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Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries (and sometimes longer ones) of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.
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Articles about events, conflicts and disease around the world
Sell in May and Go Away: It's True But Here's Why You Should Ignore It (Trang Ho, Forbes) Trang Ho has contributed to GEI. The adage is true over long periods of time but there are shorter periods of time when it is not. One example given by Trang is May being the top return month of the year for 13 consecutive years 1985-1997. The graphic shows the return track through the calendar for the most recent 65 years, along with the 15 pre-election years (presidential elections) of which 2015 is one, and the 7 pre-election years when a Democrat was in the White House (again like 2015). Econintersect: The volatility may look much greater for the pre-election years but that is most likely an artifact of the smaller data sets. See also next article.
Can the ‘Presidential Cycle’ Boost Stocks? (The Wall Street Journal) In the article above the graph shows much better returns in the pre-presidential election year since 1950. This article confirms that the effect is true when all the data back to 1900 is included: The third year of the presidential cycle is the best for stocks on average. The emphasis is important. For Pres. Obama the third year of his first term was the worst year for stocks during his tenure. Using the table at Wikipedia, the S&P 500 return for 2011 is listed as 0.00%. All other six years of his presidency had double digit returns (average = 15%). In the graph below the first year of each presidential cycle has hadd the lowest return by a small margin. For Obama the two first years have been the best by far, averaging 26.5%. Lesson: Only a fool will try to use long-term averages to predict short-term results, even in flipping a coin, say nothing of stocks. Also, you should be remebering the oft repeated disclaimer: "Past performance is no guarantee of future results". That is actually a misleading statement because the word "guarantee" insinuates that their might still be some likelihood (just less than a guarantee). The much better statements which are not misleading (and we have seen such wording): "Past performance is no indication of future results".
Think Active Can't Outperform? Think Again (Invesco.com) Invesco conducted an extensive study of approximately 3,000 equity mutual funds over the past 20 years (covering five distinct market cycles) to investigate the performance of "high active share" funds. They found that 61% of high active share funds outperformed benchmarks over the 20 years. The reason for this was significantly because of less down-market losses (better "downside capture").
(a) High active share funds are those whose holdings held 60% or more stocks that were not specifically held by the benchmark
(b) Downside capture refers to losing less money in a down market than the benchmark.
Econintersect: This study is confusing because it says that active management outperforms but, it appears to us, what is being studied is a process of comparing the values of investing using new and different indexing formulas. It is not clear that "high active" management is anything more than using different indexing. How much trading occurs in the funds followed in this study? Unless there is significant trading beyond what is required to maintain a specified index, then the study is not comparing active to passive management, but is instead comparing how different indexes behaved. Since 60% or more of the stocks in high active management funds are different from the S&P 500, the latter cannot be a representation of passive management for the former. It is a benchmark for active management funds containing substantially the same stocks which can vary in allocation against the distribution within the index. It appears that the Invesco study is not delivering exactly what the title implies about "active" management. It is a study which may indicate that there are new and novel indexes, some of which outperformed the S&P 500 through the time period studied. Active management within these new indexes? It is not clear how much actually occurred.
Business @ the Speed of Thought (Markus Kirjonen) Bill Gates published a book in 1999: Business @ the Speed of Thought. This is a review of that book by a student in Finland, which is well worth reading. In the review Kirjonen lists 15 predictions made by Gates in the book. Before you look through the list, think back to what the world was like in the late 1990s and then marvel at how prescient this list really was:
Other Economics and Business Items of Note and Miscellanea
Fewer Than 50% Of Parents Are Saving For College! (Michael Haltman, LinkedIn) Michael Haltman has contributed to GEI. The percentage is down significantly since 2009. And the average amount put aside for college is about $10,000. This is enough for current average costs for one semester at public universities and enough for about two weeks at the most expensive private institutions.
What’s Really Behind the Flash Crash Trader Prosecution? (Pam and Russ Martens, Wall Street on Parade) Hat tip to Roger Erickson. The Martens have contributed to GEI. As we (Econintersect) commented when the story broke, this looks like a selective ticket for speeding where one or two cars out of hundreds exceeding the speed limit by 15 mph are pulled over and issued citations. That is similar to what the Martens think, as well.
The Martens point out that the complaint itself is highly unusual: It is only one page plus an afidavit from an FBI agent. And no Justice Department official has signed the complaint. The Martens continue:
There are a lot of damaging speculations by the Martens about what Wall Street evils might be behind this and other "small fry" cases pursued with relentless diligence by the DoJ while the "big fish" swim free except for billions paid in "protection money". Related articles follow.
The Flash Crash Trader Has Strong Defense Witnesses (Pam and Russ Martens, Wall Street on Parade)
Eric Holder’s Coup de Grâce: Arresting a Bedroom Trader for the Flash Crash (Pam and Russ Martens, Wall Street on Parade)
‘Flash Crash’ Trader Navinder Sarao Ordered to Remain in Custody After Failing to Pay Bail (The Wall Street Journal) U.S. authorities accuse trader of making $40 million through manipulation of futures market yet he remains in jail unable to raise $7.7 million for bail.
Flash Crash Report Raises Flags on Quasi Stock Exchanges Inside Wall Street Firms (Pam and Russ Martens, Wall Street on Parade) This is a 2010 article about another fiasco attempt to pin the stock market flash crash on an insignificant small trade while ignoring the possible roles of large firms.
CME Suspends Traders for Alleged Sarao-Like Manipulation (Bloomberg) CME Group Inc. said it suspended two traders for placing manipulative trades similar to the ones that catapulted Navinder Singh Sarao into headlines around the world last week. Heet Khara and Nasim Salim engaged in a practice called “layering,” in which orders are placed with no intention of following through on them. Previous news and cases:
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