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Subject: Long Term Capital Management

Long-Term Capital Management (LTCM) was a U.S. hedge fund which used trading strategies such as fixed income arbitrage, statistical arbitrage, and pairs trading, combined with high leverage. It failed spectacularly in the late 1990s, leading to a massive bailout by other major banks and investment houses, which was supervised by the Federal Reserve.
LTCM was founded in 1994 by John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Board of directors members included Myron Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences. Initially enormously successful with annualized returns of over 40% (after fees) in its first years, in 1998 it lost $4.6 billion in less than four months following the Russian financial crisis and became a prominent example of the risk potential in the hedge fund industry. The fund folded in early 2000. (Wikipedia Jan 2010)

The top of the market

Track buybacks with ‘Google Alerts’

Google has useful tools

Google has come out with a new service called Google Alerts that is a great tool for tracking the madness of the US equity market. Sign up and enter the words ’stock buybacks’ and each day your email will bring proof of the lack of market rationality. Googling for ’stock buybacks’ now brings information that suggests that the ‘Buyback Era’ may be drawing to an end.

The Enron scandal

Jeff Skilling explains US corporate ethics

No right, no wrong compass

Unfortunately for society, Jeff Skilling of Enron told the truth according to tenets of moral relativism learned at the Harvard Business School and with McKinsey and Company, when, on being sentenced to decades in prison, he said, “That’s the way the game is played. You win some, you lose some.”

Skilling was a representative of corporate executives of his time. He did not work alone, nor was he an isolated ‘bad apple’.

Efficient Market Hypothesis

Academics battle over index funds

The Battle of the Academics

In an editorial published on June 27, 2006, Burton G. Malkiel joined with John C. Bogle of the Vanguard Group, to fight for “capitalization-weighted indexing” against the insurgency of Jeremy Siegel, Eugene Fama, Robert Arnott, and Kenneth French, proponents of a heretical notion of “fundamental-weighted indexing”.

The first casualty in this war has been the Efficient Market Hypothesis, first nicked by Professor Siegel in his opening article.

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Featured articles on inside pages

Stock buybacks

Accelerating to a buyback-option blowout

By Q1 2006, stock buybacks had multiplied to five times the level of 2000. Buybacks grew by 25% in 2005, with corporate profits after taxes increasing only 5.5%. At these rates, buybacks will exceed after-tax profits by 2009.
More ...

Securities Analysis

How inflation impacts EPS and PE ratios.

The Obama administration and Congress are laying foundations for high inflation. US equity investors should consider the effect of a rapidly devaluating currency on EPS and PE ratios. More ...

US Politics

President Obama's Lincoln moment

In mid 2009, Barack Obama found that Lincoln's saying, "You can't fool all of the people all of the time," applied to his presidency. Profligate spending and unpopular health reform ended Obama's honeymoon. More ...

US equities

Professor Siegel’s Epiphany

The topic "Baby Boom — Baby Bomb?" was debated by Michael Milken and Professor Jeremy Siegel in April 2006. This debate was featured in BusinessWeek in the article, "When Boomers Cash Out: A buy-and-hold legend sees tough times ahead." Professor Siegel is the guru of the Common Stock Legend.
More ...

US Bonds

Bond demand exceeds supply for a decade

Over the decade, 1995-2004, the demand for US bonds of all types has surpassed new bond issues in eight of the last ten years. This is the reason that bond prices have held firm, even in 2003, when net new issues reached almost $1.8 trillion. More ...

World Economy

Signs of US losing its groove?

Thirty years ago, US income from abroad was more than double the amount of income that the US paid to the rest of the world. This year, or the next, this foreign income surplus may disappear forever. Is the US 'losing its groove'? More ...

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2010-10-15 16:02