have experience with file-sync software, feel free to share it.

Thursday, September 01, 2005

"You Gotta You Debits, You Gotta You Credits"

Today's online New York Times has a very revealing article titled "The Opportunity Costs of Economics Education". It comments on a recent study by Paul Ferraro and Laura Taylor of Georgia State University. They asked a simple question on opportunity cost to economics PhDs at a major academic conference. Most got it wrong. Here's the best part:
Unfortunately, however, most students seem to emerge from introductory economics courses without having learned even the most important basic principles. According to one recent study, their ability to answer simple economic questions several months after leaving the course is not measurably different from that of people who never took a principles course.

What explains such abysmal performance? One problem is the encyclopedic range typical of introductory courses. As the Nobel laureate George J. Stigler wrote more than 40 years ago, "The brief exposure to each of a vast array of techniques and problems leaves the student no basic economic logic with which to analyze the economic questions he will face as a citizen." (emphasis mine)

Click here for the whole thing.

I see the same problem in the way finance is taught. In the introductory finance course at many schools, they cover something on the order of 14-15 chapters in a semester. When you ask why, they invariably say, "We simply HAVE to cover (fill in the blanks)". So, the students end up racing through all these topics, and understand very little. If you ask them, "did you cover portfolio variance", they'll answer in the affirmative, but if you ask them to calculate the variance of a portfolio, they can't. Likewise for most topics. I know - in my upper division course, I have to spend the first couple of weeks reteaching the basics of time value (the most important concept in finance). But, after all, they did "cover" all the topics...

At my alma mater, they taught the same class in a way that totally spoiled me for the purpose of working at most other schools. In a rare (for academia) fit of common sense, they realized that you can teach a lot of topics poorly, or a few topics very well. So, they limited the introductory course to a few critical concepts (like time value of money, how to read financial statements, how to value a security, etc...), but completely beat these topics to death.

Father Guido Sarducci used to do a routine where he talked about "Sarducci University". It went something like this:

"In the typical college, you go to school for 4 years. You might spend a whole year studying a couple of accounting classes. After you're done, what do you remember - "you gotta you debits, you gotta you credits". At Sarducci University, we only teach the basics -- "you gotta you debits, you gotta you credits". So you can get all your coursework done in one year instead of four. We got a beautiful campus on the beach. You tell your parents that it takes 4 years - $10,000 per year. You give us $30,000, and you keep $10,000. This way, you can spend three years on the beach, and at the end, you'll still know "you gotta you debits, you gotta you credits"

While humorous, it gets across an important point. Pick what you want people to remember. Then spend more time on those points and drill them home, over and over. The students won't be exposed to as many concepts, but they'll know those few things very well.

It works for classes, and it works for any presentation. Don't try to cover too many points, but if you think it's important, drive it home (over and over).

Update: Truck and Barter and Marginal Revolution just weighed in on this topic. The comments following up on their posts are also worth reading.