Five things I learned this week: Nov 18th 2012

Market Risk Premium is measured in many different ways, including methods like surveying the client base (one of the methodologies used in this Goldman Sachs paper from 2002), from taking data published by Ibbotson and Duff & Phelps. The whole range is demonstrated in this very interesting paper by folks at IESE based on a survey of about 5,700 academics and practitioners. Key takeaway from this paper was that there’s no one measure, and it appears that in the end, people invest based on a historical guideline and a judgement call. Damodaran’s approach of Implied Risk Premium scores pretty highly in this survey (second behind Ibbotson/Morningstar), though the reponders were highly divergent about their sources; roughly 5% of the participants cited Damodaran. I personally agree strongly with Damodaran’s approach: why care about what people are saying, let’s simply see what the market is willing to pay. Another measure that I think a number of participants have started to pay attention to is the appetite for junk bonds. Outflows and inflows for the junk bond ETF and their premium/discount to NAV is an interesting indicator of how far investors are reaching for yield and their appetite for risk. Personally, I think the game is up when you start hearing about PIK financing. I’d be interesting to see how well correlated the flow of funds into high yield vehicles is to the implied risk premium of equities. It’s been added to my list of projects.

We recently saw the news that old Barbarian at the Gate–KKR is now introducing funds to be offered to the individual investors. I take that as a sign of few investable assets remaining in the world. After all, if one of the biggest PE shops (where success begets success, something that’s been statistically proven) is looking to making its dough on management fee and not the carry (which they earn by making returns and often exiting by selling the asset to someone else, including the public markets), what does it say about available returns? One could argue that this is a manifestation of continually subdued IPO and M&A volume, but what does that say in turn? Marginal investors can’t find returns in the assets being offered. All in all, not a positive signal for the markets.

I read about the Canton Fair, a twice-yearly industrial fair, the largest of its kind, and appears to be dominated by medium-sized businesses. It provides anecdotal evidence about the appetite for Chinese exports, and the businesses where Chinese companies are looking to sell its wares. China-watchers look at the statistics from this event to gauge how well the Chinese exports are holding up.

I learned that territory under Louisiana Purchase, the biggest real estate deal in the world, was at one time a gift from the French to the Spanish, and some of the thirteen colonies of the United States at the time considered seceding and associating themselves with the Spanish government when the Spanish barred foreign ships and boats from the New Orleans port, which was the place from where goods shipped upstream  from lands along the Mississippi was moved from the riverboats to the ships headed to the eastern seaboard of the United States.

The last one if not exactly one thing that I learned but I was reading the FT Business Book of the Year Award shortlist’s excerpts at, which essentially made me want to read all of these books in a single go. With school over, I don’t have such luxuries anymore, but a man can dream.



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