1. The twenty-five most valuable blogs in America.  (24/7 Wall St.)
2. Doug Kass, “There is a giant bubble in quant funds, and their outsized influence in buying stocks, bonds and commodities might soon be approaching the height its of popularity.” (TheStreet)
3. Ways that individuals can play the carry trade.  (Felix Salmon)
4. If you trade gold, like GLD, you need to know this at tax time.  (FusionIQ)
5. When your cost of capital is 0% everything looks attractive.  (Kid Dynamite also Big Picture)
6. A simple asset class timing model based on the slope of the yield curve.  (World Beta)
7. The best of the bull market may already be behind us.  (Barron’s)
8. 10 common characteristics of successful traders from Van Tharp.  (Kirk Report)
9. Using the Taylor Rule as a check on rate expectations.  (Accrued Interest)
10. Top stocks of the decade.  (Crossing Wall Street)

Below are links to the three top Abnormal Returns-authored posts (excluding linkfests).

1. Is merger arbitrage a worthwhile strategy for an ETF?  (Abnormal Returns also IndexUniverse)
2. Dogbert, Umberto Eco and Abnormal Returns. How news aggregators bring a small measure of order to the world.  (Abnormal Returns also Felix Salmon)
3. Most people investing by the seat of your pants.  On building a testable investment process  (Abnormal Returns)

As always thanks for checking in with Abnormal Returns.  Please feel free to comment or drop us a line.

The stock market is now 20% overvalued.  (The Money Game)

Has the carry trade gotten too crowded?  (pazzomundo via TPC)

Year-end is nearing and putting pressure on T-bill yields.  (FT Alphaville, Money & Co., Across the Curve, MarketBeat, DJ Market Talk)

Is there a better benchmark out there than the Barclays Capital Aggregate Bond Index. (EconomPic Data)

The most ridiculous ETFs of all-time.  (The Money Game also Clusterstock)

Under what conditions will the U.S. 12-Month Natural Gas Fund (UNL) outperform its more (in)famous cousin the U.S. Natural Gas Fund (UNG)?  (IndexUniverse, ETF Database)

Explaining the anomalous correlation between equities and gold.  (MarketBeat)

Finance recruiters are scouting poker rooms for trading talent.  (Bloomberg)

Are shareholders going to push back against Goldman Sachs (GS) bonuses?  (Deal Journal, Atlantic Business)

The House pushes back against Federal Reserve independence.  (WSJ, WashingtonPost, Huffington Post, Free exchange)

Is the housing crisis over yet?  (Calculated Risk)

Rail traffic (and container counts) are still sluggish.  (The Pragmatic Capitalist, Carpe Diem)

Felix Salmon vs. Henry Blodget on proper disclosure in the new financial media.  (Salmon, Blodget, Salmon)

A “panoramic” view of eight centuries of financial crises.  (Simoleon Sense)

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Be wary when a private equity firm looks to go public.  (WSJ, Behind the Headlines)

Using the Taylor Rule as a check on rate expectations.  (Accrued Interest)

One overlooked downside to Fed policy is the dearth of opportunities for yield investors like insurance companies.  (WSJ)

Gold is nearly 20% above its 200 day moving average.  (Bespoke)

Carolyn Cui, “GLD now rivals many of the world’s central banks, among the biggest holders of bullion. If GLD were a central bank, it would rank fifth – just below France and above China.”  (MarketBeat)

John Paulson is launching a gold-focused hedge fund.  (Marketwatch also DealBook)

An early vote for Ford (F) as stock of the year.  (Crossing Wall Street)

How did the “golden cross” strategy perform this market cycle?  (MarketSci Blog)

An extended profile of Ken Griffin and Citadel Group who are trying to put a horrible 2008 in the rear view mirror.  (WSJ also Dealbreaker)

Phibro is looking for more outside capital.  (Clusterstock)

Ways that individuals can play the carry trade.  (Felix Salmon)

10 common characteristics of successful traders from Van Tharp.  (Kirk Report)

Buy-and-holders in 401(k) plans are now above water .  (The Money Game)

On the relationship between sovereign credit spreads and Transparency International’s annual Corruption Perceptions Index.  (Dealbreaker)

High frequency trading is on the rise for the simple reason it is cheaper and more effective.  (FT Alphaville)

How much do hedge fund lockups hurt investors?  (SSRN)

Peter Eavis, “Commercial real estate looks too tough to save.”  (WSJ)

What are the prospects for a General Motors IPO in 2010?  (24/7 Wall St.)

Ironically, House Democrats want to regulate foreign exchange derivatives, the one area that play little or no role in the financial crisis.  (Huffington Post)

Jonathan Ford and Peter Thal Larsen, “If you spool back ten years, Goldman Sachs was considered to be a strong global bank. Its balance sheet is now almost five times bigger. It is simply hard to believe that the ideal size for a global bank should have risen so sharply in a single decade.”  (Prospect Magazine)

By one rate-of-change measure the recession ended in July.  (Econbrowser)

Mike Shedlock, “There is plenty of money available for lending. However, there are fewer businesses wanting loans, and fewer still credit worthy businesses who want loans.”  (Global Economic Trend Analysis)

Why California needs to transition to rail and alternative energy and fast.  (Gregor Macdonald)

Dogbert, Umberto Eco and Abnormal Returns. How news aggregators bring a small measure of order to the world.  (Abnormal Returns also Felix Salmon)

Who wins in an age where people commonly live to 100 years old.  (Humble Student of the Markets)

Investment themes and fads year-by-year from 1996 to present.  (The Reformed Broker)

Does Apple (AAPL) have an Android problem?  (Credit Writedowns)

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“Investment blogging is difficult.”  (Abnormal Returns)

You would think, by transitive properties, that investment blog aggregation would also be difficult.  But the idea floating around of late that aggregation, including investment blog aggregation, is easy.  Especially if you read the Dilbert comic below.

(And please don’t send this to the BusinessInsider guys who have had this strip sent to them one too many times.)

News aggregators may be high profile targets at the moment, but the art of aggregation is not easy.  paidContent.org reported today that the New York Times is going stop its aggregation feature Times Extra at the end of the month.  The Times reportedly wants to stay in the aggregation business, just with a different model.

There are at least two big reasons why aggregation has come under such scrutiny of late.  The first is the campaign by Rupert Murdoch of News Corp., owner of many online news sites including WSJ.com, to somehow extract payment from aggregators, including Google, for access to his online properties.  Mike Masnik at TechDirt notes the hypocrisy in this by citing many examples of News Corp. site engaging in aggregation themselves.

The second reason is that aggregation has become increasingly high profile as it yields successful business models on the Internet.  A quick look at the list of the twenty-five most valuable blogs at 24/7 Wall St. shows a number of them aggregate content whether in whole or in part as a part of their business model.  The Huffington Post which is in which has taken flak as a news aggregator shows up at #2 on the list.

A common denominator among the blogs on that list is a steady stream of posts during the day.  The business models of these sites is dependent on a large number of unique visitors and page views.  Common ways to do this is to generate controversy, break news or aggregate content.  Some of these very sites, including The Huffington Post, have come under fire for the way they aggregate content.

The same is true in the investment blogosphere where two investment sites Seeking Alpha #11 and The Business Insider #16 make an appearance on the list of most valuable blogs.  Mebane Faber at World Beta recently did an analysis to find out what it takes to be a popular investment blogger.  An examination of popular investment blogs shows a high correlation between the number of posts and site visits.  This finding is not all that surprising to us given our earlier discussion of what it takes to be an A-list blogger.  However, the quantity of posts is not necessarily correlated with the quality of posts.

That is where a site like Abnormal Returns, amongst others, comes in, to hopefully help the reader cull quality posts from the investment blogosphere.  We have previously (and publicly) discussed the challenges of investment blog aggregation.  It is interesting to note that in the time Abnormal Returns has been doing a daily linkfest not one blogger (or publisher) has asked us not to link to their articles.  Indeed we are frequently asked by individual bloggers and MSM sites to link to their work.

One legitimate fear is that news gathering will suffer in this new age because of a lack of support.  Fortunately we are already seeing some innovation in the news gathering model.  For instance the Chicago News Cooperative has been formed as a for-profit/non-profit hybrid to generate news content about the Chicagoland area.

The popularity of these aggregation sites should serve not as a irritant to the mainstream media sites but should spur them to re-think their own business models.  There certainly are some sites out there that take liberties with the notion of “fair use” to pad their page views.  That point aside, the heart of the matter is that readers look to these sites to help them make sense of the (investment) world.

The flood of information facing us as we visit the Internet each day can be intimidating.  That notion of information overload is not new.  Umberto Eco in an interview appearing at Spiegel Online discusses how human beings have been using lists to try and make sense of the world for quite some time.  Eco states:

The list is the origin of culture. It’s part of the history of art and literature. What does culture want? To make infinity comprehensible. It also wants to create order — not always, but often. And how, as a human being, does one face infinity? How does one attempt to grasp the incomprehensible? Through lists, through catalogs, through collections in museums and through encyclopedias and dictionaries.

Eco goes on to discusses how in the age of Google algorithmically derived lists are potentially dangerous.  The challenge for the user is how to discriminate amongst the many results of a search.

Some may argue we are stretching to equate the generation of lists in art and culture with news aggregation.  However the goals are the same.  A human editor curating posts is trying to help the reader navigate their information flow.  In short to try and make the the world we live in a little bit more comprehensible.

Aggregators, investment or otherwise, are not the cause of the downfall of traditional news gatherers like newspapers.  They are simply a sign that people are hungry for information and analysis presented in an efficient manner.  For better or worse, that instinct to seek out order in an increasingly complex world is here to stay.

Top stocks of the decade.  (Crossing Wall Street)

The story of Amazon.com (AMZN) in a decade of stock prices.  (Bespoke)

Doug Kass, “There is a giant bubble in quant funds, and their outsized influence in buying stocks, bonds and commodities might soon be approaching the height its of popularity.” (TheStreet)

A patent on fundamental indexation could cause problems for some money managers.  (WSJ)

Jason Zweig, “Confronted with any investment that’s named with a catchy WACronym, you must fight back with your own acronym. Being on your guard is as easy as ABC: Always Be Cautious.”  (WSJ)

John Paulson’s case for Bank of America (BAC) stock.  (Dealbreaker also TheStreet)

Brett Arends, “Perhaps biotech investing is best left to wealthy dreamers with money to burn.”  (WSJ)

Target date mutual funds help investors avoid “avoidable mistakes.”  (Morningstar)

What is behind the jump in lumber prices?  (The Pragmatic Capitalist)

Keep a close eye on bid-ask spreads and premiums to NAV when trading international ETFs.  (Morningstar)

Will the Index ARB Merger Arbitrage ETF (MNA) provide competition for hedge funds?  (WSJ, IndexUniverse earlier Abnormal Returns)

Buying into Texas and Oklahoma just got a lot cheaper.  (ETF Database)

More thematic ETFs including the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (GRID) and some focused small cap ETFs from IndexIQ.  (IndexUniverse, ibid)

Private equity firm Apollo Management plans to list on the NYSE.  (FT)

Goldman Sachs (GS) and Warren Buffett jump on the small business-jobs bandwagon.  (NYTimes also Atlantic Business)

“(T)he New York Fed, led by our current Secretary of the Treasury, botched the rescue of AIG so completely and so pathetically  that it does border, as Yves says, on criminal incompetence.” (Epicurean Dealmaker)

The next stimulus plan will be focused on “jobs, jobs, jobs.”  (Calculated Risk)

Evidence accumulating that the “worst pullback in consumer spending since the 1970’s” is just about over.  (The Stash also Free exchange)

If you thought housing starts were bad take a look at apartments.  (Floyd Norris)

Be wary when experts move outside their realm of competence.  (A Dash of Insight)

Contrarian alert!  Maria Bartiromo gets into the newsletter business.  (Dealbreaker)

Are news aggregators “parasites”?  (Dilbert also Silicon Alley Insider)

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The gold market has all the makings of a bubble.  (Buttonwood, Fund My Mutual Fund also Telegraph)

If you trade gold, like GLD, you need to know this at tax time.  (FusionIQ)

Currency ETCs work better than on first blush.  (Felix Salmon, FT Alphaville)

Not every outsized options trade signals a takeover.  (Ultimi Barbarorum)

ProShares leveraged ETFs avoid any capital gains distributions in 2009.  (IndexUniverse, ibid)

Why it may be worth bothering with mutual funds from small shops.  (Morningstar)

Pimco is launching an actively managed ETF to bridge the gap between money market funds and short term bond funds, the Pimco Enhanced Short Maturity Strategy Fund (MINT).  (IndexUniverse, ETF Database)

Is merger arbitrage a worthwhile strategy for an ETF?  (Abnormal Returns also IndexUniverse)

Both Buffett and Soros heart Wal-Mart (WMT).  (MarketBeat earlier Abnormal Returns)

One day Berkshire Hathaway (BRK-A) is going to look (and trade) like a big conglomerate. (Felix Salmon earlier Abnormal Returns)

Has public outrage put the halt to Goldman Sachs (GS) equity outperformance?  (Bespoke)

Short selling bans affect the “quality” of a market.  (The Stash)

The Distress Index tells us nothing about future stock market returns.  (CXO Advisory Group)

Michael Panzner, “Commercial real estate seems to be the accident waiting to happen.”  (Clusterstock)

The tug of war between de-equitisation and re-equitisation is on in Europe.  (FT Alphaville)

Does financial volatility help explain economic activity?  (SSRN)

Some reasons to keep the deductibility of corporate interest payments. (Megan McArdle)

The Fed got played in the AIG bailout.  (Alea Blog, Big Picture, WSJ, 24/7 Wall St., Dealbreaker also Megan McArdle)

Bernanke thinks simply breaking up banks will not solve the too-big-to-fail problem.  (MarketBeat)

Industrial production was no great shakes in October. (Calculated Risk)

The Build America Bonds program is working..at a high cost to the federal government.  (Time)

The electric car era yields a new term:  “range anxiety.”  (WashingtonPost also EconLog)

Daniel W. Drezner, “Of course, the problem with football — and politics — is that decision-makers are usually judged by the quality of the outcomes rather than the quality of the processes.  So, the result in both worlds is often excessive risk-aversion.”  (Foreign Policy also Deadspin)

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I think most of the IndexIQ ETFs are silly, but they nailed this one.  Merger Arb ETF to hit the market, Convertible arb next?

Simply put merger arbitrage involves purchasing the shares in companies for whom there is an announced takeover transaction.  Depending upon the form of the deal the arbitrageur may take a short position in the acquiring company to eliminate the risk of the acquiring company’s stock falling in the meantime.  The risk in this strategy arises from failed deals.  Deals can fail for many reasons including a failure to acquire approval from shareholders or regulatory authorities.

There is a fair amount of academic literature on the returns to following a merger arbitrage strategy.  In a recent paper, “Merger Arbitrage and Idiosyncratic Risk”, Shane D. Shepherd reviews the literature on the topic.  He confirms the traditional finding that a merger arbitrage strategy has a non-linear beta with the market.  However after adding another factor that relationship disappears and is subsumed by this merger arb factor.  From the conclusion to the paper:

The existence of a merger arbitrage risk factor means that arbitrageurs are adequately compensated for bearing risk that is less than perfectly correlated with market risk. Merger arbitrage has often been cited as an excellent diversification tool, and this analysis supports that sentiment.

Given this finding it should not come as a surprise that merger arbitrage is a long-standing strategy employed primarily at hedge funds.  However there are a number of open-end mutual funds* and a closed-end fund* that also specialize in the strategy.  It should not be surprising that merger arbitrage was targeted by the ETF industry.

However is the new merger arbitrage ETF a good representation of the strategy?

Thomas Kirchner, the author of a book on merger arbitrage, a blogger at The Deal Sleuth and the manager of a mutual fund Pennsylvania Avenue Event-Driven Fund (PAEDX) takes issue with the new merger arbitrage ETF.  (Conflict-of-interest noted.)  While Kirchner has a number of questions about the fund’s strategy he makes an obvious point.  There is no arbitrage in the IQ ARB Merger Arbitrage ETF.  He writes:

No arbitrage: The MNA ETF does not short the acquirer. It takes long only positions in companies that get acquired. To the extent that they invest in cash deals (Sun Microsystem [JAVA] is a top holding with 7.55% of the fund) there clearly are no acquirers to short. We wouldn’t mind a cash deal-only merger arb fund. But if you do stock deals you really should short the acquirer if you want to call yourself an “arbitrage” fund and give your investors that risk profile.

The fund shorts equity indices to hedge out some of the market risk from stock deals, but it is a stretch to call this arbitrage.  That would be like calling a long-only portfolio with a long-standing equity index hedge an equity long-short fund.

Once the ETF industry moved beyond plain vanilla indices it was forced to make compromises to fit certain strategies into the ETF format.  There have been issues noted with a number of ETFs including those focused on high yield bond and commodities.  Obviously shorting the acquiror stock is no simple matter.  It requires borrowing shares and in some cases paying dearly for the privilege.  It therefore may be impossible to conduct true merger arbitrage in an ETF format.

Investors should therefore closely read the prospectus and information available from the fund to make sure that the strategy as outlined matches with their expectations.  The actively managed open-end mutual funds do, by and large, conduct traditional merger arbitrage and have multi-year live track records.  But you do pay for the privilege.  The IQ ETF has a proposed 0.75% annual fee and the mutual funds have expense ratios well in excess of 1%.

It is not clear that any investor needs a merger arbitrage fund.  That being said the existing open-end merger arb funds have garnered a critical mass of assets under management.  Nor is it clear that IndexIQ “nailed it” in constructing the fund’s (misnamed) strategy.  As is always the case with new and untested ETF strategies, caveat emptor.  Which around here means know what you are getting in an ETF, before you buy it.

——-

*You can find more information on the IQ ARB Merger Arbitrage ETF at the IndexIQ website.

*Shepherd, Shane D., “Merger Arbitrage and Idiosyncratic Risk” (October 13, 2009). Review of Business Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1488415

*The two biggest open-end merger arbitrage funds:  Merger Fund (MERFX), Arbitrage Fund (ARBFX), .  The closed-end fund is the Gabelli Deal Fund (GDL).

The performance gap YTD between large caps and small caps has evaporated.  (MarketBeat)

Four key sectors that are struggling of late.  (VIX and More also Bespoke)

While the window remains open corporations are issuing bonds at a rapid pace.  (WSJ)

Tracking down the months in which Galleon had big slugs of alpha.  (HedgeWeek via Alea)

A number of firsts in the launch of the iShares Diversified Alternatives Trust (ALT).  (IndexUniverse)

Apparently it is back to business as usual at money market mutual funds.  (WSJ)

Why would any one pay a premium for S&P 500 Covered Call Fund (BEP)?  (Daily Options Report)

A simple asset class timing model based on the slope of the yield curve.  (World Beta)

The Ivy League Model isn’t broken.  It just needs to be tweaked. (The Pragmatic Capitalist)

Izabella Kaminska, “In short, natgas — traditionally one of the most responsive commodity markets to supply and demand fundamentals — has been acting hugely out of character.”  (FT Alphaville)

Should we be worried that the big high frequency traders are now in the futures markets?  (FT also FT Alphaville)

Three observations about calendar effects on the equity market.  (CXO Advisory Group)

GDP-based indices are fundamentally flawed.  (SSRN)

Buffett admits that BNI was no bargain, while the BDI soars.  (DealBook, The Money Game)

Citigroup (C) is attracting some friends.  (Dealbreaker, James Altucher)

Is General Motors in better shape that previously thought?  (Washington Post, Deal Journal)

How the credit rating agencies are just like a racket.  (The Big Money)

Should the Fed be doing more?  (Tim Duy)

The Federal budget deficit looks worse when it put in a graph.  (Bespoke)

“It appears retail sales have bottomed, but there has been little pickup in final demand.”  (Calculated Risk also EconomPic Data, Atlantic Business)

Secretary Geithner has “long valued the blogosphere.”  (NYTimes)

James Surowiecki, “Subsidizing debt seems harmless simply because we’ve always done it. But the fact that you’ve had a bad habit for a long time doesn’t make it less dangerous.”  (New Yorker also The Balance Sheet, Felix Salmon)

Experts oversell their predictive powers.  (The Frontal Cortex)

Michael Mauboussin talks with Tom Keene about his book, Think Twice.  (Bloomberg)

The top ten business books on Amazon for 2009 are a bit of a mess.  (The Reformed Broker)

Will the Apple Tablet be the gadget to “end all gadgets”?  (CNNMoney)

Water and Helium-3 make the moon an attractive destination.  (The Money Game)

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Investor sentiment at week end.  (The Technical Take, Trader’s Narrative)

What happens to the stock market after a successful earnings season?  (Bespoke)

Jason Zweig, “..fighting confirmation bias is a never-ending battle. But if you can’t conquer this gremlin of your own mind, you don’t stand a chance of outwitting the market.”  (WSJ)

The best new mutual funds of 2009.  (Morningstar)

Why Schwab’s move into ETFs could be huge.  (ETF Trends)

Get a load of these devilishly complex currency ETPs.  (FT Alphaville)

The PowerShares Build America Bonds Portfolio Fund (BAB) is set to launch. (IndexUniverse)

John Paulson likes Citigroup (C) and has kicked Goldman Sachs (GS) to the curb.  (24/7 Wall St.)

Gregory Zuckerman, “Eight investing lessons of Mr. Paulson’s $20 billion gamble, the greatest trade in financial history.”  (WSJ)

And you thought the video game industry was recession-proof?  (Silicon Alley Insider)

The companies are thriving in the new, new economy.  (Howard Lindzon)

Is the hedge fund era on Wall Street finally over?  (NY Magazine)

Just how unusual is it to have a falling dollar and rising stock market?  (A Dash of Insight)

A look at the many economic models that have led investors astray.  (The Psy-Fi Blog)

Steve Randy Waldman, “The one rule that you can rely on with respect to banking regulation is that whenever regulators have discretion, they do exactly the wrong thing. For very predictable reasons and despite the best of intentions, they screw up.”  (Interfluidity)

On the relationship between housing starts and the unemployment rate.  (Calculated Risk)

Is a rebound in the jobs market closer than we think?  (Slate)

James Hamilton, “Why are the prices of so many commodities rising in an economy that seems to remain quite weak?”  (Econbrowser)

Is the recovery in China all smoke and mirrors?  (The Reformed Broker)

China has no plans to remove the Yuan peg to the US dollar any time soon.  (The Money Game, ibid)

Richard Thaler, “Some games and battles are like that: even when you win, you lose. When you see at the start that such a dynamic is likely, you’re better off just walking away.” (NYTimes also naked capitalism)

Bryan Caplan, “Why aren’t academic economists Bayesians?”  (EconLog)

Bloomberg LP is reinvesting terminal revenue into becoming a media powerhouse.  (NYTimes)

The best f***ing books about the financial crisis.  (Infectious Greed)

Top clicks this week on Abnormal Returns.  (Abnormal Returns)

Brett Steenbarger, “Romantic relationships mirror our deepest experiences of ourselves, sometimes for better; other times for worse.”  (TraderFeed)

The 50 best inventions of 2009.  (Time)

Abnormal Returns is a proud member of the StockTwits Network.

1. The twenty-five most valuable blogs in America.  (24/7 Wall St.)
2. What happens to the stock market when the VIX goes from overbought to oversold in five days?  (Quantifiable Edges)
3. YTD returns for the S&P 500 in other currencies don’t look all that hot.  (Bespoke)
4. Chocolate milk is the new red wine.  (NYTimes)
5. The conditions are ripe for a new hedge fund boom.  (Bloomberg)
6. Albert Edwards is firmly in the bearish camp.  (Fund My Mutual Fund, Infectious Greed)
7. Does HFT make technical analysis irrelevant?  (Washington’s Blog)
8. Suggested reading for the potential value investor.  (Value Plays)
9. The IMF warns that the dollar-carry trade is blowing bubbles around the world.  (The Money Game also Washington Post)
10. Bond fund managers are closing their books early to lock in gains before year-end.  (WSJ)

Below are links to the five top Abnormal Returns-authored posts (excluding linkfests).

1. Most people investing by the seat of your pants.  On building a testable investment process  (Abnormal Returns)
2. On the importance of learning the lessons from trading losses.  (Abnormal Returns)
3. What will Warren Buffett’s eventual successor do with the soon to be acquired Burlington Northern? (Abnormal Returns)
4. Is the falling spread on emerging market bonds an indication of growing investor risk appetites?  (Abnormal Returns also FT Alphaville)
5. On the difference between hedging and diversification and how cash can serve as an equity hedge.  (Abnormal Returns)

Thanks for checking in with Abnormal Returns this week.  As always you should feel free to drop us a line or leave a comment with your thoughts.