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March 29, 2006

Recency Bias Comes as No Surprise, Even for Pension Funds


Institutional Investor reports on a behavioral foible to which even professionals and institutions are not immune:

The most common mistake pension funds make is evaluating managers based on their short-term performance, giving too much praise to managers having a good run and over-criticizing firms experiencing short-term underperformance, according to Michael Oyster, consultant at Fund Evaluation Group. Oyster, who authored a paper on avoiding the pitfalls of investing for FEG's February Research Roundup, said three years is too short a time period in which to assess managers. FEG conducted a study which showed that all the U.S. large-cap managers that posted top quartile returns for the 10 years ending December 2005 ranked below the median for at least one rolling three-year period during that time.

Obviously individuals (and the mobs they join) have a similar problem in evaluating funds, managers, asset classes, and individual securities.

Posted by The Unknown at 2:52 PM |

March 28, 2006

Tom Delay's Inside Trader? (Hello, SEC?)

Via Daily Kos, the Wall Street Journal reports today on an effort to shut down insider trading in Capitol Hill offices:

Amid broad congressional concern about ethics scandals, some lawmakers are poised to expand the battle for reform: They want to enact legislation that would prohibit members of Congress and their aides from trading stocks based on nonpublic information gathered on Capitol Hill.

Two Democrat lawmakers plan to introduce today a bill that would block trading on such inside information. Current securities law and congressional ethics rules don't prohibit lawmakers or their staff members from buying and selling securities based on information learned in the halls of Congress.

It isn't clear yet what kind of support the bill will garner from Republicans. But its prospects are enhanced by the current charged environment in Congress; lawmakers from both parties in both houses have placed a high priority on passing ethics and lobbying-reform legislation. Such legislation would provide a vehicle to which proponents could attach a measure on stock trades.
. . .

The two Democrats who wrote the bill say they were motivated by the trading activity of a former top aide to Rep. Tom DeLay, the onetime Republican majority leader in the House. The aide, Tony Rudy, bought and sold hundreds of stocks from his computer in the U.S. Capitol in 1999 and 2000, according to financial-disclosure forms and other DeLay aides.

Recall that miscreant Republican Senate Majority Leader Bill Frist has also been implicated in this game.

Posted by The Unknown at 9:04 AM |

March 27, 2006

Ketchup

After a month with no updates until today, not that much has changed in the valuation picture except that bonds, both on the government and on the corporate side, have become just a little bit more competitive with stocks.

The S&P 500 sits just above 1300, giving it an "earnings yield" (inverse Price-to-earnings ratio) of 5.86% (as always, we're being safe and using 12 months trailing "as reported" earnings in this calculation).

Meanwhile the yield on the 10-Year Treasury note has risen to 4.7%, and may rise higher tomorrow when the Fed raises short rates to 4.75%.

Corporate bonds provide a tighter race for stocks, with the AAA-rated 10 year composite bond rate at roughly 5.44%.

Of course this means that it is becoming more expensive for corporations to borrow money, and this has the potentional to hit bottom lines, thus degrading earnings, thus undercutting stocks.

Asset allocation is a topic that I will soon revisit, but I will say that in this environment I am comfortable enough to be slowly, gradually rebalancing my portfolio to be bringing my allocation to bonds up into line with my target. Certainly something cataclysmic could happen to interest rates, savagely knee-capping the value of my bond portfolio, but if such an event occurs, stocks are likely to take a beating as well, and I'll still be getting my interest payments on the bond funds, reinvested for more shares at the lower prices.

Posted by The Unknown at 2:45 PM |

March 5, 2006

Fed predictions, hoo haw, et cetera.


James Grant thinks the Fed is through raising short-term rates and that the FOMC is willing to call it a day at 4.5%. Grant thinks Bernanke sees trouble in the savagely inverted yield curve, at least that's what I think I read in a stranger's copy of Grant's Interest Rate Observer. Of course Grant's rant preceded what Bernanke told Congress about the inversion, namely that the inversion reflects strong foreign demand for longer Treasuries, and so on.

Meanwhile the Brothers Lehman have raised their forecast for the Fed to 5.5%, anticipating four more quarter point rate increases. The Bros' analysts cite, among other reasons, a failure of housing prices to deflated as quickly as expected, for their new Fed rate target.

Paul McCulley sees some trouble ahead due to the Fed's hyper-anality.

And his PIMCO colleague Bill Gross sounds a bit pissed about all the liars and spenders in the Bush Administration, and urges investors to diversify globally. We're there, dude.

Posted by The Unknown at 4:05 PM |