Author Archive

  • Share Traders More Reckless Than Psychopaths, Study Shows
    , September 27th, 2011 at 9:43 am

    From Spiegel:

    Two weeks ago, yet another case of rogue trading shocked the financial world when UBS trader Kweku Adoboli was arrested for allegedly squandering some $2.3 billion with a risky and unauthorized investment scheme. The 31-year-old, who had been based in London for the Swiss bank, remains in jail. The bank’s chief executive Oswald Grübel, meanwhile, has resigned over the scandal — the third major embarrassment to rattle the institution in just a few years.

    The situation mirrors a similar scandal at French bank Société Générale, where another young “rogue trader,” Jérôme Kerviel, gambled away billions in 2010. He is still serving a three-year jail sentence. But why do these situations keep arising in the financial world?

    According to a new study at the University of St. Gallen seen by SPIEGEL, one contributing factor may be that stockbrokers’ behavior is more reckless and manipulative than that of psychopaths. Researchers at the Swiss research university measured the readiness to cooperate and the egotism of 28 professional traders who took part in computer simulations and intelligence tests. The results, compared with the behavior of psychopaths, exceeded the expectations of the study’s co-authors, forensic expert Pascal Scherrer, and Thomas Noll, a lead administrator at the Pöschwies prison north of Zürich.

    Appetite for Destruction

    “Naturally one can’t characterize the traders as deranged,” Noll told SPIEGEL. “But for example, they behaved more egotistically and were more willing to take risks than a group of psychopaths who took the same test.”

    Particularly shocking for Noll was the fact that the bankers weren’t aiming for higher winnings than their comparison group. Instead they were more interested in achieving a competitive advantage. Instead of taking a sober and businesslike approach to reaching the highest profit, “it was most important to the traders to get more than their opponents,” Noll explained. “And they spent a lot of energy trying to damage their opponents.”

    Using a metaphor to describe the behavior, Noll said the stockbrokers behaved as though their neighbor had the same car, “and they took after it with a baseball bat so they could look better themselves.”

    The researchers were unable to explain this penchant for destruction, they said.

    Speaking of traders, Cullen Roche of Pragmatic Capitalist points us toward this video which made the rounds yesterday. Lots of people think this trader in the video is some sort of brave truth teller.

    My take is that his comments are silly and frivolous. He doesn’t say anything more than “things are bad because they’re bad because they’re not good.” Sadly, this sort of thing is popular these days.

    Felix Salmon has more.

  • Morning News: September 27, 2011
    , September 27th, 2011 at 5:22 am

    Global Takeover Rebound Falters on European Woes

    European Shares Lifted by Euro Zone Debt Plan Hopes

    European Loan Growth Quickened in August, Defying Debt Crisis

    Strikes Grind Greece to a Halt

    France’s Pre-Louis XIV System Helps Cap Debt Costs

    S&P Forecasts Strain for China Property Developers

    Gold Rallies After Biggest Three-Day Drop Since Lehman Collapse

    Geithner Tells Europe to ‘Get On With It’ After Global Chiding Over Crisis

    Freddie Mac Loan Deal Defective, Report Says

    Sales of New U.S. Homes Fell to Six-Month Low in August

    S.&P. Target of Inquiry in Securities

    Buffett Spots Fresh Bargain: Shares in His Own Company

    Rival Ad-Tech Firms to Become One

    Deloitte Sued for $7.6 Billion, Accused of Missing Fraud

    JPMorgan Seeks to Move Lehman’s $8.6 Billion Lawsuit

    Goldman Sachs Draws Up Deeper Cuts

    Jeff Miller: Investors: Prepare to be deceived on the Europe Story

    Phil Pearlman: The Tao of Missing a Trade

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  • SEC May Move Against S&P
    , September 26th, 2011 at 12:47 pm

    The AP reports:

    The staff of the Securities and Exchange Commission is considering recommending civil legal action against Standard & Poor’s over its rating of a 2007 collateralized debt offering.

    Collateralized debt obligations, also known as C.D.O.’s, are securities tied to multiple underlying mortgage loans. The securities generally gain value if borrowers repay. But if borrowers default, investors lose money. Soured C.D.O.’s have been blamed for making the 2008 financial crisis worse. Ratings agencies have been accused of being lax in rating the investment.

    The S.E.C. staff said it may recommend that the commission seek civil money penalties, disgorgement of fees or other actions.

    S.& P. has been under fire for its recent downgrade of United States long-term debt, as well as several bad calls it made leading to the financial crisis and economic meltdown that began in 2008. The unit’s president stepped down last month.

    McGraw-Hill Companies, which owns S.& P., said Monday that it received a so-called Wells notice from the S.E.C. on Thursday. A Wells notice is a warning to a company that the commission is considering enforcement action.

    S.& P. said it has been cooperating with the commission and plans to continue cooperating on the matter.

    Shares of McGraw-Hill ($MHP) are down about 1% today.

  • The Plunge in Microsoft’s Valuation
    , September 26th, 2011 at 12:28 pm

    For the last 16 months, shares of Microsoft ($MSFT) have mostly been locked in a tight trading range between $24 and $28 per share. The stock has crept out of that range only a few times.

    What’s amazing is how far Microsoft’s valuation has fallen (see chart below). The stock dipped below $25 per share today. For the last fiscal year, the computer giant earned $2.69 per share, so that’s a trailing P/E Ratio of 9.3.

    Analysts on Wall Street expect earnings for the current fiscal year, ending in June 2012, of $2.86 per share. For the year after that, analysts see earnings of $3.13 per share. So the company is still growing, albeit not like it was 15 years ago.

    The chart below shows MSFT’s price over the last ten years along with its earnings-per-share and P/E Ratio. Notice how steeply the P/E Ratio has plunged.

    Basically, MSFT has shifted from being a growth stock into being a value stock. It must sound odd to anyone who remembers the go-go days of the 1990s to call Microsoft a “value stock,” but look at the facts.

    The company just raised its quarterly dividend by 25% to 20 cents per share. At $25 per share, an 80-cent annual dividend comes yields 3.2% which is more than a 30-year Treasury.

    Bear in mind that Microsoft is rated Triple-A while U.S. government debt is not.

  • Icahn Pulls Out of Clorox
    , September 26th, 2011 at 11:36 am

    The AP reports:

    Billionaire investor Carl Icahn’s withdrawal of his slate of directors for Clorox Co.’s board likely stemmed from his inability to find a potential buyer for the consumer products company, an analyst said Monday.

    “We conclude Icahn’s real learning was likely that no strategic acquirer was ready, willing and able,” John San Marco of Janney Capital Markets wrote in a client note.

    In a filing with the Securities and Exchange Commission, Icahn said he still thinks selling the company — which makes salad dressing, beauty products and other goods — is the best way to maximize shareholder value but that most shareholders don’t seem to support the idea.

    Icahn, known for shaking up struggling companies, had proposed to either sell Clorox or buy it himself for at least $78 per share. The company had dismissed the proposal as not credible. In August, Icahn said he wanted to install himself and 10 other directors on the company’s board.

    I can’t say I’m surprised. The stock is currently at $66 per share. This was a waste of time and money for Icahn. The share price of CLX is now lower than where it was before Icahn started this crusade.

    This is what I wrote two months ago when CLX was at $74:

    In my opinion, these bids over-value Clorox. Wall Street currently expects the company to earn $4.06 per share this fiscal year (which ends next June). That values CLX at nearly 20 times forward earnings. That’s just too rich.

    I hate watching boards shoot down offers of over-payment. I doubt an offer like this will come again soon. I’m not sure any competing bids will come along, and Icahn may be forced to pull his offer. If I were a CLX shareholder, I’d get out of the stock right now.

  • Gold Continues Its Plunge
    , September 26th, 2011 at 10:40 am

    Thanks to the Fed’s Operation Twist, gold continues to fall:

    Gold is often sold off as a means of raising dollars when funding conditions deteriorate, much as they did in late 2008 with the onset of the credit crunch that ensued from banks withholding lending because of their concern over counterparty exposure to toxic U.S. mortgage-backed assets.

    “Gold is one of the few assets that remains in positive territory this year, in a sense it is one of the last assets standing, and because of this as investors head for cash they sell the assets that have performed. Essentially gold is a victim of its own success as liquidity trumps,” wrote UBS analyst Edel Tully in a note.

    Silver came under fire, falling by as much as 16 percent at one point in the day and set for its worst three-day fall on record, having lost more than 25 percent in this period.

    The spot price was last down 6.7 percent at $29.00 an ounce, its lowest since last November.

    Platinum fell by 3 percent to $1,559.25 an ounce, its lowest since May last year, while palladium recovered from an earlier 5.0-percent fall to trade up 0.4 percent on the day at $637.22 an ounce, around its lowest since last October.

  • Berkshire Hathaway to Buy Back Shares
    , September 26th, 2011 at 10:17 am

    As I’ve said many times, I’m not a fan of share buybacks. My view is that companies ought to focus on their businesses and not waste their time trying to financially engineer a higher share price.

    When in doubt, excess cash flow should go to investors in the form of dividends. If investors then wish to buy more stock, that’s their decision. I hope that someday the tax fund is more favorable to that decision. I also think companies often use share buybacks to mask the extent to which they’ve diluted their stocks with executive stock options.

    As such, I was surprised to see that Berkshire Hathaway ($BRKA) has announced a share repurchase. The stock has been hit hard lately so there’s been more pressure on the company to do something. Berkshire has said that it will spend no more than a 10% premium of book value on share repurchase of the A and B shares.

    Berkshire is currently sitting on a war chest of $38 billion. Sometimes I wonder if having too much cash is a problem for companies. It’s as if the giant piggy banks distort their vision and they think they have to spend it all. This leads to poor acquisitions or countless share repurchase programs. The only benefit I see is that they generate positive press releases.

    This repurchase is an interesting and surprising move coming from Buffett. He has said that it’s harder for him to see promising acquisition candidates given Berkshire’s size. The company said it won’t have its cash position fall below $20 billion.

    The shares are up about $5,000 today.

  • Morning News: September 26, 2011
    , September 26th, 2011 at 5:17 am

    Europe Stews on Greece, and Markets Sweat Out the Wait

    German Government Confident on Euro Rescue Fund

    Tokyo Shares End Down; Nikkei Hits 29-Mo Low On Weaker Euro

    PBOC’s Zhou Says ‘Too Early’ to Decide How to Aid Europe

    Euro Remains Above Average Amid Debt Concerns

    Polish Zloty Goes From First to Worst Amid Crisis

    As Sides Dig In, Panel on Deficit Has an Uphill Fight

    UBS in ‘Disarray,’ Ermotti Named Interim CEO

    Record Dividends Lure Morgan Stanley to Asia as Equities Drop

    Netflix Secures Streaming Deal With DreamWorks

    Samsung’s Legal Woes Threaten to Crimp Tablets, Chips

    Boeing Sees 787 as Jet Lineup’s ‘Backbone’ With Delay Set to End

    Chevron, Partners Approve $29 Billion LNG Project

    Anglo-Dutch Publishing Group Reed Elsevier to Buy Accuity

    Europe Plan In Works Is A Game Changer

    Joshua Brown: This Trend is Nobody’s Friend

    Epicurean Dealmaker: A Victim of Soycumstance

    Be sure to follow me on Twitter.

  • BOATLIFT, An Untold Tale of 9/11 Resilience
    , September 25th, 2011 at 1:25 pm

  • Emanuel Derman on the Perils of Pragmamorphism
    , September 24th, 2011 at 11:52 am

    Wise words:

    Models are different. Models are metaphors or analogies. Calling the brain an electronic computer is a model. Calling a computer an electronic brain is a model too. These are analogies, based on similarity, not identity. They are graven images, useful but not very accurate.

    Models tell you only what something is more or less like. Theories tell you what something actually is.

    In economics one can make only models. The Efficient Market Model that has gone so badly awry compares stock prices to smoke diffusing through a room, and models them with the physics of diffusion. But those are flawed analogies, not theory or fact.

    Therefore the similarity of physics and finance lies more in their mathematical language, their syntax rather than their semantics. There is no grand unified theory of everything in finance.

    The world is not a model.

    Read the whole thing.