Talks from Trumpington

More on Facebook

2012-05-24T14:37:00.002+02:00

This is a long but interesting article on the story behind Facebook's IPO. His view is even more pessimistic than mine but the P/E analysis is quite interesting. Anyway, the stock is currently trading at $32 / share, almost 20% below the offer price.

FB may still surprise investors with a new source of explosive growth that nobody, but that is lot to count on to justify paying 60x multiples.

2012-05-17T22:06:00.001+02:00

A while ago I posted about my bearishness of the Brazilian stock market. Putting my money where my mouth is (was), I bought two securities in February and the other day somebody at work asked me how did it go.

I closed the trade almost two months ago (way before the current turmoil) and made money itself on the position, but after the transaction costs (wasn't investing a lot since I don't have much!) I just broke even.

Here are the details of the two securities and their current price (could have made LOTS of money if I had stayed put):

1) The first was an Ultra-short ETF on the Brazilian index (in US$)

Bought it @ 13.43 on 16-Feb

Sold it @ 15.15 on 13-Mar. (12% profit)

Since then it has gone up 70% if we take today's price.

2) The other was a put option on the MSCI Brazil ETF, with strike 50 and maturity in Jan/2013.

Bought it @ 3.15 on 16-Feb

Sold it @ 2.9 on 13-Mar. Total (8% loss)

Current price @ 5.8 17-May (100% increase) The underlying is now around 51.5.

Major lessons learned: if you trust your trade, stay put and let it develop. Be VERY careful with bid-ask spreads and commissions.

I think there has been some panic selling in the past few days. Maybe it's time to buy another lottery ticket again! :)

Facebook Valuation: Worth $100bi?

2012-05-15T19:50:00.001+02:00

I was just reading in the FT that Facebook has raised its price range before the IPO. If they get what they want, the company will be valued between $93bn and $104bn.

The final project of the Corporate Finance course I taught earlier this year at Cambridge asked students (split in groups) to value Facebook. The highest valuations were around $80bi and that, often, involved some heroic growth assumptions.

Aswath Damodaran has a nice blog post with his valuation of the company, with a figure aroun $71bi. People from FT's Lex column also has an interesting calculator that you can play out with on your own (not sure if it open to non-subscribers).

At $100 billion, if I could I would surely short Facebook from the second day of trading. It will be interesting to see what the first-day price change will look like.

Either people are true believers that Zuckerberg will pull out another magic cash-flow rabbit out of his hat or....

New Journal and more on "Publish or Perish"

2012-05-03T22:56:00.000+02:00

Following an earlier post on the "Publish or Perish" pressure in academia today I received an email about a new journal in Finance, the Critical Finance Review, edited by Ivo Welch.

In line with Matt Spiegel's comments, the editorial line of the new journal is to give more chance to controversial papers and "non-result" ones. I believe that the profession benefits from both. Hope the journal catches on and becomes a force among Finance research outlets.

Double standards (as usual)

2012-04-13T19:44:00.001+02:00

This week the Brazilian president visited the U.S. and kept on complaining about the "monetary tsunami" caused by the lax monetary policy followed by developed countries' Central Banks.

I'm always amazed by how she forgets that this same easy money helped to pump up growth rates in emerging markets not such a long time ago.

Useless...

What a Hectic Couple of Weeks!

2012-03-15T21:02:00.000+01:00

On top of finishing the two courses I was teaching this term, the past two weeks have been the busiest ones I've had research-wise this year, with deadlines to submit papers to two of the three major conferences.

The first one was for the European Finance Association meeting in Copenhagen in August 2012. The second meeting, whose deadline is today, is the American Finance Association meeting in San Diego in January 2013.

In the end I managed to submit three papers.

Here they are:

The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market

(with Reena Aggarwal and Jason Sturgess, both from Georgetown University)

The Big Short versus The Right Short: Short Selling Activity and Housing Prices Predictability (with Carles Vergara-Alert from IESE)

Ownership Structure, Limits to Arbitrage and Stock Returns: Evidence from Equity Lending Markets

Thanks to all of my co-authors for the hard work. Let's get those babies in!

Now is back to revising them all and submit them to journals.

Make Voting More Transparent

2012-03-15T15:29:00.007+01:00

Last December I recorded a podcast talking a bit about one of my papers and its implications to the real world.

Here is the link if you are interested.

Great editing job by Judge's team!

Publish or Perish

2012-03-10T20:34:00.000+01:00

This is a great article by Matthew Spiegel (editor of the RFS) on the current status of publication requirements and the fact that referees ask for too many robustness tests and changes rather than evaluating whether or not the article has passed the bar to be published.

I maybe biased due to not having that many years down the road but here is my take. Of course referees usually make great suggestions and help to improve a lot a paper, but Matthew is right that often the need to play the game of pleasing referees makes papers unnecessarily long and the review process more annoying to everyone.

The fact that introductions are now four times longer than in the 80s is great example of this gaming taking place. In the end, as economists say, it all boils down to setting proper incentives.

Transaction Costs, Brazilian Markets and Exotic Securities

2012-02-16T13:37:00.002+01:00

Wow. I'm amazed by the frictions to trade more exotic stuff. I wanted to buy some put options on the Brazilian index in the UK or the US. It took me almost a month to set up an account and complete the wire transfer. I had to sign million of forms and it took almost 10 days for the first transfer to be approved.

Bid-ask spreads are transaction costs are high! If anyone is interested, thos are the two securities I selected:

1) One is an Ultra-short ETF on the Brazilian index (in US$), so if I get it right I'll get both the market fall in domestic terms, plus the currency depreciation (the real is seriously overvalued).

2) The other is a put option on the MSCI Brazil ETF, with strike 50 and maturity in Jan/2013.

Let's see what happens...

I Still Haven't Found What I'm Looking For

2012-02-02T23:08:00.001+01:00

Wow. Bono will get REALLY rich with Facebook's IPO:

Moneyball and Academic Finance

2012-02-01T13:35:00.001+01:00

This weekend I saw "Moneyball", the movie with Brad Pitt based on Michael Lewis' book. It has an enterntaining story and I highly recommend it.

One aspect made me think about academia. In the movie, the assistant GM says that teams should really aim for players that produce runs, which in the long run in what a team needs to generate wins. In academia nowadays all that people care are about publications in A journals (i.e the home runs) rather than publications in lesser-ranked journals (i.e. everything else).

I'm not sure whether having a team of heavy hitters is socially optimal!

PS - A friend of many wrote a very interesting post on the movie as well.

Scary News

2012-01-27T16:08:00.001+01:00

This graph on British GDP is very scary:

It shows that the economic recovery following the start of the recession is actually worse than the one observed during the Great Depression in the 30s.

In my humble opinion, it seems that the dosage of the austerity medicine is killing patients all over Europe.

(Outsourced from Brad Delong's blog post)

Next US President?

2012-01-15T21:07:00.001+01:00

It is becoming more and more likely that the US presidency will be contested by Obama and Mitt Romney. For those that don't know anything about him (like me), here is Vanity Fair's article on him. I found it a bit unfair on the private equity culture but it's still a good read.

http://www.vanityfair.com/politics/2012/02/mitt-romney-201202

2012-01-08T10:52:00.003+01:00

Some ramblings on Brazil - Part II - Outlook

2012-01-07T00:39:00.002+01:00

Following up on my previous post, on this one I plan to talk a bit about the country's current situation and some (big) challenges and problems it has to solve, and quickly! Having spent the previous three weeks in Rio allowed me to chat to friends, listen to taxi drivers, and read the general news printed on newspapers to get a feel of "sentiment".

Unfortunately, my opinion is that we have all the signs of a bubble ready to burst. Outrageous real estate prices, overvalued currency, etc... Although things have improved a lot and it is obvious that great advances have been made, there are some clear signs that things are getting a little out of line. I heard someone say the other day that Brazil's growth was more of a catch-up with the present (following the lost decade in the 80s) than a new dawn that would allow the country to move up into developed status.

Everything in Rio is horribly expensive, with some things being simply ridiculous. When I moved to the UK in 2002, living costs were way cheaper than in London. I felt like a king whenever I came back for holidays even though I was on a PhD stipend. Nowadays, things are radically different. Most things are cheaper in London and even rental prices, long a plight of London's non-investment bankers, are very close to the ones you pay in Rio.

Let me look at a few factors that might pose a problem:

i) Global Economy: I've actually been more negative about global growth prospects than now. My guess here is that the world will do better than consensus expectations while Brazil worse. Signs from the US indicate that the economic might be getting back on track while China seems to be managing to avoid a hard landing. Big risks to be careful are: (i) the Euro-mess is not sorted (God knows that politicians are trying hard to cause a disaster) (ii) the US recovery is derailed because of the presidential elections; and (iii) real estate markets crash in China. The main danger to Brazil comes from China. Its demand for raw materials have increased tremendously in past years, both in volume and prices. This was great for Brazil but the country's increasing reliance on primary products is dangerous in case international demand goes down. Since 2006, terms of trade have improved by more than 30% and if simply returns to the same levels it will have a big impact on how the current account balance is financed.

ii) Credit Growth: Because of high interest rates and some other problems, private debt to GDP ratios have always been way lower than international averages. Economic growth was bound to make (and was helped by it) grow. And grow it did. In 2003, credit amounted to 24.6% of GDP (for comparison it is way more above 100% in the US and the UK). It went to 40.5% in 2008 and reached 48% in Sep/2011, with an average growth rate of 16.3% even after the crisis period in 2009. Brazilian families' debt levels are at an all-time high and a decrease in growth or an increase in interest rates might trigger a wave of defaults that bring the house the down.

iii) Monetary / Fiscal Policy: Brazil has an official inflation target of 4.5% with 2% upper/lower bound. In 2011, it hit the upper bound but the Central Bank seems to have accepted inflation run above the target rather than increase interest rates (or implement other "macroprudential measures" as they say here) and reduce growth (always a politically tough call). Given that the public sector share of GDP keeps growing and the government does nothing to control a little its expenditures, worrying about inflation should be on investors' minds unless the Central Bank decides to change its current stance.

iv) Real Estate Prices: I might be biased since I've spent all of my time in Rio and the city had lots of good things going for it, but real estate prices are just surreal at the moment. From 2006 to 2010 prices increased by more than 150% and in 2011 alone went up by 35%. A square meter in Leblon costs around 6,000 pounds which is more than in Barcelona and similar to London. You can feel the same kind of madness that was going on in London circa 2008 and we all know how that turned out to be. Even if the nothing happens with the country as a whole, real estate in Rio is doomed to crash. When? I'd wish I knew.

All of these factors are in one way or another related to each other and while Brazil is now enjoying a virtuous cycle, things can change to a bad equilibrium and fall into a vicious cycle (kinda of like Spain and the UK at the moment). Alas, like in many countries, politicians haven't been using the good times to prepare for future lean years.

In the final post of this series I'll talk about the main challenges for the future.

Some ramblings on Brazil - Part I - Recent Past

2012-01-01T21:01:00.000+01:00

Hello everyone.

Happy Holidays! I'm currently in Rio enjoying the break under 30-degree weather (well, it's actually raining at the moment) rather than semi-freezing in London (to be honest the weather has been great this year).

As I take a break from meeting family & friends, eating good food, and preparing classes for my upcoming course at Cambridge, I sat down and started thinking a little about the current economic situation of Brazil and my humble predictions for the near future and I thought that this would make an interesting post to share. I'll start with a quick overview of the recent past. On the next post, I will talk more about some of the economic bottlenecks and my view on what is going to happen. I hope it is not too long!

My biggest concern is that Brazil is quickly approaching a ceiling given its current structure. I'm very skeptical about whether the country can sustain 4-5% growth or not and I am seriously worried that the burst of the current bubble is just around the corner. Anyway, here is my take on the near past:

Following years of bad macroeconomic policies in the early 90s, the Brazilian Social Democrats party (the PSDB) finally put the house in order and pushed through some needed economic reforms (breaking up inefficient state monopolies, budgetary expenditure checks and balances, etc.). These reforms are really what made the "growth miracle" seen under former president Lula's Workers party (the PT) possible, riding the good international climate and the benefits of the sudden emergence of a large set of consumers enjoying better economic conditions. The country had given up so many growth opportunities before sorting out its inflation problem that a huge pent-up potential was unleashed after the Real plan, the privatization of major companies, and the improvement of the international situation after the late 90s financial crises.

To Lula's merit and contrary to many people's opinions (including mine), he didn't messed up with the economy and carried on the same sensible policies implemented by the PSDB. His party was strongly against the Real stabilization plan, the fiscal responsibility law, and the banking reforms (to mention just a few), which are now touted as the ones that enabled Brazil to withstand the nasty effects of the crisis. I'm not even going to talk about the large corruption schemes that have taken place after Lula stepped into power. What makes me the saddest is that he could have achieved so much more and squandered the opportunity to implement structural change at a time when the global climate was very favorable.

Unfortunately, if you look at the reforms that Brazil desperately needs to shift up a gear, nothing has really happened in the past 10 years. Labor, pension and tax law reforms are major bottlenecks of growth and will stifle any chance of sustainable long term growth beyond 3-4% a year. All of these changes need constitutional reforms that are very difficult to pass through parliament, specially under Brazil's crazy multi-party political system. Lula decided not to fight to push them through, opting to making minor changes through regular legislation, and even those were mostly a waste. His successor, Dilma Roussef, appears to be following the same path as well.

Nonetheless, here we are: Brazil is the current darling of markets. Dozens of large companies are trying to enter the country, the expansion of consumer credit is booming, and it will host the 2014 World Cup and 2016 Summer Olympic Games.

Things look great, but now what? Stay tuned for the next post!

Sistine Chapel

2011-11-16T16:20:00.001+01:00

I've only been to Rome once and unfortunately the Sistine Chapel was closed. I really want to return, but while that doesn't happen at least I can take a peek from here:

http://www.vatican.va/various/cappelle/sistina_vr/index.html

I wonder what these VR simulations will look like in 30 years.

Aren't people overreacting?

2011-11-14T14:58:00.001+01:00

I was reading Jim ONeill's weekly analysis (Chairman of GSAM) and enjoyed his putting in perspective the European crisis:

"... in 2011, the change in China’s nominal GDP in US$ will be the equivalent of creating three new Greek economies. In the context of the above question and what is important this week, I realized that, along with the other three BRIC nations, the probable change in the US$ value of their combined GDP in 2012 is likely to be close to $2 trillion. They will effectively create the equivalent of another Italy.

This is what the BRIC countries can do to help the world, and especially troubled Europe, way more than any specific steps to invest in European beleaguered bonds."

No wonder people get so excited with emerging markets' potential. This is truly where economic growth is nowadays, both in percentage and absolute values, and is / will be one of the key macro trends for years to come.

Airton Senna

2011-11-06T12:53:00.002+01:00

Yesterday I watched the Senna documentary on TV. I loved it and hope it gets an Oscar nomination (and wins the prize of course!).

Senna was one of my childhood heroes and probably Brazil's most beloved sporting hero (maybe even more than Pelé). In my family, just like many others in Brazil, it was a tradition to watch the F1 gran-prix on Sundays. The European races would usually start around 11am-12 and my uncles and cousins would come to my house and watch the race while preparing Sunday lunch. There so many good memories of Senna, Nelson Piquet and their battles against Prost, Mansell and others. Great times for F1!

Senna's death is similar to JFK's death for Americans, in the sense that every Brazilian remembers what they were doing upon hearing the news. I was watching the race live and remember my mother crying and everyone being really sad when we realized what had happened.

In a country lacking role models it is very emotional to revisit Senna's trajectory all over again. In the documentary they ask Senna about his best sporting memory and he mentions his first kart races in Europe, when it wasn't about the money or the politics, just pure driving.

It is sad but I guess this is how many things work nowadays. Maybe I'm getting old and sentimental but I feel that things were more about emotions and getting things done rather than today. Now it is all about money, internal politics, and people feeling entitled for everything without willing to put in the hard work needed to get things.

Anyway, I hope you all watch the movie. (Americans will need subtitles to truly enjoy it.)

Economics is all around

2011-11-03T12:28:00.002+01:00

I was reading the blog of my colleague Simon Taylor here at Judge and he posted the link of a spoof video by MBAs in Columbia on how one of the (untold) reasons of doing an MBA maybe to find a rich husband.

Regardless of whether this is true or not, I'm amazed by the number of marriages that year after year. In my PhD cohort of 18 people, we had 2 marriages!

Gary Becker would totally agree.

Here is the video:

Eurocrisis: Just Sayin'...

2011-11-03T12:24:00.000+01:00

If politicians had agreed two years ago - when the size of the problem was already know - to do the same things proposed last week, I'm sure we wouldn't be in the terrible mess we are now: no need to keep bleeding for 2 months with the Greek referendum, less austerity measures needed, smaller bail-out size, etc...

Politicians are not on average known for being good, but the currently crop of leaders is really depressing to watch...

Wealth of Nations

2011-10-26T10:59:00.000+02:00

A friend sent me this interesting report by Credit Suisse on the global wealth.

It's impressive how having more than USD 10,000 is enough to put you ahead of 3 billion people (67.6% of the world).

Luck or Skill? Paulson & Co. edition

2011-10-12T00:22:00.000+02:00

I've just read on the FT that John Paulson (who made billions betting on falling US housing market prices in 2008) has warned of 25% redemptions in his $30bi AUM fund, following losses of more than 40% so far this year.

My MSc. dissertation was on whether technical analysis can generate abnormal returns or it is onlu due to "luck"- i.e. out of many possible combinations you are bound to find one that will have excellent results.

I usually use Warren Buffet as an example during my classes on market efficiency but maybe Paulson will be interesting as well. Maybe his profits back in 2008 were simply luck and shouldn't be expected to persist in the future?

The Size of the Greek Problem Over Time

2011-10-01T01:32:00.000+02:00

The image says it all:

History of Corporations

2011-07-18T15:39:00.000+02:00

It's been ages since I posted anything. Moving to a new job in a new country while still trying to catchup with my debt to my co-authors is not easy! My apologies to all. Once I'm settled (moving date is August 1st) I hope to get back on track.

In any case, I found this very nice article on the history of corporations that I found very interesting.

More and more I believe that all MBAs should have a history-cum-law course. It would probably overlap a lot with Ethics and maybe Strategy courses but I am sometimes amazed by the lack of historical knowledge on previous crises and the inner workings of a modern corporation.

Have a nice summer!