Wednesday, August 26, 2015

Market Efficiency Wins Again

Skeptics of stock market efficiency are always ready to argue "evidence" that the stock market is grossly inefficient. One piece of evidence that has been used in recent years is the performance of hedge funds. An oft reported statistic is that the average hedge fund return since 1996 was 12.6 percent per year. A recent article highlights research that indicates this claim is incorrect. Overstated hedge funds returns are due to the fact that hedge funds self-report returns. So, if a fund has poor returns, it stops reporting returns. Additionally, when a hedge fund is started, it will often not report returns until it has "something to brag about."  After removing these biases, the researchers found that the average annual hedge fund return since 1996 was only 6.3 percent, half of the reported average!

Annuity Sales

The stock market crash in 2008 made many investors nervous. As a result, many of these investors have searched for more certain investments, including annuities. We describe annuities as an equal payment at some specified interval for a fixed period. In an investing prospective, annuities are an investment vehicle that can have a fixed rate. Although there is more involved in an annuity, the basics of an annuity are that an investor deposits money into the account and either immediately or at some point in the future receives payments. The payments are calculated like the annuity payments in the textbook. So, the payments are based off the amount deposited, the interest rate, and the number of payments. Since annuities are currently paying below 3 percent, it is surprising that sales of annuities have increased because this lower interest rate results in lower payments than when the interest rate is higher.

Stock And Gold Correlation

Historically, the correlation between the stock market and gold prices is low, or even negative during some periods. Because of this, gold is often seen as a good asset for a diversified portfolio since a low or negative correlation can increase diversification. However, just because it happened in the past does not mean that it will happen in the future. For example, while the market dropped on Monday, gold prices also took a hit. While one day does not a trend make, both the stock market as a whole and gold are down year-to-date. All of this should be taken as a warning. Just because two assets have had a low or negative correlation in the past does not mean that the correlation will hold going forward. In other words, when using correlation, we want the correlation going forward but are often forced to use historical correlation. 

CEO Pay Ratio

One of the most controversial provisions of the Dodd-Frank Act is the CEO pay ratio rule. This rule requires that public companies report CEO pay as a ratio of the median employee pay. And while this seems like a relatively easy computation, many large multinationals are arguing that it is a difficult and expensive proposition. Compensation around the world is measured in different ways, depending on government regulations about social benefits, healthcare, and taxes. Additionally, whether part-time employees should be included in the calculation has become a contentious issue. Since wages overseas are often lower than in the U.S., companies are eager to exclude foreign workers. Either way, the rule will be expensive: The SEC has estimated the cost to all companies in the first year will be $1.2 billion.

Monday, August 3, 2015

Greek Stocks Tank

Even though Greece reached an accord on the repayment of its sovereign debt, there are still those who believe the reprieve will be short-lived. Given this fear, coupled with the weak Greek economy, it is little surprise that the Athens stock market nose dived when it opened for the first time in five weeks. Overall, the Athens market fell 16.2 percent today, with several bank stocks dropping 30 percent, the maximum allowed according to Greek stock market regulations.