How information gets into price

In most finance classes we talk about how information gets into the price of securities. Here is a great example. Apple (which SIMM owns) has traded down on rumors that Steve Jobs is sick. Traders have been looking for information to prove or disprove these rumors. how far will they go? How about asking frozen yogurt clerks?Steve Jobs In Great Health -- Frozen Yogurt Clerk (AAPL): "Can't

Financial crisis of '08 among the worst ever

An interesting look at the current economic crisis from a historic perspective. Financial crisis of '08 among the worst ever From SignonSan Diego: "Scott Reynolds Nelson, a history professor at Virginia's College of William and Mary, suggests that 2008 may be much more like 1873 than 1929.In 1873, the crisis started in Europe, where cheap mortgage terms spurred a residential real estate bubble.

An Amazing Document On Madoff Said To Have Been Sent To SEC In 2005

What? There are enough sources on this one to report it. When I first saw it I assumed just an internet urban legend, but it seems legit enough (and yet still unbelievable as well) that I at least want to ention it so we can use it in class discussions. Wow!An Amazing Document On Madoff Said To Have Been Sent To SEC In 2005 :: Business News :: Here Is The City News :: The Latest Business &

Traders Say Madoff's Strategy Was Unworkable - WSJ.com

Traders Say Madoff's Strategy Was Unworkable - WSJ.com: "The other red flag easily available to investors was the shallow volume in the options Mr. Madoff claimed to use as a hedge.About $3.25 billion of stock could have been protected by the total S&P 100 options outstanding at the end of November, according to the Chicago Board Options Exchange. Mr. Madoff was thought to have had as much as $50

And the news gets worse

Now there appears to be a suicide tied to the Madoff case...Bloomberg.com: Worldwide: "Thierry Magon de La Villehuchet, who ran a fund that invested with Bernard Madoff, was found dead at his Madison Avenue office today, a New York City police officer at the scene said. The death appeared to be a suicide, he said."

Bernie Madoff: Ponzi For The Long Run

Clusterstock continues to do an amazingly good job at reporting on the Madoff ponzi scheme.What is most puzzling is how one person could create and maintain such a intricate scheme. Just for instance, wouldn't the auditors (a small firm) have seen what was going on? How about those that invested with him?Or even those people supposedly placing trades etc. It leads many to the conclusion that

Tale of the first $350 billion - Dec. 19, 2008

Have you wondered where the first $350 billion went? Here is how CNN reports it:Tale of the first $350 billion - Dec. 19, 2008: ""..checks totaling $168 billion in varying amounts to 116 banks;...committed another $82 billion to capitalize more banks;... bought $40 billion in preferred shares of American International Group (AIG, Fortune 500) so the troubled insurer could pay off an earlier loan

Chinese Banks' Great Leap Backward - WSJ.com

In the department of what else can we worry about? The WSJ suggests that Chinese banks are being pressured to take some major chances.Chinese Banks' Great Leap Backward - WSJ.com: "...risk-prevention institutions built up over the past decade are now under enormous pressure to forgo prudence in the interest of maintaining economic growth. There have been two triggers for this. First, the global

My Favorite Christmas movie; yes with Finance content

Sure it is a great movie even without the finance content, but when you throw in some subprime lending, a liquidity crisis, a run on a bank, and even some regulatory issues, and you have both a great movie and a financial learning opportunity.Yes, it is A Wonderful Life! Surprisingly, the whole thing is online.

History repeats itself

What a GREAT article. It is by Carole Loomis in Fortune, but comes to us via AllAboutAlpha.comFeatured Post Today's Post » Hedge fund industry enters time-warp in January 1970, pops out virtually unchanged in 2008:A few look-ins:"...the similarities between the hedge fund world of 1970 and that of 2008 and truly amazing - almost eerie in fact. Even the 39 year old Warren Buffett makes a cameo

Is compensation to blame?

History will look for answers to what caused the problems, but somewhere in that mix, compensation has to be a part of the problem. From increasing an already risky environment, to rewarding lending to questionable borrowers, to creating incentives to increase information asymmetries, compensation practices have to be examined.From the NY Times:The Reckoning - On Wall Street, Bonuses, Not

'A university bailout? from WSJ.com

'Shovel-Ready' on Campus - WSJ.com: "With the Big Three seeking a bailout from Washington,...executives of 36 public universities, state university systems and higher-education associations, urging Congress and President-elect Obama to rescue them.Mr. Obama has already promised to expand federal subsidies to higher education by increasing Pell grants and making student-loan terms more permissive.

Dilbert on Finance-seriously.

The Motley Fool reports the following: 9 Things You Should Do Instead of Buying Stocks: "Most know Scott Adams only as the creator of Dilbert. But ....Adams' passion for personal finance is matched only by his utter disdain for [individual] stocks. That's right, this keen observer of business and management trends believes that most people, himself included, cannot beat the market buying

Eliot Spitzer Lost Money With Madoff

Class jokes rarely are funny to those not in the class, but since some former students may still br reading the bog I will include the following from Clusterstock. Eliot Spitzer Lost Money With Madoff: "Add the name Eliot Spitzer to the list of prominent people allegedly ripped off by Wall Street trader Bernard L. Madoff. Yesterday at Slate's holiday party Spitzer, who is writing a column for the

Pyramid Schemes Are as American as Apple Pie - WSJ.com

The Madoff fraud has many looking back at past Ponzi Schemes. The best history that I have seen is frm the WSJ (and John Gordon Steele). It is on US Grant and the pyramid scheme that used his name back in the 1880's.Pyramid Schemes Are as American as Apple Pie - WSJ.com: "Ponzi schemes, where early investors are paid dividends out of the money put in by later investors, usually last only a few

Done correcting and break update

Just a fast update on some non finance things:Grades are in. I wasn't sure if I would get them in by the deadline (and technically missed it but by less than an hour) but it is a relief to have them turned in. It was a very good group this semester. Smaller classes than normal, but the quality was excellent. Have several papers calling my name over break. To my co-authors, sorry. But you

Bernie Madoff's Victims: The List

Clusterstock is reporting that not only the Wilpons but also the Mets' minority owner Saul Katz lost money at the hands of Madoff. (also many any others. See the list:Bernie Madoff's Victims: The List from Clusterstock

Mets owners are among those hurt by Madoff

Ok, now it is too much. Before the Madoff fraud was bad before but then it was just the economy and people's life savings (including many charities), now it is also the NY Mets! Yikes.From The NY Times:"Bob DuPuy, the president and chief operating officer of Major League Baseball, said Saturday that he and Commissioner Bud Selig had spoken with Wilpon on Friday. DuPuy said that all three

Madoff arrested, charged; may be facing $50 bln in losses: FBI - MarketWatch

When it rains it pours! As if investors didn't have enough to worry about, you can now add whether their fiduciaries are not only investing poorly, but whether they are ripping them off completely! Madoff arrested, charged; may be facing $50 bln in losses: FBI - MarketWatch: "Bernard Madoff, former Nasdaq Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, was

So much for transparency

Shh. Don't tell them the bad news.I guess we should have expected it. Government agencies are not known for being the most open of groups, but you'd think that in the case of making loans the Fed of all people would be a bit forthcoming. But to date that is not the case, which is a bit disturbing.From Bloomberg.com: Exclusive: Fed Refuses to Disclose Recipients of $2 Trillion in Lending ""The

Stock Picker Bill Miller's Defeat - WSJ.com

We know so much less than we think we know. Just because someone has done well in the past, it does not mean that trend will continue.It is fascinating that the big collapses (he financial debacles that are studied years later as well as the crushing military defeats) often happen after a long period of wins. Why? Because the decision makers fall in love with their ability (over confidence)

U.S. Says It Will Bail Out Christmas - WSJ.com

U.S. Says It Will Bail Out Christmas - WSJ.com: "Government officials are said to be concerned at the risk that the collapse of Santa Claus could pose to the nation's intricately related system of holiday happiness. Though a failure by Santa Claus poses the largest systemic risk, the government is also prepared to step in to bail out Christmas trees, caroling parties and mistletoe producers.....

The Predictive Power of Implied Volatility: Evidence from the Over-the-Counter Stock Index Options Market in Hong Kong and Japan by Wayne Yu, Evans Lui

In preparing for this weekend's derivatives lecture, I found this new paper by Yu and Lui that is consistent with the previous view that Implied Volatility is a better forecaster than either historical (naive) forecasts or GARCH forecasts.One look at their paper from SSRN-The Predictive Power of Implied Volatility: Evidence from the Over-the-Counter Stock Index Options Market in Hong Kong and

When renting a ship to anchor it offshore makes sense (and cents!)

Contango and Backwardation are two terms that confuse many students. But with today's oil markets giving us an historic (and memorable!) example of contango, I trust many more will remember it going forward.First the fast definitions: (want a better definition? see Investorwords.com)Contango: when futures price is higher than spot priceBackwardation: when spot price is higher than futures

Say what? Yep a negative T-bill rate

From Bloomberg.com: Treasury Bills Trade at Negative Rates as Haven Demand Surges :"Treasuries rose, pushing rates on the three-month bill negative for the first time, as investors gravitate toward the safety of U.S. government debt amid the worst financial crisis since the Great Depression.The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent, the

Holding CEOs Accountable - WSJ.com

Jonathan Macey has a great piece in the WSJ on the problems with many boards.Holding CEOs Accountable - WSJ.com: "As board tenure lengthens, it becomes increasingly less likely that boards will remain independent of the managers they are charged with monitoring. The capture problem is exacerbated by the incentives of managers to develop close personal ties with directors."Sounds a lot like

Customers as shareholders or shareholders as shareholders

Learning new things should cause us to rethink our positions. The reevaluation is much preferred over stubbornly clinging to what once seemed to be a good idea. That said there must be a happy median between just shifting in the wind and obstinacy.With that in mind, it is time for a fast finance lesson.Within the nexus of contracts that make a firm there are many ways we can link the various

Warren Buffett: then and now

Clusterstock may have outdone themselves with their great look at Warren Buffett's previous articles. One in 1974, one in 1979, one in 1999, and then a recent opinion-editorial in the NY Times.Buffett Calls The Market Again...And He's Never Been Wrong: "...who is Buffett, anyway? How do we know he isn't one of these jokers who is never in doubt and usually wrong?"While all of the articles are

Looking back at Pearl Harbor

In a week that we spent quite a bit of class time talking about impact of "non linear" events (Black Swans etc) and almost 67 years to the day, I wanted to take a look at some Pearl Harbor sites and then got thinking maybe showing what happened to the US stock market would be interesting. So:Disasters and Their Impact On the Stock Market: "...for Pearl Harbor, on the first day after the attack

Money Factory--Great for a Money and Banking class

If you are in a Money and Banking class, you will definitely want to watch this one!Hulu - National Geographic Channel: Money Factory: "Money: everyone wants it, dreams of it and schemes for it. Find out how U.S. currency is made, faked and protected, and meet the mastermind behind one of the biggest counterfeit.."

The Sky is falling!!! but maybe not all the way

With apologies to chicken little, it is bad out there: over half a million jobs lost in one month and almost 2 million so far this year, stock markets down, people fearing for their jobs, and the governments bail outs seemingly being every day events.Not surprising this bad news is forcing investors to become more risk averse and many to become more pessimistic. Indeed, with all this bad news

Treasury Weighs Plan To Cut U.S. Mortgage Rates : NPR

Treasury Weighs Plan To Cut U.S. Mortgage Rates : NPR: "The Treasury Department is considering a plan to dramatically lower mortgage rates for homebuyers to as low as 4.5 percent — more than a full point below currently offered rates, sources say."It seems that this would be done by the government buying up mortgages much like the Fed recently said they were going to do. One problem, as the

ML analyst suggests oil could go to below $25 a barrel!

Bloomberg.com: Worldwide: "Crude oil may dip below $25 a barrel next year if the recession that’s slashing fuel demand around the world spreads to China, Merrill Lynch & Co. said.....Global oil demand has slumped as the U.S., Europe and Japan face simultaneous recessions for the first time since World War II. The number of Americans collecting jobless benefits rose to 4 million in the week to Nov

Freeport-McMoRan Gets Out The Ax - Forbes.com

Great class example.Freeport-McMoRan Gets Out The Ax - Forbes.com: "The Phoenix-based mining company said Tuesday it was suspending its dividend, scaling back production and slashing its 2009 capital expenditures plans...Shares of Freeport tumbled 17.3%, or $3.77, to close Wednesday's trading session at $18.05"A few comments:1. Dividend cuts convey additional information about the future (

For first time in 50 years, stocks yielding more than bonds - MarketWatch

For first time in 50 years, stocks yielding more than bonds - MarketWatch: "As of Tuesday's close, for example, the S&P's dividend yield was 3.3%, while the 10-year T-Note was yielding 2.7% -- a spread of 0.6 percentage points in favor of stocks. To put this in historical context, the spread since 1958 has averaged 3.7 percentage points in favor of bonds."Before 1958 what now seems an inversion

The Bailout So Far - WSJ.com

As Big Three auto manufacturers asks for $34 Billion (up $9 billion in a week) from the government, the government's TARP program comes under attack from the GAO for its loose controls, and AIG plans on asking for a still better deal, the WSJ gives us a look at the Bailout so far. Important background for those who do not know who Doug Flutie is or do not remember the play for which he is most

How Stocks Have Returned 10% Per Year

After Henry Blodget from Clusterstock was on NPR saying that stocks were back to "fair value" (i.e. their long run average), he had a listener email him about how the 10% annual return in stocks is found. His answer is below:How Stocks Have Returned 10% Per Year: "...the 10% number includes dividends, which is the way people normally look at stock market returns. On a pure price basis, returns

Videos explaining aspects of the current financial situation

Wow. The Unknownprofessor over at Financial Rounds really found some great lessons done in video format. AMAZINGLY good and am embarrassed to say I had not seen them before today.My personal favorite uses an Arctic Expedition to show what has happened and what credit default swaps are.The second video is on CDOs. GREAT!Thanks to Financial Rounds!And finally one that I just found when watching

Potentially the biggest (most serious) situation since the American Revolution?

Granted this was a month ago, but bigger than the US Civil War? Bigger than the Depression? WW II? Wow. That was one of the warnings from Nissan Taleb on the PBS news Hour in late October about the current financial situation.Thanks to Mark for pointing this one out to me.

Universities as sellers

Bloomberg.com: Exclusive: "A push by the richest U.S. universities to unload their stakes in private-equity funds is flooding the market, driving down prices for the world’s best- known buyout firms.Investors led by Harvard University, which manages the largest U.S. endowment at $36.9 billion, may increase so-called secondary sales of private-equity funds to more than $100 billion during the next

Dealbook - Putting a Value on a C.E.O. - NYTimes.com

The NY Times has an interesting look at CEO pay and how having the government playing a role may lead to different outcomes. Using Citi as an example, the article asks how pay can be structured to bother create proper incentives and reward managers.Dealbook - Putting a Value on a C.E.O. - NYTimes.com: "...many people argue that Wall Street’s approach to compensation helped get us in this mess to

Fed and tresury officials on why they did what they did

I am a "glass is half full" person who on top of that thinks that we will probably find more water before even that is gone. But I do get a tad concerned when smart people who have informational advanatges get worried. We had two examples of this today.FromTreasury Secretary Henry Paulson as quoted at Bloomberg.com: Worldwide: "Treasury Secretary Henry Paulson said his actions bailing out some

It's official: U.S. in a recession since December 2007 - Dec. 1, 2008

It's official: U.S. in a recession since December 2007 - Dec. 1, 2008: "The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures.'The committee views the payroll employment measure, which