World Beta Blog

New addition:

Empirical Finance

Empirical Finance Blog

Their paper Do Fund Managers Identify and Share Profitable Ideas?

I’ll be in SF through tomorrow morning if anyone is around for a quick meetup.

Books on the way and pre-ordered from Mauldin, Greenblatt, and Kauffman:

Endgame: The End of the Debt SuperCycle and How It Changes Everything – Mauldin

The Big Secret for the Small Investor: A New Route to Long-Term Investment Success – Greenblatt

The Futures: The Rise of the Speculator and the Origins of the World’s Biggest Markets -Lambert

Alpha Trading: Profitable Strategies That Remove Directional Risk (Wiley Trading) – Kaufman

Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff – Richard

I forgot to mention in the last post that I will be in San Francisco next week.  Drop me a line if  you want to meetup.

And if you find yourself in the snow in Tahoe this weekend (after my speech of course!) come to Squaw and we can talk markets at the Chammy.

Since I am still finishing up the design of the CQR newsletter (this weekend I hope!) I thought I would update my travel here since I will be in the Bay Area for a talk Saturday.

Come out and ask some questions!

AAII Silicon Valley, Feb 19, Sunnyvale, CA

AAII Los Angeles, Mar 19, Los Angeles

R Finance , Apr 29-30, Chicago, IL

NAAIM, May 2-4 , San Diego, CA

ETF Investing, May 16-18, New York, NY

I’ve long written on the blog that dividends no longer give an investor the total picture regarding how companies return cash to shareholders.    Dividends quit being predictive in the early 1980′s due to a structural change in markets as companies starting buying back more stock.  It is due primarily to the SEC instituting rule 10b-18 in 1982 – providing a safe harbor for firms conducting repurchases from stock manipulation charges.  See Grullon and Michaely [2002] for more info on the impact of Rule 10b-18.  Nice graphic from EconomPic here:

The problem is even including buybacks doesn’t give one the entire picture.  You have to include share issuance as well.  One of my favorite papers is On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing.  Take a look at the below chart that shows net payout yield (which is dividends + buybacks – issuance).  I think there is a lot of interesting work to be done with float on both an aggregate stock market level as well as individual stock level.  (Caveat: one difficulty is that companies can announce buybacks then never make them as well as cutting dividends etc.  One could get even further and include debt repayment as well.)

The authors find that “the widely documented decline in the predictive power of dividends for excess stock returns is due largely to the omission of alternative channels by which firms distribute and receive cash from shareholdlers.” Additionally, while dividend yield has lost its predictive ability over time, the payout yield has remained a robust indicator for excess stock return.  Many companies still love just talking about dividends, after all it is a great story.  But when there is a shift in markets structurally I tend to side with ol John Maynard “when the facts change I change my mind – what do you do?” line of thinking.

From 1983 – 2003 the various strategies returned:

Dow: 13.4%
DOGS: 16.2%
NPY: 19.1%

This paper (“Asset Growth and the Cross-Section of Stock Returns” by Schill, Gulen, and Cooper) is even more encompassing. It basically says a decrease in total assets is good – things like dividends, buybacks, spinoffs, and paying down debt. Ominous signs for future stock performance – accquistions, share issuances, borrowing, and sitting on lots of cash.

I would curious to hear any creative ways readers can interpret the below data sets (and if you have access to CRSP would love to see the paper updated with 2009-2011 data).  Would also like to see an indepedent Net Payout Yield “Dogs of the Dow” and “Dogs of the S&P500″ with data through 2011.  Drop me a line if you  are interested in working on either project.

As an aside, TrimTabs does a lot of work here and is launching a tactical fund based on float.  Full disclosure:  we launched a fund with the same provider (AdvisorShares) and I may be biased since I went to the 2003 ALCS with TrimTabs in Al Davis’s box where Damon had the collision in CF.  As an aside to that aside, Davis’s box is the most 70′s pimped out thing I have ever seen with mirrors everywhere, etc.

Here are a couple posts from Aswath Damodaran on the subject of augmented dividends:

Stock Buybacks: What is happening and why?

Buybacks and Stock Prices: Good or bad news?

The Shift to Buybacks: Implications for investors

The below chart and table I constructed from the CRSP Excel files from Payout and Net Payout Time Series Data: Excel File

From Michael Roberts’s homepage:

Payout and Net Payout Time Series Data:

This dataset contains annual and monthly time series for aggregate corporate payout (dividends plus equity repurchases) and net payout (dividends plus equity repurchases less equity issuances). To use this datasets, please reference the following paper which contains details on the construction and usage of the data.

“On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing,” with Jacob Boudoukh, Roni Michaely, and Matthew Richardson, Journal of Finance, 2007, 62, 877 – 915

Nice update to the Dorsey Wright Paper: Bringing Real World Testing to Relative Strength. Here is their monthly newsletter that takes a look at relative strength as another alternative to market cap weighting.

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I spend a lot of time thinking about what to do with my content.  Wonderful post by James Altucher on his writing experiences as well as a new project by Seth Godin – The Domino Project.

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A portfolio manager doing genetics research (and in this case I’m not referring to my bio background!).

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Social media scorecard

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One of the original reasons I started blogging had to do with frustration that the UK,Canada, Amsterdam, Swithzerland etc all were about a decade ahead of the US in listing hedge funds.  They had funds managed by Third Point, K2, Harris, etc and the US was falling far behind.  We tried to launch an ETN on the foreign listed hedge funds in ’08 but Lehman imploded that structure for awhile and you can’t invest in those funds otherwise due to the PFIC tax treatment (which is a shame since you can often buy them at solid discounts to NAV).

It’s great to see more and more hedge-like mutual funds and ETFs coming to market.  Lots of alternative beta indexes coming out of the big shops as well.

Barclay’s has a turn-of-the-month Index (TOM – trademarked I’m not joking) that shorts 10 days prior to month end the covers and goes long 3 days prior through 3 days after.  I know Peter Eliades used to run a fund based on the concept and the numbers (backtested) are impressive.

It looks like there is a UK based product trading for about a year and a half.

Another interesting index is the Dow Jones Contrarian Opportunities Index that screens for stocks with the worst three year trailing total returns.  Lots and lots of great innovation out there and it feels like we’re only in the first inning…

I couldn’t stop laughing at the resemblance between the stage at Inside ETFs and all of the Zach Galifianakis skits – Between Two Ferns.  Below is a picture of Ralph Acampora and me (you can’t see David Fry and Ian Naismith).  Following are a couple of the FunnyorDie videos (I think are SFW). Thanks to the traders at Knight for the pic. Michael Cera followed by Conan O’Brien.

I will be in Greenville, SC tomorrow, Atlanta Friday, and Miami next week for the IndexUniverse Conference.  Drop me a line if you want to meetup!