A vote of confidence in financial bloggers – at least those featured on SeekingAlpha – emerges in a paper looking at the effect of their stock predictions.
According to the paper* by Veljko Fotak, a Doctoral candidate at the University of Oklahoma’s Price College of Business, blog recommendations appear to have an impact on stock prices and trading volumes.
The average market reaction is of an increase in stock prices of around 0.4% for long recommendations and a decrease of 0.8% for short recommendations.
The analysis was based on 500 buy and sell recommendations for the year 2006 from SeekingAlpha; of those, 340 are classified as long recommendations and 160 as short. The recommendations originated from 107 different blogs and 122 distinct bloggers.
Fotak found abnormal trading volumes after recommendations, but also that trading volumes appear abnormal in the days preceding the blog posting, which does leave open the possibility that abnormal trading volumes following blog publications are a result of trading momentum. “The stronger impact of short recommendations offers additional evidence in the still open debate as to whether short recommendations do lead to stronger market reactions,” Fotak writes.
Unlike studies of the effects of e-mail spam, Fotak found “no evidence of short-term mean reversion in the days following the event. “This difference in market reaction can be interpreted as an indication of the fact that, while e-mail spam is, often times, an attempt to manipulate markets, blogs are not. E-mail spammers spread false information in order to move the price of a security; eventually, the price reverts to its fundamental value. In the case of blogs, it is plausible to hypothesize that posters are acting out of a genuine desire to spread real information. The lack of mean reversion in prices following publication supports this hypothesis.”
Bloggers do appear, for the most part, to echo information already available in the media, Fotak writes. “Yet, as market reactions to select blogs suggests, some do spread genuine information and analysis, which does lead to a market adjustment.”
*The Impact of Blog Recommendations on Security Prices and Trading Volumes (Veljko Fotak – Michael F. Price College of Business, University of Oklahoma)
A high-tech approach to home health care could save an estimated $400 billion annually by bringing hospital-like care into the home at a much lower cost, according to Deloitte. In a new report, “Connected Care: Technology-Enabled Care at Home,” Deloitte lays out a framework for health system transformation that illustrates the role that technology-enabled connected care can play.
It engages consumers in self-care management, leverages technology, reduces demand on the system, and employs evidence-based clinical knowledge management tools to prompt, alert and facilitate safe and effective care.
Such “connected care,” is, in essence, a type of home care that — with the correct institutional framework and access to technology — can bring a near hospital-like experience to the patient at a fraction of the cost. According to Deloitte, it can be most helpful in two broad categories of care: Better Chronic Care Management and Post-Acute Discharge Monitoring.
The report emphasizes that technology alone is not the key: “It must be incorporated into a care management program personalized to an individual’s needs and under the oversight of a care team. In-home technologies enable frequent, effective and personalized patient interactions to equip them to care for themselves.”
There are a number of hurdles to successful implementation of such a system on an industry-wide basis.
“The financial services sector earned consumer trust to grow its online banking services successfully; similarly, technology-enabled connected care must adapt lessons learned from other industries where web based and self-management technologies have been successfully deployed, such as:
- Clear Statements – Most online shopping web sites include easy-to-find, simple and concise explanations of why the financial transaction can be trusted.
- Visible Indicators – By placing large icons on a web site that indicate secure transactions, consumers are aware that their transactions are protected from interlopers.
- Trusted Authorities – Many organizations are members of industry associations that strive to protect consumers, and state so on their web sites. By being part of the Better Business Bureau (BBB), consumer privacy protection groups, or other associations, consumers generally assume that the trust they extend to these organizations will also apply to their member sites.
- Anonymity – Many web sites allow users to share information anonymously with virtual communities. Users create pseudonyms and post personal information, such as their financial condition, difficulties at work, x-rays or other medical records, in public forums for others to review and provide feedback. Being able to do so anonymously allows these users to request advice they might otherwise hesitate to seek.
Assets under management of sovereign wealth funds (SWFs) increased 18% in 2007 to reach $3.3 trillion according to International Financial Services London (IFSL).
There was a further $6.1 trillion held in other sovereign investment vehicles, such as pension reserve funds, development funds and state-owned corporations’ funds and also $5.3 trillion in other official foreign exchange reserves, IFSL said in a new report.
Since the start of the subprime crisis SWFs, mostly from Asia, have invested over $60 billion predominantly in US and Swiss banks.
Cross-border M&A deals by SWFs totalled $49 billion in 2007, up 165% from $19 billion in the previous year. Another $24 billion has already been invested in the first three months of 2008.
IFSL expects assets of SWFs to reach over $5 trillion in 2010 and $10 trillion in 2015.
The growth in SWFs over the past year has stemmed mostly from an increase in foreign exchange reserves in some Asian countries and rising revenue from oil exports.
SWFs funded by commodities exports, primarily oil and gas exports, totalled $2.1 trillion at the end of 2007. Non-commodity SWFs totalled $1.2 trillion, double their total three years earlier: their 36% share of global SWFs at end-2007 may increase to 40% by 2010 and a half by 2015. Non-commodity SWFs are funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses, pension reserves and privatisation revenue.
The IFSL report includes detailed background information on SWFs, including tables and charts such as this one that helps illustrate one of the fundamental reasons for the current financial woes of the United States.
The IFSL report says that, according to Deutsche Bank Research, SWFs asset allocation could lead to a gross capital inflow of over $1 trillion into global equity markets and $1.5 trillion into debt markets between 2008 and 2013.
In an effort to address the growing concerns over the increasing role of SWFs the Sovereign Wealth Fund Institute today issued The Linaburg-Maduell Transparency Index. The index was developed around Norway’s Government Pension Fund, “as it is known to be the pinnacle of clear investment intentions. ”
The index is based off ten essential principles that depict sovereign wealth fund transparency to the public. The minimum rating a fund can receive is a 1, however, the Sovereign Wealth Fund Institute recommends a minimum rating of 8 in order to claim adequate transparency. The principles:
- Fund provides history including reason for creation, origins of wealth, and government ownership structure
- Fund provides history including reason for creation, origins of wealth, and government ownership structure
- Fund provides independently audited annual reports
- Fund provides percent ownership of company holdings, financial returns, and geographic locations of holdings
- If applicable, the fund provides size, composition, and return of foreign exchange reserves
- Fund provides guidelines in reference to ethical standards, investment policies, remuneration policies, and enforcer of guidelines
- Fund provides clear strategies and objectives
- If applicable, the fund clearly identifies subsidiaries and contact information
- If applicable, the fund identifies external managers
- Fund manages its own web site
- Fund provides main office location address and contact information such as telephone and fax
The Federal Communications Commission is considering mandating “a-la-carte” pricing, which would allow consumers to pay for only the individual channels they choose, rather than being required to subscribe to packages of channels. A new study by Yankee Group says such a change would have dire consequences, not just for the cable industry, but also for content producers and viewers.
Certainly, such consumer choice would inject an incredible level of competition into the industry. The report believes this level of capitalism would lead to “economic ruin,” as it predicts the over 500 current video programming services would fall to under thirty.
Prices for individual channels, the report theorizes, would have to double or triple their current costs. The report similarly makes the argument that niche channels would not have an adequate audience to survive.
The study also notes that cable companies will have to improve infrastructure in order to manage the individual packages that each consumer subscribes to.
according to Yanke Group, thhe immediate effect of a-la-carte will be:
- Drop in carriage fees: Under a-la-carte, programmers will lose most of their revenue base. Consumers won’t subscribe to niche networks, such as cooking, healthy living or nature. Surviving networks will be forced charge consumer between $5.00 and $10.00 per channel to overcome the decrease in carriage fees.
- Decrease in advertising revenue: In an a-la-carte world, casual viewers don’t exist, decreasing the number of viewers and consequently advertising revenue. Niche networks won’t have enough reach to survive. Their demise, however, will create TV inventory shortage. The shortage would artificially inflate CPMs, ameliorating the impact on the surviving networks.
- Economic ruin: If the FCC mandates a-la-carte, the 565 national video programming services and networks will dwindle to about 30. The fallout from the job loss will ripple throughout the US economy.
A-la-carte regulation will hurt everyone. It will fail to lower multi-channel video bills, trigger a chain of events that will undermine the existing video ecosystem and lower the quality and quantity of content available to consumers. The effects of a-la-carte
regulation will permeate other mediums, such as online video, by decreasing the amount of professional content available.
The Yankee Group Report A-la-Carte: The Demise of Television as We Know It, includes recommendations for Regulators, Service Providers and Content Owners/Programmers.
Monoline bond insurers may have been bumped of the front page by Bear Stearns and the like, but the issues that plague them have not gone away.
Fitch this week downgraded FGIC and SCA’s XL Capital Assurance to junk status, and CreditSights warned that FGIC was on the brink of regulatory intervention; “To sum it up, FGIC is in a materially worse situation that we had previously believed. Barring a bailout or significant capital injection, the company is at material risk of being seized by regulators.”
As the Financial Times reports, the biggest bond insurers, Ambac (NYSE: ABK) and MBIA, (NYSE: MBI) are temporarily off the hook after their crucial triple-A credit ratings were recently confirmed. Yet “the markets are still not certain that even these big fish will be able to hang on to their top ratings.”
Still, in Research Recap’s most popular post of the week, Fitch asserted that the monolines’ problems should not have much negative impact on the assets they are guaranteeing in Europe and Asia.
Speaking of Europe, the next most-read post was the CreditSights outlook for write-downs at European banks, which have taken widely divergent approaches to valuing their risky assets.
And in an environment looking for other shoes to drop, CreditSights also scored with its report noting that credit card delinquencies are rising more rapidly than normal given unemployment trends. An earlier report from Fitch found that unemployment would need to quadruple before affecting highly rated credit-card backed paper.
Visitors to Research recap are also paying atttention to warning signs such as Standard & Poor’s latest ranking of potential “fallen angels” – prominent debt- challenged companies, headed by Sprint Nextel.
And finally, it’s nice to see strong interest in long-range research such as the Federal Government’s priorities for manufacturing R&D: Hydrogen fuel and Nanotechnology.
The “unscalability” of hedge fund managers’ acumen appears to be a major reason that the average risk-adjusted return (alpha) of hedge funds declines over time, new research shows.
A recent working paper by a researcher at Penn State examined the declining alpha the hedge fund sector has suffered over the past fifteen years.
One of the study’s main findings refutes the notion that average hedge fund alpha has declined due to the creation of a number of inferior hedge funds: “By studying the distribution of individual hedge fund alphas, we find that the large right tail (funds with positive alphas) that was once present has shrunk over time, while the left tail (funds with negative alphas) has remained unchanged.
Thus, the decrease in average alpha is not due to an increasing percentage of funds with unskilled managers and negative alphas, as suggested by the hedge fund bubble hypothesis.
(Chart displays the difference between “Top” and “Bottom” funds (95th
percentile minus 5th percentile; 90th percentile minus 10th percentile; 75th percentile minus 25th percentile). The sample period extends from January 1994 through December 2005. )
The two main reasons cited for the decline in alpha are the change in fund characteristics and market conditions.
Unsurprisingly the paper finds that “hedge fund investors chase alpha at the individual fund level, thus funds with large positive alphas receive more flow than those with negative alphas.” However, flow into the strategy to which a fund belongs always has a negative impact on the fund’s future performance.
Lastly, “Our findings indicate that the decline in alpha over time is attributable to capacity constraints, which arise both from the unscalability of managers’ abilities and from the limited profitable opportunities in the market. Therefore, hedge fund investors should consider the capacity constraints at both fund level and strategy level, before making the decision to chase alpha.”
∗Why Does Hedge Fund Alpha Decrease over Time? Evidence from Individual Hedge Funds (Zhaodong( Ken) Zhong, Smeal College of Business, Penn State University). Via Kedrosky.
The debate over the merits of ethanol as an alternative fuel continues to rage.
The latest salvo comes from the American Coalition for Ethanol, which claims that the availability of ethanol is currently reducing the cost of gasoline by between 6 and 9 cents per gallon.
ACE cites recent price reports by Axxis Petroleum and the Oil Price Information Service, showing “ethanol for blending is selling for as much as 10 to 35 cents lower than gasoline, depending on the market.”
Factoring in the blender’s tax credit, this means that the wholesale cost of E10 is between 6 and 9 cents less per gallon than gasoline.
Marathon Oil Corp. has announced that beginning in May, it will switch to an all-ethanol product slate at 16 of its Midwestern terminals, offering only E10 and no longer offering any unblended product, according to ACE. ExxonMobil also announced a similar move, stating that beginning in May, the company is eliminating conventional gasoline at some of its terminals and moving to pre-blended E10 instead.
ACE also cites a study by the state of Minnesota on E20, the 20 percent blend of ethanol. The research, conducted at Minnesota State University-Mankato and the University of Minnesota, found that E20 presented no materials compatibility issues for current vehicles or fuel dispensing equipment. During the entire year of testing, E20 provided power and performance similar to that of E10, through a broad range of ambient weather conditions.
ACE says this corroborates the results of the “optimal blend” study, released in December, which found that blends of ethanol beyond 10 percent performed well in standard, non-flex-fuel vehicles. “That research also found the conventional wisdom about ethanol’s BTU-content mileage penalty to be unfounded.”
Not only did the ethanol blends of E20 and E30 perform much better than predicted on an energy-content basis, but in three of the four vehicles tested, these mid-range blends actually offered increased fuel economy over straight gasoline.
It’s doubtful, however that such evidence will make a believer of energy journalist and author Robert Bryce, who describes ethanol fuel as “the largest scam in our nation’s history.” The Wall Street Journal Review of his book “Gusher of Lies,” notes that he assembles “50 pages of evidence to show that, if anything, the energy-intensive effort to distill ethanol out of the nation’s corn crop diminishes our energy supply. Yet ethanol production has become entangled with that other impossible-to-repeal boondoggle, agricultural subsidies.”
But it’s hard to ignore Mr. Bryce’s main point — that politicians and pundits are woefully uninformed about energy. When you hear a presidential candidate or a TV talking head calling for energy independence, or claiming that we can reduce carbon emissions by 60% or 70%, or pointing to windmills, ethanol and solar panels as the energy future of the American economy, you can be fairly certain that they are wasting their own energy on false promises and futile schemes.
While not ready to sound the alarm, CreditSights sees warning signs in the rising rate of credit card debt delinquencies.
In a new survey of US credit card Asset-Backed Security collateral performance, CreditSights finds and that pool performance has deteriorated significantly over the course of the last eight months. “Despite that deterioration, however, credit card ABS collateral delinquencies are still well within the normal historical range, and the ratings on credit card ABS senior tranches appear to be safe for now.”
While issuance and excess spread levels do help to offset concerns about rising delinquencies, we find some worrying evidence that delinquencies are rising more rapidly than what might have been historically normal given recent trends in unemployment.
“We would grant that the most recent unemployment data have been surprisingly low, so in the coming months we may simply see unemployment rise, validating the recent steep rise in delinquencies. But if something else is going on, especially if there has been some structural change in the behaviour of credit card borrowers that has made them more likely to default than they historically would have been given current economic conditions, then credit card ABS bondholders may have a more bumpy ride ahead than they might have expected.”
Stripping out master trusts which did not exist in 2001, CreditSights finds that most master trusts are approaching their mid-2001 delinquency levels, and one (the MBNA/BofA trust) is now well above that mid-01 level. Only the Discover master trust is still enjoying delinquency rates well below its 2001 levels.
“Combining all six of the older credit card ABS master trusts’ delinquency rates into a simple average of the six, we find that average delinquency rates have jumped sharply over the last eight months, from an index reading of just under 70 (where the delinquency rate index stood at 100 as of May 2001) to a reading of 89.5 today. While that leaves average delinquency rates below their mid-2001 levels, and still well below the record index reading high of 114 in Early 2002, the increase since July 2007 has still been severe. It took 21 months – from April 2004 to January 2006 – to get this index level from just over 90 to just under 70. It has taken only eight months, however, for the index to jump from just under 70 back to around 90.”
The CreditSights report Credit Card ABS – Another Next Shoe to Drop? includes charts of delinquency rates by company.
As its urban population almost doubles from 2005 to 1 billion people by 2030, China should focus on boosting the productivity of large cities to mitigate the negative effects of growth on the planet. That’s the recommendation of the Mckinsey Global Institute in recently released study of what this explosive demographic change entails, and how policy makers should oversee China’s growth.
China will add more than 350 million people to its urban population by 2025, more than the population of today’s United States.
“The policy choices that China’s leaders make at national and local levels can alter the shape of urbanization significantly. MGI finds that an urgent shift in focus from solely driving GDP growth to an agenda of boosting urban productivity—achieving the same or better economic results with fewer resources—is not only an opportunity but a necessity. ”
221 Chinese cities will have more than 1 million+ people living in them by 2030 – Europe has 35 today .
MGI says the need to shift Chinese policy in the appropriate direction is important for every citizen on the globe: “By moving in this direction, China would cut its public spending requirement by 2.5 percent of GDP or 1.5 trillion renminbi a year, reduce SO2 and NOx emissions by upward of 35 percent, halve its water pollution, and deliver private sector savings equivalent to 1.7 percent of GDP in 2025 mainly through reduced natural resource consumption.”
At the heart of the study’s recommendations is a focus on the benefits of extremely large cities, such as Shanghai, as opposed to a more distributed growth strategy. The study notes several specifics:
- Larger cities attract more talent and investment than small and medium-sized urban areas
- City “network effects” stimulate economic growth
- There is a more efficient use of energy in densely urban environments
- Public transportation is more efficient
- Less arable land is lost
- Better control over pollution
- 20% higher GDP per capita than some other approaches
The study, accompanied by an interactative graphic overview, holds out hope that “China can mitigate the financial, environmental and social costs of urbanization while still realizing its full economic potential.”
News that American Airlines (NYSE: AMR) had to cancel 300 flights to inspect its fleet of 300 aging McDonnell Douglas MD-80s is just the latest straw breaking the back of the airlines.
American’s action comes on the heels of Southwest’s (NYSE: LUV) grounding of 43 of its older Boeing 737s for inspection. American was followed by Delta (NYSE: DAL), which began canceling flights to inspect 133 planes. While some argued that this was the airline inspection system working as it should, it’s hard to see it as positive news for the struggling industry. Recognizing the problem, a senior FAA official has called for changes in inspection mechanisms.
The pilot’s blocking of the proposed merger of Delta and Northwest (NYSE: NWA) effectively has put the brakes on another round of airline consolidation, while persistent $100-a-barrel-plus oil prices continue to put the squeeze on operating margins. The Wall Street Journal this week reported US Airways (NYSE: LCC) said fuel costs are forcing it to cut many of its midnight flights through its Las Vegas hub, a potential blow also to the ailing gaming industry. And Delta has announced plans to shed 2,000 jobs and close to 50 planes.
Following up its negative outlook for the industry, CreditSights estimates that several major airlines will need to increase passenger revenue per available seat mile (PRASM) by 7-11% to avoid breaking debt covenants, which it thinks unlikely. However, since these same airlines are overcollateralized and awash in cash they should be able to meet debt-holders demands to extract value from the issuers, CreditSights says in Airline Term Debt – Overcollateralized and Undercovered.
Loan holders are in a position to demand paydowns, and the airlines have cash to “burn.”
Standard & Poor’s on March 24 lowered its outlook on American to Negative from Positive and for US Airways to Stable from Positive.
Longer term, the maintenance and energy trends could help plane manufacturers such as Boeing (NYSE: BA) and Airbus, (Euronext Paris: EAD) if airlines speed up swapping out older planes for newer more fuel-efficient models. But that’s if and when the airlines can afford it. The main beneficiaries could be makers of smaller “regional jets,” such as Bombardier (Toronto, BBD.A) and Embraer (NYSE: ERJ) if the airlines continue the trend of “downscaling” their fleets.
Noting that fuel prices continue to outrun revenues, Credit Suisse on March 19 said “based on the capacity cuts we’re seeing & anticipating (& the pricing power that implies), believe the industry evolves to be profitable with crude at $105, though not profitable enough given the need for the airlines to reinvest in the business.”
The firm put the odds of a Delta-Northwest merger at 75% by the winter, and said failure to reach a deal would be bad news for Delta, especially in the event of a merger of Southwest and AirTran (NYSE: AAI) “a scenario we view as more likely than not at some point.”
Anticipating “a modest revenue reversal of 6-7%, beginning in Q2″ JP Morgan on March 12 broadly lowered its estimates and ratings for airlines, cutting Delta and Continental from Overweight to Neutral and most others to Underweight.
In a March 10 Primer on Airline Antitrust, Morgan Stanley said the economic case for consolidation remains strong.
In short, we see the rapid proliferation of low-cost carriers and their proven ability to successfully enter hubs as well as the continued liberalization of the international air transport system as structural trends that, on the margin, increase the probability of any merger between two airlines being approved today as compared to 2001.