< The Finance Professionals' Post: July 2011

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20 posts from July 2011


Pulp Finance

Wall Street StoriesThe tumultuous life of Wall Street has always fascinated American novelists, often (though not always) emerging from their pens in the form of potboilers, or pulp fiction—thrillers, murder mysteries, or hardboiled noir. And despite the fact that this literary subgenre has been alive and well for more than a century, the depiction of the hero (or antihero) has changed little in that time. In the popular imagination, the analyst or investment banker is rarely harried or cowed, drab or meek. Whether the protagonists of these novels are idealistic crusaders for free markets and fair play, or the scheming, sneering villains of insider deals and underhanded intrigue, they almost always embody American finance as a figure of daring—glamorous, breakneck, and dangerous!

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Wall Street Finally Gets into the Jobs Creation Business

EFinancialCareersAs the dismal jobs numbers came out today showing unemployment at 9.2 percent, investors responded by selling off stocks. But not all Wall Street firms were cringing at the news of more job losses. In fact two financial giants are actually doing something about it.

Bank of America/Merrill Lynch is joining forces with Prologis and NRG Energy to help finance a solar energy project that will create an estimated 10,000 jobs in 28 states. According to an article in Investment Weekly, the deal involves a conditional commitment from the U.S. Department of Energy's Loan Programs Office to help finance the largest distributed rooftop solar generation project in the world.

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Understanding China’s Economic Indicators

Understanding-Chinas-Economic-IndicatorsChina moves the markets. The world’s second largest economy, biggest source of growth, and most important consumer of commodities is an increasing focus of attention for investors.

But answering even simple questions about the size and growth of the Chinese economy is not straightforward. The official data is haunted by controversy, with widespread doubts about its accuracy.

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Fully Flexible Extreme Views

Figure 1: View on CVaR: extensive search of minimum relative-entropy posteriorThe combination of subjective views within a broadly accepted risk model is one of the main challenges in quantitative portfolio management. Indeed, any risk model, be it based on historical scenarios, parametric fits, or Monte Carlo scenarios generated according to a given distribution, is subject to estimation risk and thus it is inherently flawed. Therefore, it is important to provide a framework that allows practitioners to overlay their judgement to any risk model in a statistically sound way.

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Peru: Inca Gold Still Powers a People


While its neighbors Brazil and Chile capture much of the world’s attention, Peru has quietly grown into a star performer among emerging markets. Whether this continues as its newly elected leftist president Ollanta Humala takes the helm remains to be seen, but preliminary signs are hopeful, even if growth becomes more muted than in the recent past.

Peru has been known as a commodity exporter for much of its history, and this has been both a blessing and a curse. Properly managed, Peru’s resource wealth presents great opportunities, but countries whose economies are based on extractive industries tend to be wealth concentrators. The profits from concentrating industries are not always reinvested optimally and can become the enabler of corruption networks. Peru has struggled with this dynamic through much of the last century and even before, at times rising above it, and at other times becoming overwhelmed. Its most recent track record has been positive, however, and there are reasons to hope that it will continue.

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Recent Research: Highlights from July 2011

The Role of Speculators During Times of Financial Distress.” The Journal of Alternative Investments (Summer 2011). Naomi E. Boyd, Jeffrey H. Harris, and Arkadiusz Nowak.

One of the best-known and largest hedge fund failures was the 2006 failure of Amaranth Advisors, LLC. The authors use detailed, trader-level data to examine the role of speculators during times of financial distress—in this case, the failure of Amaranth. They find that speculators served as a stabilizing force during the period by maintaining or increasing long positions, even while prices fell. The authors develop two testable propositions regarding liquidation versus transfer of positions and conclude that the probability of transfer was more likely for distant contract expirations and for contracts more dominantly held by the distressed trader. The article also examines the role of speculators in providing liquidity and mitigating the effects of liquidity risk by evaluating the change in the number of traders, the size and time between trades, and a Herfindahl measure of speculative trader concentration during the crisis period.

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Blogs for the Buyside: Altenergystocks.com

Blogs for the BuysideHave you ever been confident in your assessment of the macro underpinnings of a sector but modest in your ability to provide insight into the potential of the specific companies in the sector?

That’s what I feel like with Alt-energy. For economic, environmental and political reasons it seems clear that the area will produce the next wave of billion dollar companies. But the science, legislation and competitive arena is perplexing.

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Commodities are Different (in a "Full World")

Foreign Policy’s recent “How Goldman Sachs Created the Food Crisis” reflects the dangerous, myopic thinking all too prone to “blame Wall Street” that is a natural consequence of Wall Street’s appalling, anti-social behavior in recent years.

I am no apologist for Wall Street’s modern business practices and ethics, and certainly not for Goldman Sachs, as reflected in this blog and in my 2009 Blankfein Letters. But to confuse the historic shift underway in the commodities markets that is a result of our “full world” economy with Goldman’s or any other Wall Street speculator’s bad behavior is missing the critical point.

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When It’s Wise (And Not) to Take the Dreaded Pay Cut

EFinancialCareersThe idea of taking a pay cut is anathema for all working professionals—especially for finance execs used to handsome compensation packages. But many are finding their paychecks and pocketbooks to be much leaner this year. For those impacted by a slash in pay, unlike before, most are choosing to stay put, says Ken Murray, president of Mercury Partners, an executive search practice for front office finance professionals. He says it’s just too difficult for finance pros to replace a position.

In an interview with eFinancialCareers, Murray says it's different if you’re thinking of looking to a new employer. Then, he says, it’s verboten to accept a pay cut, unless there are serious “extenuating circumstances.” Most employers will fear that the prospective employee taking a pay cut is simply there for the moment or is in some way not as competent as their peers.

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CFA Prep: The Science of Study Groups

CFA Exam PrepPreparing for the CFA exam is a daunting process: not only do experts suggest that candidates put in hundreds of hours of study time for each level of the exam, but also the numbers show that even if you put in that kind of time there is no guarantee that you’ll pass. The good news, however, is that you don’t have to go it alone. The old adage claims that two heads are better than one, but don’t just trust the old wives—there’s scientific evidence to back it up.

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What if You Fail the CFA Exam?

CFA Exam PrepSome readers thought I was being a little harsh when I advised candidates that they shouldn't expect to pass the CFA exam the first time around. But, sadly, it's a fact that most candidates will fail the Level I exam. The numbers improve slightly as candidates progress, with nearly half of test takers passing Level II, and slightly more than half passing Level III. It can be a real blow to discover you failed, but heading into the exams knowing that you might have to take them more than once will make it easier for you to bounce back.

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Is the Quant Social Butterfly This Year’s Purple Squirrel?

EFinancialCareersEach year a new “super candidate” emerges among executive recruiters panning the streams for that next “gold” standard among employer expectations. Those of us in the business of connecting job seekers to job openings refer to these rare and often “too good to be true” candidates with the perfect combination of skills, personalities and knowledge as a “purple squirrel” representing that difficult to find person who may only exist in the imagination.

Talking to recruiters and hiring managers, it appears this year’s purple squirrel could be what one headhunter called the “Quant Social Butterfly,” that candidate who can excel both in the mathematically challenging world of quantitative analysis as well as in the “real world,” where he or she can be personable, likeable, and able to communicate and relate easily to others in a variety of social situations, such as client dinners and events.

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Astrology and Economic Forecasts

John Galbraith once said that “The only function of economic forecasting is to make astrology look respectable.” Although many of us are avid readers of economic forecasts issued by the OECD, the IMF, and the EU (the government’s forecasts attend to suffer from a general lack of creditability), it is questionable if our confidence in them is well founded. In my opinion, which is based on my experience, it is not.

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Writing Covered Calls

Writing Covered CallsThese days, it is hard to find investments with the potential to generate attractive returns without taking on too much risk. At the conservative end of the spectrum, bond yields are well below historical norms. The average bond now yields just 2.5%/year, below the typical rate of inflation. If interest rates should recover to more normal levels, today’s bond investors would have locked in at paltry yields and may also suffer big losses in the value of their investments (particularly if they have invested in bond mutual funds as opposed to individual bonds). But, on the other hand, the stock market appears very risky after losing more than 50% from the top in 2007 to the bottom in March 2009 and after falling 16% from April-July in 2010 in response to the European debtcrisis.

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Tragedians in the Workplace: Three Flaws Fatal to Career Survival

Illustration by Mark Andresen
In ancient Greek tragedy, the seeds of one’s destruction are revealed through personality. Aristotle believed that every tragic hero had a fatal flaw that ultimately led to his or her downfall. This flaw was as irreversible as the will of the gods. Sophocles also explored the “fatal flaw” theory in the majority of his seven surviving plays.

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Worldview: Summer Perspectives on the Arab Spring

It’s been scarcely six months since the start of what is now being called the “Arab Spring” : a series of revolts and, in some cases, the overthrow of authoritarian regimes in the Middle East. The conclusion of these events is yet uncertain even where revolts have thus far seemed “successful.” In this Wordlview special report, we offer some perspective on these events and suggestions on how to think about them as they evolve.

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What’s In Your Portfolio? Investment in CFA vs. MBA for Finance Professionals

Career DevelopmentIf you’ve ever visited finance or analyst forums, you will probably immediately recognize the debate: which is better, the Chartered Financial Analyst (CFA) designation or a Master’s in Business Administration (MBA)? Some argue the MBA is a waste of time and money unless it comes from one of the top-ranked MBA programs. Others claim MBA graduates have a flimsy grasp on finance compared with those with a CFA charter. MBA enthusiasts counter that CFAs have a deep knowledge of asset management principles but lack context about the broader aspects of business. Underlying these arguments is the answer: no one program is right for everyone.

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The Value of Women on Boards—What Statistics and Common Sense Tell Us

This year’s GovernanceMetrics International’s “2011 Women on Boards” report offers a number of insights into the progress, or lack thereof, being made to bring more women onto corporate boards around the world. The biggest and most depressing news is that “40 percent of the world’s largest publicly listed companies have not appointed even one woman to their boards.” The report also describes a discernable European trend to legislate quotas (undoubtedly in response to the lack of voluntary action on the part of most corporate boards). For example, Norway has established a quota requiring 40% of boards be composed of women), Spain has a quota requirement in the pipeline, and France’s National Assembly has recently passed a quota law. Laws are also under consideration in the Netherlands, Belgium, and Italy.

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Blogs for the Buyside: Calculatedriskblog.com

Blogs for the BuysideDid you ever want a website that combines an economist’s long-term perspective with a journalist’s ability to find the right headline and publish immediately?

That’s what I feel I get when I visit Bill McBride’s Calculatedriskblog.com. I go there every morning to see his analysis on the latest economic data. His graphs are simple but illuminating, his analysis firm but measured, and the readers offer sharp and constructive comments of McBride’s work.

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Are Buy-Backs on a Rising Market Always a Bad Move?

In an article in the Financial Times, “Buy-backs on a rising market are always a bad move” on Monday, June 13, 2011, Tony Jackson made the argument that share buybacks are a failed strategy because companies are buying back stock more frequently when stock prices are high than when they are low. He framed the argument in terms of recent actions by ExxonMobil to use stock to buy XTO Energy last summer and subsequently to increase its buyback program. He stated “Logically, the first action made sense only if Exxon thought its stock was over-valued. The second made sense only if it thought the opposite.”

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