Monday, May 29, 2006

Stock exchanges

Excellent overview of stock exchanges, their actions and their future. | Articles by Subject | Financial exchanges: "So much for the notion that liquidity and technology will inevitably make trading a natural monopoly. NASDAQ's overwhelming market share in stocks not listed on the NYSE and American Stock Exchange disappeared a decade ago. It has never returned, despite the acquisition of its largest competitor, Instinet. Up to two-thirds of transactions in British shares and perhaps 75% of German share trades now take place off-exchange, according to Hans-Joachim Voth, an economist at Barcelona's Pompeu Fabra university. "

The pressure to merge comes as technology and market practice takes more of the secondary market and liquidity away.

Thursday, May 25, 2006


Ask the expert? I don't think so.

Predicting the World Cup...This paper suggests that it is true - the chances of me predicting who will win the world cup are the same as that of my wife identifying the victor. However, while she is clear that she is guessing, I can talk about the 'reasons' behind my 'prediction' for a long time.

Economists View points to a book by Philip E. Tetlock, How accurate are your pet pundits? investigating the accuracy of forecasts.

Imagine your job as a media executive depends on expanding your viewing audience. Whom would you pick: an expert who balances conflicting arguments and concludes that the likeliest outcome is more of the same, or an expert who gets viewers on the edge of their seats over radical Islamists seizing control and causing oil prices to soar? ...

More on Tetlock from John Kay here

Tuesday, May 23, 2006

Public or private

An old one from the Economist. Thanks to Tim Worstall for the pointer. The best way of supplying water and a natural experiment.

Water industry | Frozen taps |
"PRIVATISED in England, a mutual in Wales, a nationalised industry in Scotland and a government department in Northern Ireland—there is no better proving ground for different ideas about utility provision than Britain's water industry. "

The Scottish water was more expensive, less clean and there were more leaks in 2003 (when the article was written).

"“Essentially, the service was run by engineers,” says Alan Alexander, chairman of Scottish Water, a new company formed in 2002 by a merger of three regional state-owned utilities. “No-one gave much thought to economics.” Politics has also played a role. The utility has been in thrall to trade unions, so it is over-manned. And the need to keep politicians sweet may explain why business charges have risen so much faster than the domestic bills most voters pay"

Wednesday, May 17, 2006


There is little sign that consumers are yet cutting back as a result of higher oil prices. Lex: Wal-Mart:
"At a time like this, it is nice when retailers manage to avoid nasty surprises. That is especially so when it comes to Wal-Mart, which remains more exposed than most to price conscious US shoppers feeling the squeeze from higher petrol prices. For now, however, rising fuel costs seem to have reassuringly little impact on either revenues or profitability. "
I guess the main evidence would come from lower sales at Wal-Mart or even higher sales if more people were pushed towards the cheapest items.

Tuesday, May 16, 2006

Auditors and agency issues

Excellent little look at auditing from John Kay.
Auditors need escape Prisoner’s Dilemma

Market forces have destroyed the old professional cartel and left managers appointing auditors on behalf of shareholders. Not surprising, Kay says, that auditing is expensive and not always effective.

Tuesday, May 09, 2006

Oligopoly and price wars

Paul Kedrosky: " Speak Dell

Dell blew up in after-hours tonight, announcing it would miss first-quarter earnings and that it was taking down the forecast. CEO Kevin Rollins had the following opaque offering by way of explanation:

'During Q1 we continued to execute on our strategy to reinvigorate growth by making investments in our support infrastructure and product quality and by accelerating pricing adjustments. We are committed to delivering industry leading value to our customers, which ultimately results in industry leading growth for the company.'

I know what you're thinking. You're thinking, What the hell does that mean? I speak Dell, so here is my translation:

During Q1 we tried to fix our support problems in hopes that would spike growth in the crummy PC market, but that didn't work so we tried to save the quarter by cutting prices earlier and more than expected. Trouble is, those bastards at HP cut prices too, which made us drop prices further. Now we're left with losing money on PC sales and trying to make it up on volume."

Mr. Friedman and Mr. Keynes

Nice analogy for central bank activity and the control over the economy
PIMCO Bonds - FF May 2006: "Technically, this link is called Velocity, the rate of turnover of the stock of money. Non-technically, think of Velocity as the pace of beer drinking at a fraternity party. If the pace is stable, or at least predictable, the barkeep could target the final goal of moderate buzzdom at the end of the party by simply supplying kegs at a constant rate, or a pace-adjusted predictable rate, and let the market figure out the price at which to ration the beer. In this case, you could call the barkeep Milton Friedman."

Monday, May 08, 2006


Something to keep an eye on - "brutal" means "enought already!" :
"Mr Trichet took a hawkish tack, confirming expectations that the ECB will hike in June, possibly even by a outsize 50 basis points. But that was not really the point. Instead the market was surprised that Mr Trichet chose not to comment on the euro’s sharp rise against the dollar. Twice in 2004 Mr Trichet referred to similar moves as “brutal”, helping to head off further euro gains. So far this time neither Mr Trichet nor any of his colleagues have spoken out."

Saturday, May 06, 2006

Poker and Game Theory

Tim Harford on poker and game theory.
Tim Harford looks at risk and insurance and points out that it would make much more sense for most of us to bare small risks ourselves. Risky business:
"Few of us see risks that way. Matthew Rabin and Richard Thaler pointed out in 2001, in a paper that surprised even their fellow economists, that anyone who pays even slightly more than the fair premium to escape from a risk on a £50 phone or a 1900 insurance deductible must be making a mistake. The stakes are too tiny: in the context of a £1m lifetime income, even 1900 is a small enough risk to swallow."

Meanwhile, Stefan Dercon from Oxford looks at the way that a lack of insurance can prevent Etheopian farmers borrowing to buy fertiliser. The downside risk here is imprisonment for non-repayment.

Friday, May 05, 2006

SUV sales

The Detroit Free Press reports on April auto sales. Skidding auto sales drive new incentives:
"Consumers bought 1.4 million cars and trucks in April, a decline of 4.2% compared with the same month a year ago. And while car sales did relatively well, the light-truck category, which includes pickups, minivans, SUVs and vans, took a beating. Truck sales plummeted 7% during the month.Consumers bought 1.4 million cars and trucks in April, a decline of 4.2% compared with the same month a year ago. And while car sales did relatively well, the light-truck category, which includes pickups, minivans, SUVs and vans, took a beating. Truck sales plummeted 7% during the month."

Mid-size SUV sales were hit particularly hard. Chevrolet Traiblazer sales fell 27.9% against April 2005; Jeep Grand Cherokee fell 43.0% and Ford Exlorer slipped 42.1%.

Thursday, May 04, 2006

Transfer pricing

This is a link from Greg Manikw's blogCorporate Tax Rates to a report from KPMG on corporate tax rates. The relatively high taxes in the US may be one reason why returns to US FDI abroad appear to be much higher than the returns to FDI into the US. It could also be one of the reasons for strong demand for US FDI into low tax Ireland.

Monday, May 01, 2006

Serial corellation in equities :
"It is worth comparing those figures with the heady days of the dotcom boom. In March 2000, net retail sales of open-ended funds were £2.8bn, while the Isa season raised a staggering £3.3bn.
So we have not quite reclaimed the heights of six years ago. In part, this is because Isas were new in 2000; there were few redemptions, while investors are nowadays cashing in some old plans. And the Investment Management Association says Isa sales were hit by the withdrawal of the dividend tax credit (one of Gordon Brown’s little tinkerings) in 2004.
A similar picture can be seen in the US. Sales of mutual funds are up but are not at 2000 levels. According to the Investment Company Institute, US equity funds had an inflow of $27bn in February; monthly sales peaked at more than $50bn in early 2000.
In short, we are not in the kind of bubble territory seen six years ago. Nevertheless, it is disappointing to see that it is much easier to persuade UK investors to buy equities now, with the FTSE 100 index above 6,000, than it was in March 2003 (net retail sales £740m, Isa season £658m) when the index was at 3,200."

Here is good evidence for the idea that retail investment in securities is mainly based on past performance, not an analysis of the fundamentals. This would point to trends developing in securities prices and over-shooting of fundamentals. It would be interesting to look at the relationship between these retail flows and something like P/E ratio.