Tag Archives: New York Times

Efficient Market Theory Gets Smacked Down

Paul Krugman in the Sunday New York Times offers an insightful smack down of the Chicago School of macroeconomics and the efficient market theory that forms a foundation of index investing. The basic question in How Did Economists Get is So Wrong? is how did the economists completely fail to predict the financial crisis?

Krugman says the Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten and quotes Brad DeLong of the University of California, Berkeley, about the “intellectual collapse” of the Chicago School. Krugman points to Robert Shiller, an economics professor at Yale, the author of Irrational Exhuberance and a partner at the ETF firm MacroMarkets, as one of the few economists to get it right.

Krugman says economics needs to go back to the great economist of the Great Depression: John Maynard Keynes for an explanation of what had happened and a solution to future depressions.

Keynes, who called the financial markets a casino, “did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” Krugaman says, “he wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps.”

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Blackrock Buys BGI for $13.5 Billion

In a deal sure to create major changes in the ETF industry, asset-management giant Blackrock agreed to buy Barclays Global Investors (BGI) from Barclays PLC for $13.5 billion late Thursday.

BGI, which coined the term exchange-traded fund, has been the industry’s market leader since the emergence of its iShares family of ETFs in 2000. It remains the industry leader with more funds than any other ETF sponsor and a little less than 50% market share.

With more than $2.7 trillion in assets under management, The Wall Street Journal says this creates a “money-management titan twice the size of its closest competitor,” such as State Street, another ETF provider, and mutual fund giant Fidelity Investments.

The most interesting tidbit comes out of The New York Times. The Times reports Barclays’ president Robert Diamond had first discussed a potential deal with BlackRock approximately seven years ago, but decided the timing was not right.

My favorite nugget, the boys at BGI won’t have to change the initials on their luggage. The firm will continue to be called BGI as the new company takes the name BlackRock Global Investors.

BlackRock Rumored to Buy BGI; BNY Could Enter the Fray

Kudos to Douglas Appell and Pension & Investments for breaking what may be the biggest scoop of the ETF industry this year.

Pension & Investments reported just before the market closed Friday that giant money manager BlackRock made a late day play for Barclays Global Investors. Unnamed sources say, “BlackRock is likely to announce an agreement to buy BGI, creating the world’s biggest institutional money manager.” The source expects the announcement within days. BGI owns the iShares exchange traded fund business.

Big British bank Barclays put the unit up for sale earlier this year in an effort to raise capital and stave off the British government either investing in or nationalizing the bank. CVC, a British private equity firm, offered in April to buy iShares for $4.2 billion. BlackRock is expected to trump that with a $10 billion offer. CVC holds the option to make a counter bid. But a source not directly involved in the deal said CVC wouldn’t be able to top the BlackRock offer.

I love how every story crediting Appell calls him a veteran journalist. What makes one a veteran journalist vs. a regular journalist? I’ve heard of rookie journalists. But after the first year, aren’t all journalists “veteran journalists”?

This morning, the New York Times confirmed the story. Negotiations appear stuck on the issue of price. Barclays wants “more than $12 billion.” Vanguard Group, the providers of a large family of ETFs and mutual funds, had previously been mentioned as a buyer.

This story cleared up one question in many people’s minds: Is this for iShares alone or all of BGI. The Time says all of BGI, which operates in 15 countries with more than $1 trillion in assets under management. If the deal goes through, Barclays could end up with a seat on BlackRock’s board.

The Financial Times confirms the story and raises the ante. FT.com reports Bank of New York Mellon is about to stage an 11th -hour challenge for BGI. FT predicts the deal could come in around $13 billion, with Barclays taking a 20% stake in Blackrock.

I want to know where is Fidelity, the mutual fund giant? Fidelity missed the boat the first time and here’s its chance to be one of the largest in the mutual fund and ETF businesses in one fell swoop.

Apparently, I Stole the Show

This isn’t an ETF entry, but I went to this journalism event at BusinessWeek last month. Steve Liesman of CNBC, FLoyd Norris of the New York Times, William Holstein the author of “Why GM Matters” and a guy from Credit Suisse.

Orla O’Sullivan of Bank Systems & Technology seemed to find my question about banker bonuses much more interesting than what the panelists were saying considering she put me in the lead of her story.

The markets may not have been too impressed with Treasury Secretary Geithner’s plan to deal with banks bad loans, but the audience at a recent Columbia University discussion BS&T attended on the economy loved the suggestion of one of the attendees. “Why not give the toxic assets to investment bankers as their bonuses?” financial journalist Lawrence Carrel rhetorically asked a panel partly composed of Pulitzer Prize winners.

After all, the now troubled assets were “their idea,” Carrel said of the I. Bankers. “They’d be taking on the risks but there’s the potential to make money too,” said Carrel, who wrote a recently published book on exchange traded funds, ‘ETFs For The Long Haul’.

And I like the way she adulterated the title of my book. LOL.

Maybe this toxic asset thing is a topic worth pursuing.

Which Will Win? January Effect or Super Bowl Effect?

Wall Street traders are lot like professional athletes. Apart from getting paid salaries unfathomable by the average American, these are both very superstitious groups of people. Athletes may seem almost obsessive compulsive in the routines they must perform before a game or in their belief in lucky underwear and such. Wall Streeters meanwhile believes in collection of traditional sayings, maxims and old saws that can give people direction and actually govern many investing strategies; sayings such as “Don’t fight the Fed.”

One of the less logical but apparently excellent prognosticating sayings is “As goes January, so goes the year.” In short, if the stock market rises in January, it will have a good year, if it falls in January, watch out.

Well, CNNMoney reports that this was the worst January ever for the Dow Jones Industrial Average, down 8.8%, and the S&P 500, off 8.6%. The Nasdaq tumbled as well, 6.4%, but not as much as last year. The Nasdaq’s 9.9% plunge January 2008 seems a pretty good predictor of the year to come.

Howard Silverblatt, senior index analyst at S&P tells the New York Times in 60 of the last 80 years, the S&P 500’s performance in January reflected how the index fared that year.

Standard & Poor’s market historian Sam Stovall tells CNNMoney about the correlation going back to 1945. “Since then, whenever the S&P 500 gained in January, the market continued to rise during the rest of the year 85% of the time. But the stats are less consistent when the market fell in January. Since 1945, a decline in that month yielded a decline in the next 11 months only 48% of the time, for an average loss in that period of 2.2%.”

Meanwhile another famous market Wall Street myth, the Super Bowl Stock Market Predictor, says the market will rise this year. This forecast tool says when a team from the original NFL wins the Super Bowl the market will rise experience just such an occurrence. This has happened 34 times out of 42 Super Bowls for an accuracy rate of 81%. Last night’s team, the Pittsburgh Steelers, was a member of the original NFL before the AFL merger. The year of each of the Steeler’s previous five wins, the stock market rallied, even during the horrible 1970s.

Stuart Schweitzer of J.P. Morgan Private Bank told the New York Times. “It’s unlikely that the broad market has yet seen its lows. There are more disappointments ahead.” And when Wall Street can’t even believe its own hype that the market will go up this year, you better pay attention.

Peter Cohan of BloggingStocks says, “If you need your money in the next six years, it probably makes sense to sell.” He recommends money market funds. Unfortunately, I don’t think there are any ETF money market funds.

Pedigree, Schmedigree: Re-Evaluating Harvard

In an amazing coincidence, the negative aspects of the concept “the Best and the Brightest,” got a double dose of attention yesterday.

In “The Brightest are not Always the Best,” Frank Rich of the New York Times reminds us to not get all worked up with high expectations about the brand names being appointed to the Obama cabinet. Many of these people are academics, not business people. That means they believe theories, but have little experience with how reality can blow theories apart. Frankie reminds us that when David Halberstam wrote the book, “The Best and the Brightest” about the geniuses who filled out John Kennedy’s cabinet, it wasn’t a compliment, but sardonic. In this famous book, Halberstam describes how some of the best minds of that generation created the Vietnam fiasco, which destroyed Lyndon Johnson’s presidency and brought us the Richard Nixon era.

And for those of you who think it couldn’t happen again, or that history doesn’t repeat itself so quickly, Peter Cohan of BloggingStocks points out that “Five Harvard MBAs Wrecked the Global Economy.” The most famous and probably the most culpable is non-other than President George W. Bush. However, few can be faulted with thinking this guy was one of “the best.” Great quote on Bush’s pathological lying and ability to deny what he just said.

First runner-up goes to Treasury Secretary Henry Paulson, who I feel is as much, if not a greater economic criminal than Bush. Considering he ran one of the firms that sold the credit default swaps, his inability or refusal to see the destructive force they held, as well as how they were affecting the economy, means his actions are either those of an incompetent or a severe case of malevolence. Worse, I think Paulson, after months of saying nothing was wrong, only decided to get involved in September because his old firm, Goldman Sachs was teetering close to bankruptcy. I suspect Paulson fearing his $500 million savings, most of which is in a blind trust filled with Goldman stock, would become worthless if he let Goldman fail, decided to take action rather than face the alternative of spending his golden years living off of a government pension.

Third place goes to Rick Wagoner, the CEO of General Motors. This genius failed to take advantage of profits from huge sales of gas guzzling SUVs to reinvest in GM and turn that dying behemoth around. Instead, this Einstein lost billions of dollars, oversaw the 95% collapse of his company’s stock and is on the verge of destroying one of America’s largest industries. I could have run that company into the group for one-tenth the salary they paid that guy.

Filling out the list is Stan O’Neal, the man who destroyed Merrill Lynch, the world’s largest stock broker and one of the most respected names on Wall Street; and Jeff Skilling, the CEO of Enron, the architect of the biggest fraud in U.S. history. Skilling’s crimes of energy terrorism are well documented, including his being responsible for the near downfall of California and the real downfall of its then governor Grey Davis. Is Skilling responsible for the current mess? Well, he did help create the model and set the standard for destroying the retirement savings of many people. So, even if he isn’t directly responsible, it’s only because he’s already in jail.