Archive for December, 2009

• The Stock Market Fails to Outperform the Stock Market
  Eddy Elfenbein, December 2nd, 2009 at 2:52 pm

  Felix Salmon points to a study by Ken French and Eugene Fama showing that the returns of mutual funds are pretty evenly distributed. The tails are a bit fatter than the bell curve would suggest. The study also shows that fees basically eat up all the alpha. (This leads Matthew Yglesias to call the entire mutual fund industry “an elaborate fraud.”)
  Felix writes:

  For the vast majority of actively managed funds, true α is probably negative; that is, the fund managers do not have enough skill to produce risk adjusted expected returns that cover their costs.

  Personally, I’m happy with some negative alpha out there because it means more for me. However, this study doesn’t impress me much because it looks at the fund industry as a whole. What the study shows is that the stock market doesn’t outperform the stock market. I can live with that. What would be more interesting is to see if the small group of active managers with positive alpha continues to have positive alpha. That’s the key.

• The World’s Tallest Buildings and Market Bubbles
  Eddy Elfenbein, December 2nd, 2009 at 12:47 pm

  
  Here’s a look at the relationship between the successive tallest buildings in the world and market bubbles. Via Tyler Cowen, I see that Ed Glaeser writes “Dubai now has the tallest building in the world, and 11 skyscrapers that are taller than any European building.”

• The Geeks Have Won
  Eddy Elfenbein, December 2nd, 2009 at 12:31 pm

  This is the kind of story the media loves to write:

  Traditional floor trading “really is an alpha-male activity,” said Brett Steenbarger, and an associate professor of psychiatry at State University of New York at Syracuse and an expert in the psychology of trading. “You get these highly competitive people taking a good amount of risk … It’s like being in a locker room. In contrast, computer programmers are almost like a think tank.”
  Now, with high-frequency trading representing some 60 percent of U.S. stock trades, the atmosphere appears to owe as much to Arthur C. Clarke and artificial intelligence as to Gordon Gekko and the 1987 movie “Wall Street.”
  “They are introverts, some are socially awkward, and they don’t seek publicity. They are the type of guys you would see at a Star Wars convention,” said Sang Lee of Aite Group.
  High-frequency traders are practical, problem-solving people with an engineering background. “It’s a very intellectually challenging field — it’s extremely exciting to develop a strategy, implement it and see it make money,” Mr. Steenbarger said.
  And it can be very lucrative, with a programmer typically making 10 percent commission on the money his model generates, said Irene Aldridge of Able Alpha Trading, a one-time quantitative specialist at CIBC in Toronto who has a forthcoming book on the practicalities of high-frequency trading and algorithmic strategies.
  The best programmers can make tens of millions of dollars a year. That was even the case during last year’s financial crisis, as great volatility offered both risks and opportunities for high-frequency traders.
  “It’s a highly technical, mathematical game,” Mr. Berkeley said. “They are playing a very precise game of statistically estimating and predicting over the next three to five seconds whether there is going to be any liquidity in that stock and where it is. And how they can take it without being seen and without leaving any tracks.”
  Low key and somewhat awkward, these introverted but brilliant traders look up to James Simons, the Renaissance Technologies fund manager known as the “King of the Quants.”

• High-Frequency Trading Surges Across The Globe
  Eddy Elfenbein, December 2nd, 2009 at 10:02 am

  From Reuters, here’s an interesting article on the spread of high-frequency trading:

  Turf battles between exchanges also sometimes prevent the kind of interconnected market approach that provides fertile ground for high-frequency trading. Traditional brokers and institutions, whose positions are threatened by upstart trading houses, also help to erect barriers.
  But the high-frequency wave, estimated to be responsible for about 60 percent of U.S. stock trading, has already washed over much of Europe and is being felt in some emerging markets, particularly in Latin America.
  It is also making inroads in futures, options and foreign exchange.
  In Brazilian stocks, there are signs that high-frequency trading is starting to get a grip, and some relatively small markets like Mexico and Colombia are encouraging major U.S. trading firms to bring in their latest rapid-fire trading techniques.
  Smaller markets are attracted by the promise of more liquidity, which can make investing and trading cheaper and easier for everyone and help those who want to raise capital.
  Concerns about algos gone wild setting off a market panic are secondary.
  “It’s a virtuous circle. The more people come, the more other people want to come,” said Martin Piszel, head of alternative execution services at CIBC World Markets, the investment banking arm of Canadian Imperial Bank of Commerce .

• I Didn’t See This One Coming
  Eddy Elfenbein, December 2nd, 2009 at 9:56 am

  From the killing fields to the trading floors:

  Cambodia set to build 1st stock market

• Huge Earnings Beat for Jos A. Bank
  Eddy Elfenbein, December 2nd, 2009 at 9:18 am

  The men’s clothier earned 63 cents per share for the third quarter which was eight cents better than the Street. Same-store sales rose 3.3%. The stock is the one of the most volatile members of our Buy List. Fortunately, it’s been volatile in a good way this year. Shares of Jos. A. Bank (JOSB) are up 63% this year.

• Green Mountain Raises Bid to $35 a Share
  Eddy Elfenbein, December 2nd, 2009 at 9:13 am

  This is crazy!

  Green Mountain Coffee Roasters Inc. Wednesday raised its bid for Diedrich Coffee Inc. to $35 a share in cash, keeping up a bidding war between Green Mountain and Peet’s Coffee & Tea Inc. for the single-serve coffee brand.
  Green Mountain, which had earlier offered to buy Diedrich for $32 a share in cash, said in a statement its new offer values Diedrich at about $290 million.
  Peet’s, which on Tuesday raised its offer for Diedrich to $32.50 a share in cash and stock, said Wednesday in a statement that it believed its proposal remains superior and thinks there are “significant antitrust issues” associated with any Green Mountain proposal. “We will take the next few days to consider all our alternatives and, as always, take the action we deem to be in the best interests of Peet’s shareholders,” said Peet’s CEO Patrick O’Dea.

• Some Odd Football Stats
  Eddy Elfenbein, December 1st, 2009 at 2:42 pm

  Despite being 40-years-old, Brett Farve is having the best season of his career, at least going by passer rating. Through Sunday, Farve’s passer rating is 112.1 which is the sixth-highest of all-time (although second to Drew Brees for this year). Farve’s previous high came 14 years ago when his rating was 99.5 which is the 49th best of all-time.

  Chris Johnson of the Titans already has 1,396 yards rushing on just 217 carries. He has touchdown runs of 85, 89 and 91 yards this season. Johnson is averaging 6.43 yards per carry which is the highest for a full-time back in the last 50 years.

  Thanks to a pick last night, Darren Sharper has eight interceptions for the year including three that he’s returned for touchdowns. Sharper is now the active leader in interceptions with 62 (that’s tied for 7th all-time). He has 11 lifetime touchdowns which is second all-time, just one behind Rod Woodson. On career yardage, he’s also second to Woodson trailing by 92 yards.

  The odd thing about interceptions is that 10 in one season seems to be like “hitting the wall” in a marathon. Since 1981, 12 different players have had 10 interceptions in one season but no one has gotten to 11. This might be the Nigel Tufnel Theory of Defensive Backs.

• North Korea Revalues Currency by 100-to-1
  Eddy Elfenbein, December 1st, 2009 at 1:22 pm

  Something tells me this isn’t going to work:

  In an alleged bid to curb inflation and suppress its growing black market, North Korea implemented a currency revaluation on Monday, according to Yonhap, the South Korean news agency.
  The exchange rate between old and new currencies is 100 to 1, with the old denomination of 1,000 won notes being replaced by 10 won notes.
  It is the first time in 17 years that the hermit kingdom has revalued
  its currency and the effect in the capital was instant. “Many people were taken aback and confused,” said one source to Yonhap. “Those were were worried about their hidden assets rushed to the black market to swap them for dollars or Chinese yuan. The yuan and the dollar jumped,” he added.
  “When the news spread in the jangmadang (markets), people panicked,” reported the Daily NK newspaper, quoting a source in the North Eastern province of North Hamkyung. Another source, in the Western city of Sinuiju, on the border with China, told the paper: “Traders gathered around currency dealers. Chaos ensued when currency dealers tried to avoid them.”

  It’s really shameful that a country has mismanaged its currency so badly.
  Why are you looking at me like that?

• How to Value Gold
  Eddy Elfenbein, December 1st, 2009 at 12:41 pm

  Barry Ritholtz posts a chart from Albert Edwards of SocGen which tries to show if gold is overvalued or undervalued. This chart reiterates the point I’ve made before that I’ve never seen a set of variables that closely tracks the price of gold.
  I don’t see how useful a valuation metric is when the price is often one-fifth of where it should be.
  One of Barry’s commentors sums it up well:

  Let me get this straight… Gold has been ‘inexpensive’ for for roughly 38 out of the past 40 years, and is now near a record low?