Tourism is one of the most visible and fastest growing facets of globalization in developing countries. This paper combines a rich collection of Mexican microdata with a quantitative spatial equilibrium model and a new empirical strategy to learn about the long-run economic consequences of tourism. We begin by estimating a number of reduced-form effects on local economic outcomes in today's cross-section of Mexican municipalities. To base these estimates on plausibly exogenous variation in long-term tourism exposure, we exploit geological and oceanographic variation in beach quality along the Mexican coastline to construct instrumental variables. To guide the estimation of the aggregate implications of tourism, we then write down a spatial equilibrium model of trade in goods and tourism services, and use the reduced-form moments to inform its calibration for counterfactual analysis. We find that tourism causes large and significant local economic gains relative to less touristic regions, and that these gains are in part partly driven by significant positive spillovers on manufacturing production. In the aggregate, however, we find that these local spillovers are largely offset by reductions in agglomeration economies among less touristic regions, so that the national gains from tourism are mainly driven by a classical market integration effect.
Tourism and Economic Development: Evidence from Mexico's Coastline -- by Benjamin Faber, Cecile Gaubert
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A Contagious Malady? Open Economy Dimensions of Secular Stagnation -- by Gauti B. Eggertsson, Neil R. Mehrotra, Sanjay R. Singh, Lawrence H. Summers
Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.
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Reverse Speculative Attacks -- by Manuel Amador, Javier Bianchi, Luigi Bocola, Fabrizio Perri
In January 2015, in the face of sustained capital inflows, the Swiss National Bank abandoned the floor for the Swiss Franc against the Euro, a decision which led to the appreciation of the Swiss Franc. The objective of this paper is to present a simple framework that helps to better understand the timing of this episode, which we label a "reverse speculative attack". We model a central bank which wishes to maintain a peg, and responds to increases in demand for domestic currency by expanding its balance sheet. In contrast to the classic speculative attacks, which are triggered by the depletion of foreign assets, reverse attacks are triggered by the concern of future balance sheet losses. Our key result is that the interaction between the desire to maintain the peg and the concern about future losses can lead the central bank to first accumulate a large amount of reserves, and then to abandon the peg, just as we have observed in the Swiss case.
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Incomplete Information in Macroeconomics: Accommodating Frictions in Coordination -- by George-Marios Angeletos, Chen Lian
This chapter studies how incomplete information helps accommodate frictions in coordination, leading to novel insights on the joint determination of expectations and macroeconomic outcomes. We review and synthesize recent work on global games, beauty contests, and their applications. We elaborate on the distinct effects of strategic uncertainty relative to fundamental uncertainty. We demonstrate the potential fragility of workhorse macroeconomic models to relaxations of common knowledge; the possibility of operationalizing the notions of "coordination failure" and "animal spirits" in a manner that unifies unique- and multiple-equilibrium models; and the ability of incomplete information to offer a parsimonious explanation of important empirical regularities. We provide a general treatment of these ideas, as well as specific applications in the context of business cycles, financial crises, and asset pricing.
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The Influence of Geography and Measurement in Estimating Cigarette Price Responsiveness -- by Michael F. Pesko, John A. Tauras, Jidong Huang, Frank J. Chaloupka, IV
We use data from the 2006-07 and 2010-11 waves of the Tobacco Use Supplement of the Current Population Survey to calculate cigarette price elasticities that compensate for within-state cigarette prices, which includes variation from the local tax environment. We use four state-level cigarette price measures and two sub-state-level cigarette price measures. For the two local price measures, we exploit month specific changes in these two prices in 446 sub-state areas of the United States. We document substantial variation in within-state prices, and we calculate that this variation approximately triples estimates of cigarette price responsiveness compared to using state-level prices. When using local prices, we calculate that a 10% rise in cigarette prices reduces cigarette consumption by a mean of 2.5%, which ranges from a 1.7% reduction at a price level $3 to a 5.6% reduction at a price level of $9. Our results suggest an important role for the local tax environment in studies of cigarette price responsiveness.
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Hong Kong's Securities And Futures Commission: Court Rules On Appeals Over Unlicensed Activities
The Court of First Instance has dismissed an appeal of C.L. Management Services Limited (C.L. Management) and its sole owner and director Ms Clarea Au Suet Ming against their convictions for holding out as providing advisory services on corporate finance without a licence.
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BME: 40 US Institutional Investors To Meet With Spanish Midcap Companies In New York And Chicago
Fifth edition of the Spanish Small & Midcaps Conference in New York hosted by BME, JB Capital Markets and Auerbach Grayson
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New Green Revenues Model From FTSE Russell Tracks Global Transition To A Green Economy
FTSE Russell, the global index and data provider, today announced the launch of its LCE data model, which measures the green revenues of 13,400 public companies, representing 98.5% of total global market capitalization. Revenues from a broad range of large, mid and small capitalization companies in 48 developed and emerging markets are mapped to 60 new green industrial subsectors, with FTSE Russell assigning each company in the model a low carbon industrial indicator (LOWCII) factor, representing the ratio of its green revenues to its total revenues.
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Nasdaq IR Insight⢠Boosts Its Services And Technology Capabilities With New Analytical Suite
Nasdaq IR Insight™, a comprehensive platform designed specifically for investor relations officers (IRO) and financial executives to boost strategic intelligence and support decision-making, announces another step in its evolution by releasing its new IR analytics suite, Nasdaq IR Analytics™.
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The Official Guide for GMAT Review Series Updated for 2017
Creator of the Graduate Management Admission Test (GMAT) Exam Provides 15 Percent New Content to Support Aspiring MBA Students.
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ESMA And CFTC To Cooperate On CCPs
The European Securities and Markets Authority (ESMA) and the US Commodity Futures Trading Commission (CFTC) have established a memorandum of understanding (MoU) under the European Market Infrastructure Regulation (EMIR).
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CFTC Signs MOU With The European Securities And Markets Authority Related To Recognized Central Counterparties
The U.S. Commodity Futures Trading Commission (CFTC) announced today that CFTC Chairman Timothy Massad signed a Memorandum of Understanding (MOU) with the European Securities and Markets Authority (ESMA) regarding cooperation with respect to derivatives clearing organizations (DCOs) established in the United States that have applied or that may apply to ESMA for recognition as central counterparties (Recognized CCPs). Through the MOU, the CFTC and ESMA express their willingness to cooperate with respect to Recognized CCPs.
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Shenzhen Stock Exchange Market Bulletin 6 June, 2016, Issue19
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NICE Actimize Confirms Mphasis As Certified Delivery Partner To Expand Reach Of Its Financial Crime And Compliance Solutions - The Partnership Builds Onto An Existing Reseller Agreement Currently In Place With The IT Service Provider
NICE Actimize, a NICE (NASDAQ:NICE) business and the largest and broadest provider of a single financial crime, risk and compliance software platform for the financial services industry, and Mphasis, a leading IT services provider with specialized expertise in the governance, risk and compliance sector, have announced that they have joined together in a certified delivery partnership. Mphasis, which has specialized experience in delivering NICE Actimize compliance solutions to financial institutions, has also maintained a reseller agreement status with the firm since 2014.
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Shenzhen Stock Exchange Holds Training For Controlling Shareholders And De Facto Controllers Of SME Board Companies
Shenzhen Stock Exchange (SZSE) recently held in Shenzhen the 2016 training for controlling shareholders and de facto controllers of SME board companies to improve their awareness of standard operation and propel the companies to be better performers. Conducted in the modes of real-time remote live and on-site training, it had over 900 participants including the controlling shareholders, de facto controllers, chairmen and senior management of nearly 500 SME board companies. Among them, more than 400 people were from newly listed companies and SME board enterprises that have their de facto controllers and chairmen changed in recent two years.
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Ipreo Rolls Out More BD Corporate Enhancements - Client-Driven Enhancements Include A Revolutionary New Advanced Analytics Module
Ipreo, a leading global provider of market intelligence and workflow solutions to corporate and financial services professionals, announced the next wave of enhancements to its industry-leading investor relations platform, BD Corporate.
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Icahn exits, Buffett enters, Whither Apple? Value and Price Effects of Big Name Investing
In my last post, I looked at Apple, arguing, with a Monte Carlo simulation, that the stock was a good investment at the prevailing market price ($93 at the time of the analysis). I appreciate the many comments that I got on the analysis, some taking issue with the distributions that I used for profit margins and revenue growth and some taking me to task for ignoring the fact that big name investors were either entering and exiting the stock. Those who felt that my valuation was optimistic pointed out that Carl Icahn, a long time and very vocal investor in Apple, had decided to sell his stake in the company on April 28. Some who concurred with my value judgment on Apple pointed out that Berkshire Hathaway (and by extension, Warren Buffett or his proxies) had invested in the company on May 16. Should Carl Icahnâs decision to sell Apple or Berkshire Hathawayâs choice to buy it change my assessments of value or views on its price? More generally, should the decisions by "big name" investors to buy or sell a specific company affect your investment judgments about that company?
Price versus Value: The Set Up
To set up the discussion of whether, and if so how, the actions of other investors, especially those with big names and reputations to match, affect your investing choices, I will fall back on a device that I have used before, where I contrast the value and pricing processes.
Put simply, the value process is driven by a company's fundamentals (cash flows, growth and risk) or at least your perception of those fundamentals, whereas the pricing process is driven by demand and supply, with mood, momentum and liquidity all playing big roles in determining price. In an earlier post, I argued that it these processes that separate investors from traders, with investors focused on the drivers of value and traders on the pricing process, and that the skills and tools that you need to be a successful trader are different from those that you need to be a successful investor. To understand how and why the entry of a big name investor may alter your assessments of value and price, I would suggest categorizing that investor into one of four types.
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- An Insider, who is either part of management or has privileged access to management.
- An Activist, who plans to change the way the firm is run or financed.
- A Trader, whose skill lies in playing the pricing game, with the power to either reinforce or reverse price momentum
- A Value Investor, who has valued the company and is willing to take a position based upon that value, on the expectation that the pricing gap will close.
The entry (or exit) of a big name insider or big name activist can alter your estimate of value for a company, by either changing your perceptions of cash flows, growth and risk or by having the potential to change the company's operating and financing characteristics. As a trader, the entry or exit of a big name trader may cause you to move from one side of the pricing game to the other, i.e., shift you from being a buyer to a seller. Finally, as a long term value investor who believes that a stock is mis-priced but has little or no power to cause the pricing gap to close, the entry of a big name value investor can provide a catalyst for the correction.
The Value Effect
If you asked a value purist whether the actions of other investors affect his or her value, the answer will almost always be "of course not". After all, the essence of intrinsic value is that it is determined not by what others think about the company but the company's capacity to generate cash flows over time. That said, there are two ways that the investment action (to buy or sell) of a big name investor can change your assessment of value.
- The first is if the big name investor has private information or is perceived as knowing more about the firm than you do. While that may walk awfully close to the insider trading line in the United States, it is entirely possible that the investor's information is diffuse enough to not be in violation of the law. In this case, it is entirely rational for you, as an investor, to reassess your cash flows and risk, based upon the insiders' actions. That is perhaps why we are so fascinated by insider trading, where the perception is that insider buying is value increasing and insider selling is value selling. In some emerging markets, where possessing proprietary information is neither illegal nor unusual, and the decision by an investor who is perceived as having this information (an insider, manager or family member) to buy (or sell) is an indicator that your value should be increased (decreased).
- The other scenario is where the big name investor is an activist who plans to push for changes in the way the company operates, how it is financed or how much and how it returns cash to investors. The potential effects of these changes can be most easily seen using a financial balance sheet:
To the extent that you believe that the company will have to respond to activist pressure, your assessment of value will change. An asset restructuring can alter he cash flows and risk characteristics of a business, changing your estimate of value, though the direction of the value change and its magnitude will depend on how you see these operating changes playing out in cash flows and growth. Adding debt to your financing mix can add value to a firm (because of the tilt in the tax code towards debt) or destroy value (because it exposes companies to bankruptcy risk). If you are valuing a company, the entry of a big name activist investor in the ranks with a history of pushing for more debt could lead you to reassess your value estimate as well. Returning more cash to stockholders in special dividends or buybacks can change value either upwards (if the market is discounting the cash on the presumption that the company would waste the cash on bad investments/acquisitions) or downwards (if returning the cash will expose the firm to default risk or substantial financing costs in the future).
The Pricing Effect
In some cases, the big name investing in the stock is a trader, doing so on the expectation that momentum will either continue, sustaining the pricing trend, or that momentum will reverse, causing the trend to reverse as well. Since this trade is not motivated by either new information or the desire to change how the company is run, there is no value effect, but there can be a price effect for two reasons.
- The volume effect: If the big name trader has enough money to back his or her trade, there will be a liquidity effect, where a buy will push the price up higher and a sell will push it lower.
- The bandwagon effect: To the extent that there are some in the market who perceive the big name trader as better at perceiving momentum swings than the rest of us, they will follow the investor in buying or selling the stock.
In contrast to a value effect, which is long term and sustained, the pricing effect will have a shorter half life. To the extent that the big name trader's time horizon may be even shorter, he or she can still make money from the bandwagon effect. To get a measure of the pricing effect of a big name trade, you have to look at both the resources commanded by the trader as well as the liquidity/trading volume in the stock. A trader with billions under his control investing in a lightly traded and lightly followed stock will have a much bigger pricing effect than in a very liquid, large market capitalization company.
The Catalyst Effect
It is an undeniable and frustrating truth about value investing that for most of us, it is not just enough to be right in your assessment of value but you have to get the market to correct its mistakes to make money on your investments. If you are a small investor, there is little that you can do to close the pricing gap because you have neither the money or the megaphone to close the gap. A big name value investor, though, may be more successful for two reasons: he or she can take a larger position in the stock and as with the big name trader, create a bandwagon effect where other value investors will follow into the stock. Again, the magnitude of the catalyst effect will vary across both investors and companies. The extent of the impact on the pricing gap will depend in large part on the history of success that the big name investor brings into the investment, with sustained success in the past going with a larger impact.
Apple, Icahn and Buffett
It has taken me a while to get to the point of this post, which was ostensibly about Apple and how Icahnâs exit and Buffettâs entry into the stock affect my thinking. At first sight, this graph shows how the market reacted to their actions:
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While it does look like Icahn's sale had a negative effect (albeit mild) and Berkshire's buy had a positive effect (almost as mild), I plan to use the framework of the last section to assess each of these investors and gauge how it should affect my thinking about the stock.
While it does look like Icahn's sale had a negative effect (albeit mild) and Berkshire's buy had a positive effect (almost as mild), I plan to use the framework of the last section to assess each of these investors and gauge how it should affect my thinking about the stock.
Icahn, the Activist Trader
Through much of his tenure, Carl Icahn has been labeled an activist investor but I will take issue with at least a portion of that label. It is true that Icahn is an activist, though he is much more active on the financing/dividend dimension (pushing companies to borrow money and return cash) than on the operating dimension. I do think that Icahn is more of a trader than an activist, more focused on momentum and pricing than on value and this is illustrated by the tools that brings to the assessment. When Icahn was asked why he invested in Lyft in 2015, his response was that it looked cheap relative to Uber, a classic pricing argument. With Apple, in his bullish days, Icahn argued that it was cheap, but consider how he justified his contention in May 2015, that Apple, then trading at $100, should really be trading at $240. In effect, he forecast out earnings per share in 2016 to be $12, applied a PE ratio of 18 and added the cash balance of $24.44/share. Not only is this definitely not an intrinsic valuation, it is at best "casual pricing", i.e., the type of pricing you would do on the back of an envelope after you have had a little too much to drink.
Before you point out to me that Icahn is worth billions and I am not, let me hasten to add that there is nothing ignoble about trading and that Icahn has been an incredibly successful trader over the last few decades, testimonial to his targeting and trading skills. It does color how I viewed Icahnâs investment in Apple in January 2014, his push at Apple for more dividends and more debt during his days as a Apple investor and his decision to sell his holdings on April 2016. I was already an investor in Apple in January 2014, when Icahn bought his shares, and while I did not view his decision to buy the shares as vindication of my valuation, I welcomed him to the shareholder ranks both because Apple was badly in need of a momentum shift and Icahn was playing both an activist and a catalyst role. I am glad that he put pressure on Apple to get over its unwillingness to borrow money and to return more cash in dividends and buybacks. His decision to depart does tells me two things. First, Icahn has recognized the limitations of financing and dividend policy changes in driving Appleâs value and is moving on to companies where the payoff is greater from financial reengineering. Second, it is possible that Icahnâs momentum detector is telling him that while Appleâs stock price may not be going lower, it has little room to go higher either, at least in the short term, and given his trading track record, I would take that signal seriously,
Buffett Buys In?
The decision by Berkshire Hathaway to invest in Apple about three weeks after Icahnâs departure mollified some worried Apple investors, since there is more desirable endorsement in all of value investment than Warren Buffettâs buy order. I am not privy to the inner workings in Omaha, but I have a feeling that this decision was made more by Todd Combs and Ted Wechsler, the co-heads that Buffett hired as his successors, than by Buffett, but letâs assume that Buffett was the initiator of this investment. What does that tell you about Apple stock? The good news is that the greatest value investor of this generation now considers Apple to be a value stock. The bad news is that this investor's biggest investment in a technology company has been in IBM, a company that delivers solid dividends and cash flows but has been liquidating itself gradually over the last ten years. If my value judgment on Apple had required substantial growth for value to be delivered, Buffettâs investment could very well have adversely affected my view on the company. In this case, though, I agree with his assessment that Apple is a mature company, with enough cash flows to cover dividends for a generation.
In early May, when I analyzed Apple, I knew that Carl Icahn had already closed out his position and it had no impact on my value estimate or investment judgment. Icahnâs decision to sell was an indication to me that the price might not recover quickly and that momentum could work against me in the near term, but I was okay with that, since my time horizon was not constrained. Buffettâs decision (if it was his) to jump in, a couple of weeks later, may be an indication that the best days of Apple are behind it, but I had already made the same judgment in my valuation. If there is a silver lining, it is that Buffett's followers, with their large numbers and unquestioning, will imitate him and perhaps get the price gap to close.
The Dark Side of Big Name Investing
While I am open to the possibility that the entry of a big name into a company has the potential to change the way I think about the company and perhaps my investment decisions, there are dangers embedded in doing so.
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While I am open to the possibility that the entry of a big name into a company has the potential to change the way I think about the company and perhaps my investment decisions, there are dangers embedded in doing so.
- Confirmation bias: It is a well-established fact that investors look for evidence that confirms decisions that they have already made and ignore evidence that contradicts it and big name investors feed into this bias. Thus, if you have bought a stock, you are far more likely to focus in on those big name investors who agree with you (and are either bullish on the stock or buy it) and screen out big name investors who do no.
- Mixed Motives: It is entirely possible that you (as an investor) may be misreading or misunderstanding the motives that caused the big name trade in the first place. In particular, the insider, who you assumed was trading because he or she had private information, may be selling the stock for tax or liquidity reasons. The activist, who you assumed was pushing for real changes in the company, may be more interested in collecting a payoff from the company to leave it alone. The trader, who you assumed had skills playing the momentum game, may himself be following the crowd rather than assessing momentum shifts. Finally, the value investor, who you assumed had valued the company and was pushing for the price/value gap to close, may be more trader than investor, quick to give up, if the stock moves in the wrong direction.
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Multi-Venue Trading Increases Liquidity In EU Equity Markets Despite Duplicate Orders, ESMA Says
The European Securities and Markets Authority (ESMA) has issued today an economic report on order duplication and liquidity measurement in EU equity markets.
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ICAP Electronic Markets Volumes â May 2016
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Speech By FederaL Reserve Chair Janet L. Yellen At The World Affairs Council Of Philadelphia, Philadelphia, Pennsylvania, June 6, 2016, On Current Conditions And The Outlook For The U.S. Economy
I am delighted to be with you today. I will discuss recent economic developments, the outlook, and their implications for monetary policy. My message will be largely favorable, although recent developments have been mixed. Most importantly, the economy has registered considerable progress over the past several years toward the Federal Reserve's goals of maximum employment and price stability, and, as I will explain, there are good reasons to expect that we will advance further toward those goals. The news from the labor market over the past year has been generally good, with significant job gains, the unemployment rate declining below 5 percent, rising household incomes, and tentative signs of faster wage growth. At the same time, recent signs of a slowdown in job creation bear close watching. Inflation has been lower than our objective of 2 percent, but I expect it to move up over time for reasons that I will describe. If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives. However, I will emphasize that monetary policy is not on a preset course and significant shifts in the outlook for the economy would necessitate corresponding shifts in the appropriate path of policy.
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