Under The Buttonwood Tree

Daily Link Orgy - June 11, 2010

noreply@blogger.com (EJF) — Fri, 11 Jun 2010 12:09:00 +0000

Two excellent articles from Fortune Magazine that details the possible liability to BP for the oil spill in the Gulf of Mexico.

Part One and Part Two

A good review of the field of Behavioral Finance entitled Behavioral Finance: An Introduction.

Corporations are hoarding cash as many still fear another downturn.

Will the growth of the Chinese economy stall out?

Check out these blogs that I have found over the last several months:

Above Average Odds Investing

The Psy-Fi Blog

Graham And Doddsville

Link Orgy - June 10, 2010

noreply@blogger.com (EJF) — Wed, 09 Jun 2010 10:24:00 +0000

The Federal Reserve gets transparent on its dealings.

There's still too much natural gas drilling in the United States as many operators ignore prices and drill to hold acreage.

The BP Statistical Review of World Energy shows a sharp drop in demand in 2009 for just about every form of energy, and a surprising jump in production of oil and natural gas in the U.S.

PIMCO speaks on the economy and expects a slowdown in the second half of 2010.

Weekly Link Orgy - June 7, 2010

noreply@blogger.com (EJF) — Mon, 07 Jun 2010 14:10:00 +0000

I found a new blog written by an oil industry insider. The blog is called Open Choke, and it provides an interesting point of view on activities in the Energy Sector.

The Federal Reserve Bank of New York weighs in on the Homeownership gap. The bank's conclusion:

"Negative equity homeowners will face such daunting saving requirements to retain their home or purchase a new home that they will very likely convert to renters over time. Thus, the effective rate may serve as a useful guide to the future path of the official rate. For the nation, the effective rate of homeownership calculated by the authors is 5.6 percentage points below the official homeownership rate."

Read about Bernie Madoff in a cushy Federal prison in North Carolina.

Weekly Link Orgy - February 8, 2010

noreply@blogger.com (EJF) — Mon, 08 Feb 2010 12:51:00 +0000

An excellent summary of the fundamentals in the energy complex from the Dallas Federal Reserve.

The 1st American State Bank of Minnesota, located in Hancock, Minnesota, was the only bank to fail last week. This failure will only cost the government $3.1 million.

An academic paper entitled Paulson's Gift written by Pietro Veronesi and Luigi Zingales:

"We calculate the costs and benefits of the largest ever U.S. Government intervention in the financial sector announced the 2008 Columbus-day weekend. We estimate that this intervention increased the value of banks’ financial claims by $131 billion at a taxpayers’ cost of $25 -$47 billions with a net benefit between $84bn and $107bn. By looking at the limited cross section we infer that this net benefit arises from a reduction in the probability of bankruptcy, which we estimate would destroy 22% of the enterprise value. The big winners of the plan were the three former investment banks and Citigroup, while the loser was JP Morgan."

The recent market correction shakes up the IPO market, as several firms pull offerings.

Weekly Link Orgy - January 21, 2010

noreply@blogger.com (EJF) — Thu, 21 Jan 2010 11:28:00 +0000

I have been saying for quite some time that the exploration and production industry may be underestimating the growing environmental opposition to hydraulic fracturing. The issue is getting more and more publicity as the practice spreads across the United States.

The financial crisis may be easing, but the pain for banks may continue over the next few years due to punitive taxes, weak loan demand and loss of government support.

Shale goes international as big oil goes after Toreador Resources, a micro cap oil and gas company with operations in France in the Paris Oil Basin.

Weekly Link Orgy - December 17, 2009

noreply@blogger.com (EJF) — Thu, 17 Dec 2009 15:47:00 +0000

The revenge of the hedge fund wives strikes again as the ex-wife of Steven Cohen of SAC Capital sues him. This was a wife from the late 1980's.

The IPO of Cobalt International Energy falls a little flat in its debut,but the company does have 87 prospects to drill in the Gulf of Mexico and offshore West Africa.

Ben Bernanke is a weak choice for Time Person of the Year in my humble opinion, but it couldn't have come at a better time for the Federal Reserve as he faces a reappointment vote and Congress debates reducing the powers of the Federal Reserve.

Weekly Link Orgy - December 1, 2009

noreply@blogger.com (EJF) — Tue, 01 Dec 2009 16:00:00 +0000

Here's a new anecdotal indicator of when the top of the market is reached. How about when a country starts building the tallest skyscraper in the world, that means it is time to sell. Read about the Burj Dubai.

These seem like five solid reasons for a pause in the stock market rally. Investors should beware that momentum is a powerful force and it could drive the market higher.

Iraq has big plans to develop its oil resources with the assistance of western oil companies. The country wants to move its production from 2.5 to 7.0 million barrels per day in six years.

Weekly Link Orgy - September 30, 2009

noreply@blogger.com (EJF) — Wed, 30 Sep 2009 18:27:00 +0000

The Chief of Staff of the Brazilian Government said in a speech that pre salt reserves off the Brazilian coast may hold "between 25 billion and 100 billion barrels" of reserves. If this is true and much of it turns out to be recoverable then this should put any peak oil nonsense to rest.

U.S. oil demand in July 2009 dropped to a 13 year low, according to the Energy Information Administration. Demand was 18.771 million barrels per day, down from 19.557 million barrels per day on July 2008. Although gasoline demand is moving higher, other refined petroleum products saw weak demand.

If you think Wall Street suddenly became greedy during the recent financial crisis, then read this book "The villainy of stock-jobbers detected, and the causes of the late run upon the bank and bankers discovered and considered (1701)"

Weekly Link Orgy

noreply@blogger.com (EJF) — Sun, 20 Sep 2009 12:32:00 +0000

The New York Times joins the debate over whether the market rally has gone too far. are we on the cusp of more irrational exuberance?

Did you know that Charlie Munger went to Harvard Law School?

It still sucks to be an architect, but things are getting a little better.

Get the latest copy of Grant's Interest Rate Observer for free.

Weekly Link Orgy - August 12, 2009

noreply@blogger.com (EJF) — Wed, 12 Aug 2009 16:12:00 +0000

Are you one of those doom and gloomers who think the U.S. is bound to fall like other civilizations? Do you have a theory about how it will happen? Then check out this list of 144 possibilities and see if your theory is on there.

One hundred and forty four scenarios for the fall.

Jim Simpson of BENTEK Energy, LLC, presents a compelling case that prices for natural gas may stay low for quite some time and never return to the levels that the exploration and production industry can only dream about for now.

Read a summary here.

Weekly Link Orgy - August 3, 2009

noreply@blogger.com (EJF) — Tue, 04 Aug 2009 11:40:00 +0000

The folks at Barron's weigh in on the seesaw battle between Growth and Value Investing. This is a conflict that has almost reached biblical proportions and is clouded by the use of unreliable statistics due to the composition of the indexes that are used. See my post here for more details.

Another guerrilla conflict also rages on in the financial markets - Are Speculators or Fundamentals responsible for high Oil prices? I'll make two Devil's Advocate points here. We are all speculators if you use a broad definition of the word, and if it's so damn easy to drive up the price of oil, then how come the Speculators can't drive up the price of Natural Gas?

Psychology Today shares its point of view in regard to the latest market scapegoat - the Speculator.

Daily Link Orgy - July 9, 2009

noreply@blogger.com (EJF) — Thu, 09 Jul 2009 16:08:00 +0000

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This is the tenth most downloaded paper related to a financial or investing topic.

Optimal Capital Allocation Using RAROC and EVA - By Neal Stoughton and Josef Zechner - Downloaded 21,718 times.

Abstract

"Equity capital allocation plays a particularly important role for financial institutions such as banks, who issue equity infrequently but have continuous access to debt capital. In such a context this paper shows that EVA and RAROC based capital budgeting mechanisms have economic foundations. We derive optimal capital allocation under asymmetric information and in the presence of outside managerial opportunities for an institution with a risky and a riskless division. It is shown that the results extend in a consistent manner to the multidivisional case of decentralized investment decisions with a suitable redefinition of economic capital. The decentralization leads to a charge for economic capital based on the division's own realized risk. Outside managerial opportunities increase the usage of capital and lead to overinvestment in risky projects; at the same time more capital is raised but risk limits are binding in more states. An institution with a single risky division should base its hurdle rate for capital allocated on the cost of debt. In contrast, the hurdle rate tends to the cost of equity for a diversified multidivisional firm. The analysis shows that hurdle rates have a common component in contrast to the standard perfect markets result with division-specific hurdle rates."

Daily Link Orgy - July 7, 2009

noreply@blogger.com (EJF) — Tue, 07 Jul 2009 16:08:00 +0000

Daily Link Orgy - July 2, 2009

noreply@blogger.com (EJF) — Thu, 02 Jul 2009 16:08:00 +0000

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This is the eighth most downloaded paper related to a financial or investing topic.

Value Maximization, Stakeholder Theory, and the Corporate Objective Function - By Michael C. Jensen - 22,687 downloads.

Abstract

"This paper examines the role of the corporate objective function in corporate productivity and efficiency, social welfare, and the accountability of managers and directors. I argue that since it is logically impossible to maximize in more than one dimension, purposeful behavior requires a single valued objective function. Two hundred years of work in economics and finance implies that in the absence of externalities and monopoly (and when all goods are priced), social welfare is maximized when each firm in an economy maximizes its total market value. Total value is not just the value of the equity but also includes the market values of all other financial claims including debt, preferred stock, and warrants."

Number 9.

Daily Link Orgy - June 30, 2009

noreply@blogger.com (EJF) — Tue, 30 Jun 2009 16:08:00 +0000

Daily Link Orgy - June 28, 2009

noreply@blogger.com (EJF) — Sun, 28 Jun 2009 16:08:00 +0000

Daily Link Orgy - June 26, 2009

noreply@blogger.com (EJF) — Fri, 26 Jun 2009 15:56:00 +0000

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This article is the fifth most downloaded paper related to a financial or investing topic.

Value Based Management: Economic Value Added or Cash Value Added? By Fredrik Weissenrieder - 28,505 downloads

Abstract

"What we use today to follow up a company's profitability and value creation is inconsistent with the capital market's mechanism, and what the market considers determines value--it is therefore imprecise and irrelevant. The accounting used will not any longer be a sufficient provider of financial information. Companies will experience a demand for more precise tools, both when it comes to metrics and the tool's ingredients (relevance) due to the increasing activity among shareholders/investors. The relevance in financial management must be dramatically improved. Companies must now identify the Value Based Management (VBM) concept that will best initiate a higher degree of Shareholder Value awareness in the company. A true VBM framework is consistent with the market's mechanism and our four factors that, according to the capital markets, determine value. The metric must be precise and relevant. Not random and irrelevant as accounting is today as a decision base."

Number 6.

Daily Link Orgy - June 24, 2009

noreply@blogger.com (EJF) — Wed, 24 Jun 2009 15:56:00 +0000

Daily Link Orgy - June 22, 2009

noreply@blogger.com (EJF) — Mon, 22 Jun 2009 15:56:00 +0000

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This is the third most downloaded paper related to a financial or investing topic.

A Comparison of Dividend, Cash Flow, and Earnings Approaches to Equity Valuation
Stephen H. Penman and Theodore Sougiannis - 37,934 downloads

Abstract

"Standard formulas for valuing the equity of going concerns require prediction of payoffs "to infinity" but practical analysis requires that they be predicted over finite horizons. This truncation inevitably involves (often troublesome) "terminal value" calculations. This paper contrasts dividend discount techniques, discounted cash flow analysis, and techniques based on accrual earnings when applied to a finite-horizon valuation. Valuations based on average ex-post payoffs over various horizons, with and without terminal value calculations, are compared with (ex-ante) market prices to give an indication of the error introduced by each technique in truncating the horizon. Comparisons of these errors show that accrual earnings techniques dominate free cash flow and dividend discounting approaches. Further, the relevant accounting features of techniques that make them less than ideal for finite horizon analysis are discovered. Conditions where a given technique requires particularly long forecasting horizons are identified and the performance of the alternative techniques under those conditions is examined."

Number 4.

Daily Link Orgy - June 20, 2009

noreply@blogger.com (EJF) — Sat, 20 Jun 2009 15:48:00 +0000

The Social Science Research Network is an excellent source of academic papers regarding many different topics. Don't be misled by the Social Science name, as the site has many financial and investing related papers.

Over the next week or so, I will post a list of the top ten downloaded financial or investing related papers. Some of them are classics and some may be a little surprising. Most of them are free to download as well.

This article is the second most downloaded paper related to a financial or investing topic.

Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
Michael C. Jensen and William H. Meckling - Downloaded 57,828 times

Abstract

"This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the 'separation and control' issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears the costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem."

Just to show how influential this paper is, it has been cited 2,180 times in other academic papers.

Number 3.

Daily Link Orgy - June 18, 2009

noreply@blogger.com (EJF) — Thu, 18 Jun 2009 19:29:00 +0000

Daily Link Orgy - June 17, 2009

noreply@blogger.com (EJF) — Wed, 17 Jun 2009 13:55:00 +0000

Two more high profile individuals join the growing chorus of caution about the price of oil. James Mulva, the CEO of Conoco Phillips, and Nouriel Roubini, the economist.

I found a web site called Behavioural Finance through Simoleon Sense. This is a must read for any investors so they can learn to think better when investing.

Interesting article about EnCana, a Canadian Energy company deciding to cut its natural gas production by "a couple hundred million cubic feet per day in Canada, and a couple hundred million cubic feet in the U.S." The company's total gas production is 3.8 billion cubic feet per day. The company said its production in the Rocky Mountains was cut particularly hard due to oversupply in that region.

Weekly Link Orgy

noreply@blogger.com (EJF) — Mon, 15 Jun 2009 14:27:00 +0000

So it turns out that the U.S. Treasury is actually earning a return on its investment in Citigroup in excess of the return on the S & P 500. I have said for months that the Capital Purchase Program was not a "bailout" as the media called it. The government should keep the warrants it received and the taxpayer will get a huge return down the road.

An interesting article from Reason that details the ten most absurd cover stories from Time Magazine over the last forty years.

A couple of interesting video sites with presentations applicable to investing that you should monitor for updates. These include FORA.tv and TED.

Another video source is from the The Heilbrunn Center for Graham & Dodd Investing, which has recordings of lectures devoted to Value Investing.

Weekly Link Orgy

noreply@blogger.com (EJF) — Wed, 10 Jun 2009 13:29:00 +0000

An interesting blog post by Arthur Berman posted on the blog Petroleum Truth Report. Mr. Berman, who is a geologist, takes a contrary opinion opposed to the conventional excitement over shale plays in North America.

Is the "efficient market" hypothesis responsible for the financial crisis? Jeremy Grantham mocks the hypothesis in one of his recent quarterly letters. "The incredibly inaccurate efficient market theory was believed in totality by many of our financial leaders, and believed in part by almost all. It left our economic and government establishment sitting by confidently, even as a lethally dangerous combination of asset bubbles, lax controls, pernicious incentives and wickedly complicated instruments led to our current plight."

An interesting series of blogs that cover five North American Shale plays: Barnett Shale, Bakken Shale, Haynesville Shale, Fayetteville Shale and the Marcellus Shale. The blogs are well organized, easy to read and are not cluttered with extraneous information.

The emerging debate over what direction natural gas prices will go given that the oil to gas ratio is at 18, the highest level in many years:

Article One

Article Two

Article Three

Article Four

Article Five

Being bullish on natural gas is certainly a crowded trade, which may tell investors something about it.

Weekly Link Orgy

noreply@blogger.com (EJF) — Mon, 01 Jun 2009 11:13:00 +0000

General Motors, the second oldest member of the Dow Jones Industrial Average after General Electric limps toward bankruptcy. Does the market care anymore? We will find out on Monday.

One, Two, Three and Four.

Pundits are already calling into question the incipient U.S. Economic recovery as oil prices start to climb again, and yields move higher on the back of fears about giant Federal deficits.

The great war over regulating financial institutions begins. Will it do any good to regulate Hedge Funds? Did they cause this mess we are in? Having one central regulatory agency sounds like a good plan to start.

One and Two.

Are you tired of hearing everything about the insurance industry except fundamentals. Check out these presentations at the Insurance Information Institute.