Tuesday, September 2, 2014

Dollar strengthens on expectations of US interest rate rise

Two reasons for this:

1. Investors sell euros to buy dollars to invest in the US to take advantage of the higher US rates. 
2. US borrowers borrower in foreign currency to take advantage of the lower foreign rates, and then sell the foreign currency to buy dollars to invest in the US.  This is called the "carry trade."

Both factors increase the demand for dollars in the market for foreign exchange which raises the "price" of a dollar, the exchange rate.

Saturday, August 30, 2014

Why are physicians so unhappy?

After Medicare was introduced in 1965 as a social safety net for the elderly, doctors' salaries actually increased as more people sought medical care. In 1940, in inflation-adjusted 2010 dollars, the mean income for U.S. physicians was about $50,000. By 1970, it was close to $250,000—nearly six times the median household income. 
But as doctors profited, they were increasingly perceived as bilking the system. Year after year, health-care spending grew faster than the U.S. economy as a whole. 
Meanwhile, reports of waste and fraud were rampant. A congressional investigation found that in 1974, surgeons performed 2.4 million unnecessary operations, costing nearly $4 billion and resulting in nearly 12,000 deaths. In 1969, the president of the New Haven County Medical Society warned his colleagues "to quit strangling the goose that can lay those golden eggs." 
If doctors were mismanaging their patients' care, someone else would have to manage that care for them. Beginning in 1970, health maintenance organizations, or HMOs, were championed to promote a new kind of health-care delivery built around price controls and fixed payments. Unlike with Medicare or private insurance, doctors themselves would be held responsible for excess spending. Other novel mechanisms were introduced to curtail health outlays, including greater cost-sharing by patients and insurer reviews of the necessity of medical services. That ushered in the era of HMOs.

Thursday, August 28, 2014

Is the stock market over-valued?

Two rival schools of thought:

One camp argues that the market is dangerously overvalued. The so-called CAPE ratio—the price-earnings multiple for the market based on cyclically adjusted earnings averaged over the past 10 years—stands at over 25, well above its long-run average of about 15. Today's CAPE has been exceeded only during the market peaks of 1929, early 2000 and 2007. 
Another group of forecasters are convinced that stocks are reasonably valued. The main competitors for stocks in individual and institutional portfolios are bonds. And yields on fixed-income securities are at all-time lows. Short-term interest rates are essentially zero, and the yield on the 10-year U.S. Treasury bond is only 2.4%. Investors seeking a reasonable rate of return have few places to go other than equities. This camp believes equities are a particularly attractive option in the menu offered by today's capital markets.
Burton Malkiel, author of "A Random Walk Down Wall Street" thinks there is merit to both camps:

If we add three or four percentage points to the current low Treasury yield, we still get a low discount rate that can justify high stock prices. And today's low interest rates may persist. The world is likely to experience a long period of abundant productive and labor capacity with attendant slow growth, along with low interest rates. 
While continued low rates can justify high stock prices, the CAPE followers are correct as well. Long-run equity returns from today's price levels are likely to be considerably lower than their 10% long-run average.

He recommends diversifying, not trying to time the market.  He seems like a buy and hold kind of guy.  

Wednesday, August 27, 2014

Tuesday, August 26, 2014

Weaker takeover defenses lead to more takeovers, but ...


Does this benefit shareholders?  On the one hand, weaker takeover defenses expose the companies to the threat of takeover which should force management to maximize shareholder value.  

However, when the high-value acquirer comes knocking, it doesn't need to pay as much to acquire the company.  Remember that the alternatives to agreement determine the terms of agreement and by weakening takeover defenses, the target firm has a worse outside alternative.  

What you major in is more important than where you go to school

Planet Money discovers compensating wage differentials:
Michael Gardner just graduated from City College in New York with a degree in psychology. He applied for more than 100 jobs, had trouble getting interviews and worked at Home Depot to make ends meet. ... 
Gardner just got a job earning $36,000 a year as a case worker — and he feels lucky to have it. "I came into the school knowing where I want to go and what I wanted to do," he said. "Honestly, I don't mind the money. It's more of a fulfilling thing for me."

Meanwhile, Engineers make about 3 times as much.  Now some of this is selection bias (different people choose Engineering vs. Psychology, but some is due to the causal effect of the different majors.

Monday, August 25, 2014

Is Argentina going to devalue the Peso?

The gap between the official exchange rate (9 Pesos/dollar) and the unoffiicial rate (14 Pesos/dollar) suggests that it will.  The Financial Times reports
The government’s unorthodox economic management came under further scrutiny on Thursday when beef exports were suspended to combat inflation, despite dollar shortages.

Saturday, August 23, 2014