【 Copy from a comment on this news: http://www.msnbc.com/the-last-word/russia-going-lose ]
The scary thing is how easily the American people are conned, again. All it takes is some headlines, no facts, or knowldge of the situation and the people start foaming at the mouth wanting war. Has anyone been paying attention for the last 100 wars and police actions we were conned into, started just like this. Months of intense demonazation of an imagined foe, and then surprise, the evil person does just what was warned about… This classic Iraq and Afghanistan, Iran, Viet Nam, dozens of S.American foes that no one even knew about yet started foaming at the mouth on cue.
Last month I did a study to understand why equally weighted the S&P 500 index RSP has outperformed value weighted S&P 500 index SPY by almost 3% a year since its inception. My conclusion is that it’s mostly due to Fama French risk factor loading.
However, my research also found after removing the effect of risk factors, RSP has a slight alpha advantage over SPY. I conjecture this alpha advantage is due to the fact that RSP requires annual rebalancing and SPY does not. In other word, this could be the so-called “rebalance bonus.”
To test its robustness, I extended my study to six pair of Fama French “indices.”
Posted February 10, 2014on:
(I got this from Cal Klausner, a CPA friend of mine.)
After recent tax changes, owners of small businesses face a question: Should the business continue to function as an S corporation, or should the entity revoke its election under Subchapter S of the Code?
Despite a number of statutory constraints, conventional wisdom has generally favored an S corporation classification. An S corporation is a pass-through entity whose shareholders are subject to personal income tax based on the income of the corporation. A C corporation, by contrast, is taxed as a separate entity at corporate rates, and its distributions to shareholders are subject to the personal income tax. A small business corporation electing under Subchapter S may have no more than 100 shareholders, and may not have more than one class of stock. There are no similar constraints on C corporations. Nevertheless, an S corporation classification provides business owners a superior degree of flexibility and is therefore generally preferred. Specifically, by having its income flow directly to its shareholders, an S corporation is not subject to the double taxation that a C corporation may be unable to avoid.
Posted February 6, 2014on:
Last year after the market was up about 5% in January, I wrote a newsletter to introduce my clients to the so-called “January Indicator”:
According to research done by Cooper and McConnell, what the market does in January has a strong predictive power for what the market will do for the rest of the year.
Using data since 1940, they found that if the market is up in January, it will rise an additional 14.8% for the rest of the year; if the market is down in January, it will rise only 2.92% for the rest of the year. This gives rise to a spread of almost 12%, a highly statistically significant number.
According to Sam Stovall, chief equity strategist at S&P Capital IQ, the S&P 500 since 1945 has risen 56% of the time following a down January. That is lower than the 84% frequency of February-through-December gains following a higher market in January.
1. Equity premium is the additional “wage” one can earn from taking stock market risk over not taking stock market risk.
2. Small cap premium is the additional “wage” one can earn from taking small company risk over taking large company risk.
3. Value premium is the additional “wage” one can earn from taking non-growing company risk over taking growing company risk.
Those who are ardent believers of an efficient market such as Nobel Prize winner Eugene Fama usually believe all returns should be the result of taking risk and that simple actions like rebalancing periodically should not produce additional returns.
Those who believe the market is emotion-driven, such as Nobel Prize winner Robert Shiller, believe in a rebalancing “bonus”. Since the market is either over-priced or under-priced from time to time, rebalancing allows us to take advantage of this market mispricing.
The return differential of RSP vs SPY provides an excellent control experiment to test whether this illustrious rebalancing “bonus” actually exists. SPY and RSP invest in the same 500 largest stocks of the US. SPY being a cap-weighted fund, does not require rebalancing, while RSP being a equally weighted fund requires periodic rebalancing.
Since its inception on March 9, 2003, RSP has returned 193%. At the same time, SPY has only returned 97%. This is extremely puzzling as both RSP and SPY hold the same S&P 500 stocks.The only difference is that SPY is a cap-weighted fund and RSP is an equally-weighted one. This begs the question, is RSP’s outperformance normal; and more importantly, is it likely to continue?
To answer the question I asked my intern Nahae Kim to run a regression based on the Nobel Prize winning Fama-French Three Factor Model.
R(x) – rf = alpha + beta1*(Rmkt – rf) + beta2*SML + beta3*HML
Where R(x) is the return of the selected fund, x being either RSP or SPY, alpha is the “skill” of the fund, beta1 is the market risk loading, beta2 is the small cap risk loading and beta3 is the value risk loading.
Here is what I got from the two regressions.