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Stock Buybacks Are Set-ups?

Investors might suppose that a company repurchases shares when firm officers believe that the market is undervaluing its stock. Since these officers are highly informed, the stock is subsequently likely to outperform the market. How could executives be sure that their company’s stock is undervalued? In their November 2006 paper entitled “Earnings Management and Firm Performance Following Open-market Repurchases”, Guojin Gong, Henock Louis and Amy Sun investigate whether company management orchestrates stock undervaluation through earnings management (abnormal accruals) prior to executing share repurchases. Using financial and stock price data over the period 1984-2002 (1,720 open-market repurchase announcements that are followed by actual repurchases), they conclude that: Keep Reading

Jim Cramer Comments on Our Evaluations of His Advice

Jim Cramer sent comments on our evaluations of his advice (“Jim Cramer Deconstructed” and “Cramer Offers You His Protection”). Because of the nature of Mr. Cramer’s initial message, we retain the personal nature of the subsequent exchange with slight editing (spacing and punctuation) for readability, and substitution of descriptive links for long URLs. The correspondence follows: Keep Reading

Honing in on the Prospective U.S. Equity Risk Premium

What is the latest from academia regarding the prospective equity risk premium? In their November 2006 paper entitled “Estimating the Ex Ante Equity Premium”, Glen Donaldson, Mark Kamstra and Lisa Kramer apply new simulation techniques across ten distinct models to calculate what they claim “is by far the most precise equity premium estimate that has been reported in the literature to date.” Using U.S. dividend growth rates, interest rates, Sharpe ratios, price-dividend ratios, return volatilities and the historical equity premium for 1952-2004 to calibrate their simulations, they conclude that: Keep Reading

Avoid Companies Stretching for Diminishing Returns?

The stocks of companies issuing equity/debt tend to underperform. Are there explanations for this tendency other than good market timing by corporate executives of such companies? Are these executives in the driver’s seat, selling high, or are they just along for a ride? In their November 2006 paper entitled “The New Issues Puzzle: Testing the Investment-Based Explanation”, Evgeny Lyandres, Le Sun and Lu Zhang investigate alternative theories of corporate investment as explanations for the subsequent underperformance of companies issuing equity/debt. Using equity/debt issuance data for 1970-2005, they conclude that: Keep Reading

If You Are in the Market for an Investment Advisor…

…you may be seeing something like this: Keep Reading

Paul Tracy: Authoritative?

We evaluate here the the market commentary of Paul Tracy available via Zacks.com since October 2002. Paul Tracy, founder and Chief Investment Strategist of StreetAuthority, is one of Zacks’ “pros.” StreetAuthority describes itself as “a research-intensive financial publishing firm that aims to level the playing field for small investors by giving them access to the ideas and insights of some of the country’s top investment analysts and writers.” The table below quotes forecast highlights from the cited source and shows the performance of the S&P 500 Index over various numbers of trading days after the publication date for each item. Grading takes into account more detailed market behavior when appropriate. Red plus (minus) signs to the right of specific forecasts indicate those graded right (wrong) based on subsequent market behavior, while red zeros denote any complex forecasts graded both right and wrong. We conclude that: Keep Reading

Automating the “Hedge” in Hedge Funds

Can quantitative analysts replicate the statistical performance of a given hedge fund using a set of easily tradable assets, thereby: (1) recreating the “hedge” as a transparent, liquid and cheap trading system; and, (2) establishing benchmarks truly applicable to specific hedge fund performance? In their June 2005 paper entitled “Hedge Fund Returns: You Can Make Them Yourself!”, Harry Kat and Helder Palaro describe and illustrate a statistical fund replication process. In their February 2006 paper entitled “Superstars or Average Joes? A Replication-Based Performance Evaluation of 1917 Individual Hedge Funds”, they compare the performance of hedge funds to the performance of their mechanical replicants. And, in their October 2006 paper entitled “Tell Me What You Want, What You Really, Really Want! An Exercise in Tailor-Made Synthetic Fund Creation”, they present out-of-sample tests of synthetic hedge funds with specific properties. Following are some highlights from these three papers: Keep Reading

Stock Valuation Indicator Fly-off

Deterioration over the past decade in the forecasting power of traditional indicators (such as price-dividend and price-earnings ratios) have stimulated searches for better ones, with recent emphasis on macroeconomic variables. Which financial and economic variables best predict stock returns over the short, intermediate and long terms? Is “best” good enough for market timing? In her October 2006 paper entitled “How Well Do Financial and Macroeconomic Variables Predict Stock Returns: Time-series and Cross-sectional Evidence”, Anne-Sofie Reng Rasmussen evaluates the relative performance of a wide range of variables in forecasting excess stock returns (above the one-month T-bill rate) over horizons from one quarter to eight years. Using annual data for periods as long as 1930-2005 and quarterly data for periods as long as 1926-2005, she concludes that: Keep Reading

How Investors Do (or Don’t) Take Advice

How do typical investors/traders process advice from others? Are they overconfidently dismissive, or underconfidently trading on the latest guru pronouncement? In their February 2006 paper entitled “Effects of Task Difficulty on Use of Advice”, Francesca Gino and Don Moore perform two controlled experiments to examine the tendencies of people to reject or accept advice depending on the complexity of the associated task. In one experiment, the 61 participants (mostly university students) must seek advice, and in the other they have the option of seeking advice. Since the advice came from other participants who were generally no better informed, the best strategy for each participant was to reduce noise by averaging own opinion and advisor’s opinion. Based on the results of these experiments, the authors conclude that: Keep Reading

The Political Campaign Contribution Effect

Do companies that “grease the wheels” of our political system via campaign contributions benefit from such participation? In other words, is there a significant positive correlation between company campaign contributions and stock returns? In their October 2006 paper entitled “Corporate Political Contributions and Stock Returns”, Michael Cooper, Huseyin Gulen and Alexei Ovtchinnikov construct a measure of the breadth of company campaign contribution activity and investigate whether this measure relates systematically to returns for shareholders. Combining data from the Federal Election Commission on political action committee (PAC) contributions of publicly traded firms for the period 1979-2004 (over 800,000 contributions by 1,930 firms) with associated stock price and financial data, they conclude that: Keep Reading

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