Tuesday, September 8, 2009

Inside Information

Interesting white paper that suggests that spikes in short selling prior to downgrades are indicative of analysts tipping off their clients before issuing reports during 2000 and 2001. Based on a few things I saw while trading options during that span, I can't say that I'm surprised by this result at all. Nonetheless, it's good to see statistical evidence to support something I've always suspected.

By examining levels of short selling during the days prior to an analyst downgrade, the authors show a steep increase in shorts during the 3 days just before the downgrade is announced. This spike in shorting is demonstrated to be significant even after correcting for earnings releases, corporate announcements, "me-too" downgrades, and other biases. I admit I'm not a statistician, but the results look robust to me.

I have only one minor quibble with this paper. The authors should have taken into account the reason for the downgrades, and eliminated so-called downgrades on valuation. These downgrades, which occur when a stock has reached the analyst's price target, often do not result in a significant market reaction, and are also somewhat predictable. I suspect that eliminating downgrades that were a result of a stock reaching its target would increase the efficacy of the study, and may also show that analysts were more eager to tip off their customers about highly impactful downgrades.

Full pdf version of the paper can be found here. H/t Paul Kedrosky.

Thursday, September 3, 2009

Poor Guidance

Washington Monthly magazine has released their
2009 college guide. Meant as an alternative to the US News & World Report college issue, the WaMo list is based on totally different criteria, emphasizing colleges' "contributions to society" as opposed to straight academic performance or endowment size. For someone used to the typical Ivy League dominance, this list is rather, er, different.

I have a major problem with WaMo's rankings but, before I get into things, I just want to state up front that I am not, in any way, putting US News on a pedestal. There's no question that the US News rankings aren't perfect. Seeing my alma mater jump into the top 10 because of one huge donation made it all too clear that the rankings are too heavily influenced by endowments and donations. It's an imperfect system, but as an approximation, it's not bad.

On the other hand, the WaMo rankings seemed to come completely out of left field. South Carolina State University at number 6??? I've never even heard of that school. Thanks to a combination of a high ROTC participation and significant gap between expected and actual graduation rates (45% vs 22%!!) SCSU pulls in higher than all eight Ivy League universities. For a school with a median SAT score of about 840 (math+verbal).

I think a ranking system like this is indicative of a big problem with how we, as Americans, view higher education. Too many people, I think, view a college degree as another hoop to jump through on the way to a career, not as an education that needs to be earned. I'm a firm believer that anyone and everyone who wants a college degree should have the ability to earn one, but only if they have the ability to learn and study at a high enough level. The system we have now, where for-profit degree mills and underfunded, underacheiving institutions will accept anyone with a pulse, both waters down the meaning of a college degree, and widens the income gap between those who did and did not go to college.

Ranking a school like SCSU in the top 10, I think, exacerbates these problems. Rewarding an institution that spends a whopping $4 million per year on research, has zero faculty who are members of national academies, and graduates less than 50% of its students, is a huge mistake. A school like this shouldn't be lauded. It should be condemned. A college like SCSU isn't educating and preparing its students to become the leaders and intellectuals of tomorrow. It's taking their money for 4 years and then giving them a piece of paper. Ranking SCSU as a top-10 institution is an insult to the students and graduate at the true top universities who work long and hard to earn their degrees, and equally to the students at places like SCSU who are duped into thinking that, by purchasing a piece of paper that says "college degree" on it, their paths to success are guaranteed.

I know this post is pretty harsh, and I'm not trying to demean the students of SCSU. I'm sure many of them are intelligent, hard working, and have earned every ounce of pride and prestige that comes with a college degree. What angers me is that an institution that apparently spends the bare minimum on both research and faculty is being rewarded, and that WaMo is enabling that institution through a ranking system based on the nebulous concept of "contributions to society." Any high school student who applies to SCSU with the expectation that they will get either a top-notch education or a head-start on their career based on these WaMo rankings is making a huge mistake.

Video of The Time Being

Amazing video of the California wildfires encroaching on Los Angeles.

Tuesday, September 1, 2009


Sometimes the most interesting part of an article or documentary is a single sentence, often just an aside or a tangent, tantalizing in it's genius yet brevity. Now and again I'll pick up on one of these tangents while I'm reading, or watching TV, or otherwise wasting time, and I'll become absolutely hooked. I'll try to finish whatever it was that I was working on, but the effort is usually wasted; that one idea entreats, no, demands, that I drop everything else and focus in on it. The Idea. Capital letters because, by now, The Idea has become an entity in it's own right. The Idea is coercing, demanding; the only way to satisfy it's hunger is to give in to give in to The Idea's allure and follow it down the rabbit hole. Only after The Idea has been thoroughly explored, considered, and hashed out, will The Idea let me rest. Dormant, but never completely gone. Asleep, but sometimes woken by seemingly random triggers, just as ravenous as before.

Just a few days ago I was struck by one of these epic moments and, while it's probably the sort of thing that only I could get excited about, and there's no ultimate conclusion, I can tell already that I'm going to enjoy the ride.


A few days ago I wasn't very tired after work, and decided that the best way to fall asleep was to put on my headphones and listen to a podcast of some sort. (This is usually a pretty good solution - usually I learn something interesting. If not, I pass out.) It had been a few weeks since I last checked out New Books In History, which has a great collection of hour-long, interesting interviews focusing on pretty much the entire gamut of world history, perfect for satisfying at least one of my conditions mentioned above for late-night narratives.

Since my last visit, a promising episode on WWI had been posted, which I found impossible to resist. (I think documentaries about WWI are fascinating, The Great War was a tremendous, cataclysmic event, responsible for massive geopolitical upheval, and a dramatic change in attitude across the western world. Also, Blackadder.)

The podcast, which can be found here, had been playing for about 15-20 minutes or so when the interviewer asked Alexander Watson, the author of the book in question how he decided on the specific focus for his book. Watson responded that it actually wasn't his original intention. Initially, Watson was researching an idea suggested by his advisor, Niall Ferguson, involving the card games that soldiers played to pass the time in the trenches, and how the different games played by the opposing armies may have affected how they fought, and...


At this point I'm no longer paying the slightest bit of attention to the podcast, because I've been struck by The Idea. What inferences can we draw about a culture based on it's traditional games? In my mind, this is a huge question, with all sorts of offshoots. Is Go so much more popular in Asia than in the West because it centers around the idea of balance, a concept that is valued in Asian cultures but de-emphasized in the West? How is it that chess, invented in Persia, spread across Europe virtually unchanged, but became the dramatically different Xiangqi in China, and then evolved even more significantly into Shogi in Japan? Why did the Jewish culture, which has existed for thousands of years, never develop a distinctive game of its own?

I'm not a social scientist, anthropologist, or ludologist, and I don't have a very good idea of how to go about finding the answers for any of these questions, or any of the others I'm sure I'll think of along the way. But I'm going to give it a try anyway, and see where it takes me. I know how my mind works well enough to say that this idea is going to be floating around in my head for a very long time, quite possibly for the rest of my life, sometimes dormant, sometimes at the forefront. I think it's interesting enough to indulge.