Archive for the ‘Financial Models’ Category

Feldstein called it: Stocks are headed for a fall …

February 9, 2018

“The Fed’s easy monetary policy has led to overvalued equities”
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A couple of weeks ago, we posted Feldstein: Stocks are headed for a fall …

Now that the stock market has “corrected” by over 10%, it feels like time for a flashback.

Feldman called it … and, decades ago, I had researched (and confirmed) the basis of his forecast.

So, did Iact of Feldstein’s prognostication?

Of course not …

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Let’s start by taking a stroll down memory lane ….

Over 40 years ago, an economist-wannabe co-authored a study in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.

clip_image001

The article summarized an econometric study (think: big, hairy financial model) that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.

That is, when the Fed adds liquidity into the market (think: “quantitative easing”), much of money flows into the stock market – rocket-boosting stock prices.

And the opposite is true. When the Fed tightens, stock prices fall back into earth orbit.

OK, fast forward to today.

(more…)

Feldstein: Stocks are headed for a fall …

January 18, 2018

“The Fed’s easy monetary policy has led to overvalued equities”

==========

Let’s start by taking a stroll down memory lane ….

Over 40 years ago, an economist-wannabe co-authored a study in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.

clip_image001

The article summarized an econometric study (think: big, hairy financial model) that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.

That is, when the Fed adds liquidity into the market (think: “quantitative easing”), much of money flows into the stock market – rocket-boosting stock prices.

And the opposite is true. When the Fed tightens, stock prices fall back into earth orbit.

OK, fast forward to today.

(more…)

Why did the stock market get over valued?

August 28, 2015

This was a week that market analysts retroactively tag “a long anticipated correction”.

Yeah, right.  That’s what you guys have been saying.

DJIA 08-24-15 5 years
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This week’s market dynamics beg a bigger question:

Why, given a sluggish economy and DC disarray, did the stock market keep marching forward to record highs … that met their come-uppance this week?

Easy.

Let’s start by taking a stroll down memory lane ….

(more…)

Why does the stock market hit record highs despite a sluggish economy?

November 15, 2013

Yesterday, the stock market soared to a new high, again.

image

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Why, given a sluggish economy and DC disarray, is the stock market still moving higher??

Easy.

Let’s start by taking a stroll down memory lane ….

(more…)

Why did the stock market hit record highs despite a sluggish economy?

September 19, 2013

Yesterday, the stock market soared when Bernanke announced the continuation of the Fed’s Quantitative Easing program … that is, the Fed plans to continue pumping $85 billion dollars per month into the economy.

stocks surge on Fed action

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So, why did the market reach record highs?

Easy.

Let’s start by taking a stroll down memory lane ….

(more…)

Why has the stock market has been strong despite a weak economy?

August 14, 2012

Back about 40 years ago, an economist-wannabe co-authored a study in the Journal of Finance titled “The Supply of Money and Common Stock Prices”.

image

The article summarized an econometric study that demonstrated a tight link between the amount of money floating around and, on a slightly time-delayed basis, the price of stocks.

OK, fast forward to today.

Now, when the Feds expand the money supply, it’s called “Quantitative Easing” … or QE, for short.

Recently, Jason Trennert of Strategas Research Partners published a revealing chart that visually relates stock prices (the S&P 500) to the recent periods of quantitative easing.

Hmmm.

Looks like the supply of money and common stock prices are still related.

Partially explains why the Dow is over 13,000 despite a sluggish and uncertain economy.

image

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That thud you hear: the government toxic asset plan … see a pattern ?

June 29, 2009

Ken’s Take: The foreclosure program didn’t slow foreclosures, the stimulus program hasn’t stimulated anything, and the toxic asset program hasn’t bought any toxic assets.  Are these guys ever going to be held accountable for their free-spending and ineffective programs?

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WSJ, “Wary Banks Hobble Toxic-Asset Plan”, June 29, 2009

The Obama administration’s plan to enable banks to dump troubled assets is facing troubles.

In March, Treasury Secretary Geithner announced  a two-pronged plan to offer favorable government financing to entice investors to buy bad loans and toxic securities from banks.
But that initiative — called the Public-Private Investment Program, or PPIP — has lost momentum.

Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out.

Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits.

Early this month, the Federal Deposit Insurance Corp. essentially shelved one arm of PPIP — the government-financed buying of bad bank loans.

Mr. Geithner recently said the other part — to facilitate the buying from banks of troubled securities, many backed by real-estate loans — could be scaled back because investors are “reluctant to participate.” This week, the government is expected to name investment firms to manage this securities-buying portion

Full article with lots of detail:
http://online.wsj.com/article/SB124622976702566007.html#mod=testMod

* * * * *

That thud you hear: the government toxic asset plan … see a pattern ?

June 29, 2009

Ken’s Take: The foreclosure program didn’t slow foreclosures, the stimulus program hasn’t stimulated anything, and the toxic asset program hasn’t bought any toxic assets.  Are these guys ever going to be held accountable for their free-spending and ineffective programs?

* * * * *

WSJ, “Wary Banks Hobble Toxic-Asset Plan”, June 29, 2009

The Obama administration’s plan to enable banks to dump troubled assets is facing troubles.

In March, Treasury Secretary Geithner announced  a two-pronged plan to offer favorable government financing to entice investors to buy bad loans and toxic securities from banks.
But that initiative — called the Public-Private Investment Program, or PPIP — has lost momentum.

Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out.

Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits.

Early this month, the Federal Deposit Insurance Corp. essentially shelved one arm of PPIP — the government-financed buying of bad bank loans.

Mr. Geithner recently said the other part — to facilitate the buying from banks of troubled securities, many backed by real-estate loans — could be scaled back because investors are “reluctant to participate.” This week, the government is expected to name investment firms to manage this securities-buying portion

Full article with lots of detail:
http://online.wsj.com/article/SB124622976702566007.html#mod=testMod

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Did MBAs (and their financial models) kill Wall Street?

February 18, 2009

Ken’ Take: An interesting read.

Central premise: MBAs over-engineered markets with statistical models that left no room for error (or common sense).

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Excerpted from Bloomberg.com, “Harvard Narcissists With MBAs Killed Wall Street”, Hassett, Feb 17, 2009

For two centuries, Wall Street survived wars, depressions, bank panics and terrorist attacks. Now Wall Street as we know it is dead. Gone.

Wall Street changed radically in recent years in one notable way. Twenty or 30 years ago, it was common for the best and the brightest to be doctors or engineers. By the 2000s, they wanted to be investment bankers.

When Wall Street was run by ordinary people it was able to survive everything. After the best and brightest took over, it died the first time real-estate prices dropped 20 percent.

If you walked into any major Wall Street firm a year ago and randomly selected an employee, chances are that person would either be from an Ivy League school like Harvard University, or have an MBA, or both.

The statistics are striking. Back in the 1970s, it was typical for about 5 percent of Harvard graduates to work in the financial sector… by the 1990s, that number was 15 percent. And the proportion of those with MBAs grew as well.. A 2008 report in Fortune said that Goldman Sachs hired about 300 MBAs in 2007 and that, last year, Merrill Lynch and Citigroup were planning to hire 160 and 235 MBAs, respectively.Is it just a coincidence that so many superstar minds arrived on Wall Street just as it died? Perhaps not.

Wall Street is gone because its firms did a terrible job assessing the risks of the positions they took. The models these firms used to evaluate risks failed. But having a failed model brings a firm down only if the firm collectively buys into the model.To do that, the firm must be run by people who have a great deal of faith in their models, and a great deal of faith in themselves.

That’s where Ivy Leaguers and MBAs come in.What do you get from an MBA? One recent study found that MBAs acquire an enormous amount of self-confidence during their graduate education. They learn to believe that they are the best and the brightest.

The consequences of Wall Street’s reckless brilliance in many ways parallel modern-day engineering disasters. If you travel through Italy, you can’t help but notice the many Roman bridges that still stretch across that nation’s waterways. How is it that the Romans could build bridges that would last thousands of years, while the ones we build today collapse after a few decades?

The answer is simple. Back then, they did not have the fancy computers required to calculate exactly how strong a bridge must be. So an architect made a bridge very, very strong. Today, engineers can calculate exactly how much steel they need to incorporate into a bridge to bear the expected load. The result is, they are free to make them weaker. Another result is less wiggle room for design error. Hence, modern bridge’s predilection for collapsing.

The same is true of the financial sector. Back when Wall Street was run by individuals without fancy degrees, they had a proper skepticism toward fancy models and managed their risks with a great deal more humility and caution.

Only when failed models became canon did catastrophe strike.Wall Street didn’t die in spite of being run by our best and brightest. It died because of that fact.
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Full article:
http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=a_ac69DqFutQ

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