Q4 2017

BELIEF CLUSTERS

Most of us would like to think that our beliefs are each arrived at through thoughful analysis. Yet many contradictory beliefs are simultaneously held by a large segment of the population. This sometimes leads to a misallocation of resources in which some disruptive companies are disproportionately favored over old-line firms. In this essay we suggest that even the most disruptive companies may be investable at one price, but not another.

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Q3 2017

OF SEAT BELTS, SKI HELMETS AND MARKET RALLIES

Generally, stocks rise when the economy is forecast to be strong, while bond prices decline. A forecast of economic weakness usually causes stock prices to fall, while bond prices rise as demand for funds drops. Recently, both stock and bond prices have been rallying simultaneously, suggesting an uncertain future. In this essay we try to resolve the conundrum by suggesting that both markets are responding rationally to persistent low interest rates.

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Q2 2017

ZETETIC ECONOMICS

Throughout history there have always been people who believe things not supported by evidence. For example, 1 in 4 Americans still believe the sun revolves around the Earth, while others think the Apollo moon landing was staged on a movie set. Such crackpot views are mostly harmless, unless they are held by government officials who formulate economic policy based upon magical thinking.

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Q1 2017

RETURN OF THE LUDDITES

Rapid advances in such technologies as artificial intelligence and autonomous vehicles have prompted forecasts of a future with few career opportunities for the majority of Americans. But an examination of the history of previous inventions shows that they frequently create more jobs than they displace.

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Q3 2016

IT’S THE CULTURE, STUPID

Prior to the Brexit vote in June, political pundits and pollsters were unanimous in predicting that British voters would reject leaving the EU and vote their pocketbooks. But the electorate instead voted to resist the homogenization of Britain, causing stocks to plummet worldwide. This overreaction to bad news is a well-studied phenomenon, which often creates a buying opportunity for those able to act against the crowd.

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Q2 2016

HOUR TOWN

The “gig” economy has shown explosive growth in recent years, and shows no sign of slowing down. Apps such as Uber or Lyft allow individuals to pursue earning a living working only when they want to without reporting to a traditional office or boss. In this essay we argue that the primary beneficaries of this trend are likely to be corporations, who can staff by using independent contractors who do not receive benefits like health insurance or paid vacations. For workers, though, the seductiveness of being your own boss may very well lead to reduced earning power with no career advancement.

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Q1 2016

WHEN LESS IS MORE, MORE OR LESS

The Federal Reserve’s zero interest rate policy (ZIRP) has prompted investors to cast an unusually wide net in the search for investment returns. One result has been that many start-up companies have been able to raise large amounts of capital from institutional investors without being subjected to the discipline required to go public. Many mutual funds are among the investors in these pre-public entities, and they use varying methodologies to value their holdings, resulting in identical shares being priced at vastly different prices. This seems likely to cause a problem, since mutual funds promise daily liquidity at their published net asset value, despite the fact that some of their holdings have imprecise values and no liquidity.

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Q4 2015

CENTRAL BANKER WARDROBE: SUIT, TIE & FLIP-FLOPS

In the same way that some fashions (skinny ties or short hemlines) swing in and out of favor, the popularity of specific central bank policies also varies over time. It was not long ago that Federal Reserve officials argued that the U.S. should pursue a stronger dollar. This is now out of favor, though, and Fed officials would prefer a weaker dollar to stimulate exports. This essay explores the investments likely to prosper when the pendulum of Fed policy swings back.

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Q3 2015

NO FRACKING WAY

College campuses witnessed the start of several divestiture movements. One example was to urge the sale of shares of companies doing business in South Africa as a means of opposing apartheid. The latest movement favors the sale of all energy companies in endowment portfolios. In this essay we suggest that calls for divestiture may not be the most effective way to produce change.

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Q2 2015

BIGGER THAN ELVIS

Soaring pharmaceutical prices are very much in the headlines. But the forces which have encouraged this escalation show no signs of abating, and political rhetoric notwithstanding, should continue this trend for some time to come.

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Q1 2015

THE GOLDEN RULE

Corporate activists are making headlines by taking huge stakes in public companies and agitating for change. But money management expertise does not imply expertise in managing a company, any more than athletic prowess in one sport implies the ability to excel in another.

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Q4 2014

INVESTING IS NOT ALWAYS EBOLA CHERRIES

The stock market experienced a sharp drop in the Fall. Many explanations for the drop were put forward, but the most likely was the fear of a global Ebola pandemic. In this essay we examine the economic consequences of previous epidemics, and conclude that the market's reaction is overdone and most likely represents a good entry point.

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Q3 2014

THE ROLLING STONES AS MANAGEMENT GURUS

Every good parent knows that it is necessary to use an appropriate combination of rewards and punishments to foster appropriate behavior in children - your allowance will increase if you make your bed every morning, or there will be no TV for a week if you hit your sister again. Carrots and sticks are important drivers of executive behavior, too. Here we examine several examples of bonus systems which work against the creation of shareholder value and offer a template for aligning management and shareholder interests.

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Q2 2014

HERD ON THE STREET

The long-term outperformance of value investing over growth has been well documented. Nevertheless, most investors utilize the latter approach, plowing money into the same trendy stocks. In this essay we examine data that suggests that the economic environment tends to push investors toward one style or the other, but the propensity to be a value investor appears to also have a genetic component. Like most complex behaviors, they arise from a combination of nature and nurture.

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Q1 2014

THE ULTIMATUM GAME

The media is rife with articles about the widening disparity in incomes between the top 1% of earners and everyone else. Recent research in psychology shows that when people feel that the system is unfair, they are willing to make irrational economic decisions, hurting themselves provided it also hurts those of whom they are envious. We suggest that improved education is the only politically palatable way to narrow the perceived inequality.

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Q4 2013

COMPARING APPLES AND NON-APPLES

The market value of nearly every well-known consumer products company far exceeds its tangible book value. That is because the biggest asset of such companies is the value of their brands, an off-balance sheet item. In this essay we discuss the short product life for most technology consumer products, and argue that investors should not assign the same value to a brand like Apple as to brands like Coca Cola or McDonald's.

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Q3 2013

TAKING THE HYPOCRITIC OATH

We are inundated with hypcrisy: evangelical ministers involved in sex scandals, politicians voting for policies they opposed as candidates, and actors flitting from city to city in their private jets to lecture the rest of us on how to reduce our carbon footprint. Corporate executives are frequently guilty of failing to walk the talk, too. In this essay we review recent research which suggests that we should pay as much attention to management integrity as we do to income statement and balance sheet analysis, since good behavior is statistically linked to superior returns.

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Q2 2013

A BAD CASE OF APOPHENIA

Apophenia, also known as patternicity, is the phenomenon of seeing patterns or connections in random or meaningless data. Wall Street traders are constantly studying data to tease out potentially profitable patterns. But just as when someone perceives the image of a famous person in a piece of burnt toast, many of the patters are spurious, and lead to flawed trading rules. In this essay we consider several well-known trading rules which, while widely accepted, are not likely to o consistent profitability.

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Q1 2013

LOSING INTEREST AS WE AGE

Traditional asset allocation models usually advise individuals to increase their bond exposure and decrease their stock allocation as they get older. But with interest rates at a historic low, we suggest that capital losses on fixed income securities are almost certain over the next few years, so that contrary to conventional wisdom, a higher stock allocation may be the more conservative course.

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Q4 2012

ALGOS GONE WILD

High frequency trading (HFT) is the use of computers and computational algorithms to quickly trade securities. Such trading now account for an estimated 70% of all securities trading in the United States, and have undoubtedly increase market liquidity. But as is always the case where huge sums of money are involved, many HFT firms, aided by exchanges seduced by the enormous commissions generated, have engaged in questionable behavior which have tilted the playing field against the individual investor. Unfortunately, in recent years the algorithms have occasionally broken down and destabilized the markets. In this essay we examine this phenomenon, and propose a potential remedy.

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Q3 2012

COLLATERAL DAMAGE

The Federal Reserve's policy of keeping interest rates low has been successful in helping to stabilize the fragile banking sector and revive the depressed housing market. But accommodative monetary policy can have unintended consequences. Here we examine how record low rates have lowered the discount rate by which corporations value their pension liabilities, forcing many companies to use the profits generated by the recovery to make outsized pension contributions, rather than create jobs.

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Q2 2012

CHANNELING CAPTAIN LOUIS RENAULT

In the classic movie Casablanca, Captain Louis Renault professes to be "shocked, shocked to find gambling going on in this establishment" despite having accepted bribes to look the other way. This essay examines how our political class expresses similar outrage that many large corporations and wealthy individuals pay little in the way of taxes, while accepting campaign contributions to create loopholes.

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Q1 2012

THE WORLD'S BEST DISCOUNT STORE

Individual investors frequently express frustration that stocks often rise after a seemingly negative new story, and fall after reporting good news. In this essay we consider the process of "discounting", which is the market's way of incorporating future news into today's prices.

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Q4 2011

SINOS PROBLEMS

Corporate America seems uniformly obsessed with doing business in China. In this essay we consider how normally risk-averse CEOs are tripping over each other to build market share there, while ignoring flagrant disregard for intellectual property rights, unreliable market data, rampant corruption, confiscatory corporate tax rates and protectionist policies.

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Q3 2011

LIVING IN THE FUTURE

In science it is standard practice to perform experiments, measure the results and then use the data to validate a hypothesis. In a federal system of government, the states can frequently serve as a laboratory for testing alternative approaches to societal problems. We examine several instances in which states have approached the same issues in vastly different ways which resulted in vastly different outcomes, and note that there seems to be little point in experimentation when the data is routinely ignored.

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Q2 2011

GRAY MATTER

Insider trading has been very much in the news lately. Yet despite a spate of high profile convictions there is no single statute which uses the phrase "insider trading", defines who is an "insider", or delineates which information is "material". This essay explores the tension between regulators, who prefer vague laws that permit expansive interpretation, and market participants, who seek clarity about which acts are illegal and which are not.

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Q1 2011

CHAINSAW BEN

An exploration of the unintended consequences of the Federal Reserve's massive stimulus program, one of which is the reluctance of corporations to hire when faced with margin pressure from soaring commodity prices.

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Q4 2010

CONFIRMATION HEARINGS

An essay about confirmation bias, the near-universal tendency to focus on data which supports our beliefs (while ignoring contrary data) and which frequently leads to poor investment decisions.

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Q3 2010

ETFS – EXTREMELY TRICKY FINANCIAL SECURITIES

ETFs, closed-end mutual funds which trade continuously throughout the day like stocks, have enjoyed explosive growth. In this essay we consider how their unique structure sometimes causes them to diverge sharply from the indices they are supposed to track, and how they hold the potential to destabilize markets in unexpected ways.

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Q2 2010

THE TYRANNY OF THE FEW

Anecdotal evidence of the way in which litigation by a few activists stalls economic development that would benefit society as a whole, while acknowledging that the resulting loss of American jobs and competitiveness may be the inevitable price for avoiding the ecological degradation that frequently accompanies unfettered development.

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Q1 2010

THE DOCTRINE OF PEOPLE INFALLIBILITY

An examination of the phenomenon in which a group of independent individuals often make more accurate predictions than experts, and the divergent forecasts now being sent by stock and bond investors.

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Q4 2009

BEN BERNANKE, HOMEOPATH

An essay on the long-term risks to the American economy from the Federal Reserve’s prescription for artificially low interest rates as a cure for the problems that resulted from the previous period of artificially low interest rates.

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Q3 2009

UNCLE SAM, CEO

An examination of the history of the nationalization of private enterprises in the U.S., and the likely impact of the current wave of nationalizations on long-term competitiveness.

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Q2 2009

MORTON’S FORK

An essay about how conflicting government policy objectives can place executives between a rock and a hard place, and undermine confidence in the capital markets.

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Q1 2009

ALFRED E. NEWMAN FOR PRESIDENT

An analysis of the implications of the looming huge shortfall in the Social Security and Medicare Trust Funds and recommendations for how to position portfolios.

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Q4 2008

THE MOTHER OF ALL MARGIN CALLS

How the world’s financial system nearly unraveled in the aftermath of the collective delusion that real estate could only appreciate.

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Q3 2008

A FREE TICKET TO THE GRANDSTAND

Speculators have long served as the scapegoat for the nation’s financial ills. But a nuanced analysis suggests that the role of speculators (and their tools, derivatives) is essential to the functioning of a modern economy.

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Q2 2008

ADVENTURES IN KITING

An analysis of how the Federal Reserve’s low interest rate policy ultimately created the credit crunch.

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Q1 2008

NOTHING RECEDES LIKE EXCESS

A brief description of the statistical phenomenon of regression to the mean and why it suggests that investors should be buying, rather than selling, stocks.

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Q4 2007

IN-GENE-IOUS INVESTING: SPOCK VS. CHARLES DARWIN

A discussion of the manner in which our evolutionary development inhibits our ability to invest rationally.

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