Academic Finance – Page 2

On Negative Interest Rates

Posted on 21 April 201521 April 2015 by David Merkel

Photo Credit: Alcino || What is the sound of negative one hand clapping?

As with many of my articles, this one starts with a personal story from my insurance business career (skip down four paragraphs to the end of the story if you want):

25 years ago, when it was still uncommon, I wanted?to go to an executive course at the Wharton School for actuaries that wanted to better understand investment math and markets. ?I went to my boss at AIG (a notably tight-fisted firm on expenses) and asked if the company would pay for me to go… it was an exclusive course, and very expensive compared to any other conference that I would ever go to again in my life. ?I tried not to get my hopes up.

Lo, and behold! ?AIG went for it!

A month later, I was with a bunch of bright actuaries at the Wharton School. ?The first thing I noticed was aside from the compound interest math, and maybe some bond knowledge, the actuaries were rather light on investment knowledge, and I would bet that all of them had passed the Society of Actuaries investment course. ?The second thing I noticed were some of the odd investments described in the syllabus: it was probably my first taste of derivative instruments. ?At the ripe old age of 29, I was learning a lot, and possibly more than the rest of my classmates, because I had spent a lot of time studying investments already, both on an academic and practical basis.

I had already studied the pricing of stock options in school, so I was familiar with Black-Scholes. ?(Trivia note: an actuary developed the same formula for valuing optionally terminable reinsurance treaties six years ahead of Black, Scholes and Merton. ?That doesn’t even take into account Bachelier, who derived it 73 years earlier, but no one knew about it, because it was written in French.) ?At this point, the professor left, and a grad student came in to teach us about the pricing of bond options. ?At the end of his lesson, it was time for the class to have a break. ?I went down to make a comment, and it went like this:

Me: You said that we have to adjust for the fact that interest rates can’t go negative.

Grad student: Of course.

Me: But interest rates could go negative.

GS: That’s ridiculous! ?Why would you ever lend money and accept back less than you gave them, and lose the time value of money?!

Me: Almost of the time, you wouldn’t. ?But imagine a scenario where the demand for loanable funds leaves interest rates near zero, but the times are insecure and violent, leaving you uncertain that if you stored your cash privately, you would run too large of a risk of having it stolen. ?You need your cash in the future for a given project. ?In this case, you would pay the bank to store your money.

GS: That’s an absurd scenario! ?That could never happen!

Me: It’s unlikely, I admit, but I wouldn’t say that you can never have negative interest rates.

GS: I will say it again: You can NEVER have negative interest rates.

Me: Thanks, I guess.

Well, so much for the distant past. ?Here is why I am writing this: yesterday, a friend of mine wrote me the following note:

Good evening.? I trust you had a blessed Lord’s Day in the new building.?

Talking bonds today with my Econ class.? Here’s our question. Other than playing a currency angle why would anyone buy European debt with a negative yield?? The Swiss and at least one other county sold 10 year notes with a negative yield.? Can you explain that?? No interest and less principle [sic] at the end.

Now, I didn’t quite get it perfectly right with the grad student at Wharton, but most of it comes down to:

Low demand for loanable funds,?with low measured inflation, and
Security and illiquidity of the funds invested

The first one everyone gets — inflation is low, and few want to borrow, so interest rates are very low. ?But that doesn’t explain how it can go negative.

Things are different for middle class individuals and large financial institutions. ?Someone in the middle class facing negative interest rates from a checking or savings account could say: “Forget it. ?I’m taking most of my money out of the bank, and storing it at home.” ?Leaving aside the inconvenience of currency transaction reports if the amount is over $10,000, and worries over theft, he could take his money home and store it. ?Note that he does have to run a risk of theft, though, so bringing the money home is not costless.

The bank has the same problem, but far larger. ?If you don’t invest the money, where would you store it? ?Could you even get enough currency delivered to do it? ?if you had a vault large enough to store it, could you trust the guards? ?Why make yourself a target? ?If you don’t have a vault large enough to store it, you’re in the same set of problems that exist for those that warehouse precious metals, but with a far more liquid commodity.

Thus in a weak economic environment like this, with low inflation, banks and other financial institutions that want certainty of payment in the future are willing to pay interest to get their money back later.

Part of the problem here is that the fiat currencies of the world exist only to be?units of account, and not stores of value. ?Thus in this unusual environment, they behave like any other commodity, where the prices for futures are often higher than the current spot price, which is known as backwardation. ?(Corrected from initial posting — i.e. it costs more to receive a given cash flow in the future than today, thus backwardation, not contango.) ?The rates can’t get too negative, though, or some institutions will bite the bullet and store as much cash as they can, just as other commodities get stored.

To use another analogy, a while ago, some market observers couldn’t get why anyone would accept a negative yield on Treasury Inflation Protected Securities [TIPS]. ?They did so because they had few other choices for transferring money to the future while still having inflation protection. ?Some people argued that they were locking in a loss. ?My comment at the time was, “They’re trying to avoid a larger loss.”

Thus the difficulty of managing cash outside of the bond/loan markets in a depressed economy leads to negative interest rates. ?The financial institutions may lose money in the process, but they are losing less money than if they tried to store and protect the money, if that could even be done.

Advice on Organizing Asset Allocations and Managers

Posted on 26 February 2015 by David Merkel

I was reading an occasional blast email from my friend Tom Brakke, when he mentioned a free publication from Redington, a UK asset management firm that employs actuaries, among others. I was very impressed with what I read in the 32-page publication, and highly recommend it to those who select investment managers or create asset allocations, subject to some caveats that I will list later in this article.

In the UK, actuaries are trained to a higher degree to deal with investments than they are in the US. The Society of Actuaries could learn a lot from the Institute of Actuaries in that regard. As a former Fellow in the Society of Actuaries, I was in the vanguard of those trying to apply actuarial principles to risk management, both when I managed risks for insurance companies, worked for non-insurance organizations, and manage money for upper middle class individuals and small institutions. Redington’s thoughts are very much like mine in most ways. As I see it, the best things about their investment reasoning are:

Risk management must be both quantitative and qualitative.
Risk is measured relative to client needs and thus the risk of an investment is different for clients with different needs. ?Universal measures of risk like Sharpe ratios, beta and standard deviation of asset returns are generally inferior measures of risk. ?(DM: But they allow the academics to publish! ?That’s why they exist! ?Please fire consultants that use them.)
Risk control methods must be?implemented by clients, and not countermanded if they want the risk control to work.
Shorting requires greater certainty than going long (DM: or going levered long).
Margin of safety is paramount in investing.
Risk control is more important when things are going well.
It is better to think of alternatives in terms of the specific risks that they pose, and likely future compensation, rather than look at track records.
Illiquidity should be taken on with caution, and with more than enough compensation for the loss of flexibility in future asset allocation decisions and cash flow needs.
Don’t?merely avoid risk, but take risks where?there is more than fair compensation for the risks undertaken.
And more… read the 32-page publication from Redington if you are interested. ?You will have to register for emails if you do so, but they seem to be a classy firm that would honor a future unsubscribe request. ?Me? ?I’m looking forward to the next missive.

Now, here are a few places where I differ with them:

Caveats

Aside from pacifying clients with lower volatility, selling puts and setting stop-losses will probably lower returns for investors with long liabilities to fund, who can bear the added volatility. ?Better to try to educate the client that they are likely leaving money on the table. ?(An aside: selling short-duration at-the-money puts makes money on average, and the opposite for buying them. ?Investors with long funding needs could dedicate 1% of their assets to that when the payment to do so is high — it’s another way of profiting from offering insurance in of for a crisis.)
Risk parity strategies are overrated (my arguments against it here:?one, two).
I think that reducing allocations to risky assets when volatility gets high is the wrong way to do it. ?Once volatility is high, most of the time the disaster has already happened. ?If risky asset valuations show that the market is offering you significant deals, take the deals, even if volatility is high. ?If volatility is high and valuations indicate that your opportunities are average to poor at best, yeah, get out if you can. ?But focus on valuations relative to the risk of significant loss.
In general, many of their asset class articles give you a good taste of the issues at hand, but I would have preferred more depth at the cost of a longer publication.

But aside from those caveats, the publication is highly recommended. ?Enjoy!

Out and About with The Aleph Blog

Posted on 20 December 201421 December 2014 by David Merkel

1. Recently I appeared on RT Boom/Bust again. ?The interview lasts 6+ minutes. ?Erin Ade and I discussed:

Who benefits from lower energy prices.
The No-Lose Line for owning bonds,
Whether you are compensated for inflation risks in long bonds
How much an average person should invest in stocks with any assets that they have after buying their own house.
The value of economics, or lack thereof, to investors today.

2. Also, I did an “expert interview” for Mint.com. ?I answered the following questions:

What is your most basic advice on investing?
What can you tell young people to help them stay financially secure in their futures?
How can a potential investor go about finding the best investment professional to work with for his or her individual needs?
Please explain how being a good investor and a good businessman go hand in hand.
What is your favorite part of your job?
You clearly do a lot of reading, as seen from your book reviews. What other genres of books do you enjoy?

3. Finally, Aleph Blog was featured in a list of the Top 100 Insurance Blogs at number 29. ?I find it interesting because my blog has maybe 18% of?posts on insurance topics. ?That said, I have a distinctive voice on insurance, because I will talk about consumer issues, and what are companies that might be worth owning.

Enjoy the overly long infographic.

An infographic by the team at Rebates zone

Two Portfolios. Pick One.

Posted on 29 August 201429 August 2014 by David Merkel

I’m going to show you two portfolios — I’m not initially going to tell you much about either one, but then you can consider which one you might like better. ?Here’s portfolio A:

And here is portfolio B:

There is one obvious difference in the two portfolios: portfolio B has gone up more than portfolio A in the past year. ?But the hidden story is that portfolio A’s stocks have had price returns of -85% or worse over the past four years, whereas portfolio B’s stocks have has price returns of 1000% or better. ?They are the only stocks with current market caps of over $100 million that meet those criteria.

Now, which one would you choose, if you had to hold one portfolio for the next year? The next four years?

Oddly, the right answer might be portfolio A. ?Currently, I am reading through a book called Deep Value, which I will review in a week or two, and they cite in Chapter 5 some research by Thaler and De Bondt which indicates that portfolios that have gone through extreme failure tend to outperform portfolios?that have gone through extreme?success.

Though the momentum anomaly (weak as it has been recently) usually favors portfolios with stronger price momentum, the relationship breaks down over longer periods of time, and more severe moves, where mean-reversion tends to take over. ?One thing that I can tell looking at the two portfolios — the expectations are a lot, lot higher for portfolio B than portfolio A. ?Things only have to stop getting worse for there to some positive price action there.

Sometimes I like to run a screen for?stocks have done badly over the last four years, but have begun to outperform over the last year. ?This can point out areas that are still ignored by most of the market, but where trend may have shifted. ?I’ll post that screen after my software has its weekly update on Saturday. ?Until then.

PS — as an aside, it will be fun to review the relative performance of these portfolios.

On Returns-Based Style Analysis

Posted on 26 July 201427 July 2014 by David Merkel

Sometime in the next few weeks, I am going to dig into my pre-2003 [pre-RealMoney] files and see if there is anything there to share with readers. ?Most of my best stories I have already told in my various series. ?The one I will tell tonight I don’t think I have told.

In 1994, we had a problem at Provident Mutual’s Pension Division. ?Our main external equity manager was having a very lousy year as value managers that focused on absolute yield were getting taken to the cleaners. ?This was after a few years of poor performance — the joke was, given the great performance of the past, “Hey, can you develop the 19-year track record?” ?(The last 5 years as a group were horrid, but the previous 14 were great.)

Aside: there aren’t many absolute yield managers in equities today. ?Back when dividend yields were higher, and corporate bond yields were higher, both absolute and relative yield managers flourished as interest rates and dividend yields?crested in the early 1980s, and the stocks paying high dividends got bid up as interest rates fell, much as the same thing happened to zero coupon and other noncallable long duration bonds.

The process started with a call from a manager of managers who proposed that we start up “multiple manger funds,” where we would be the manager of managers.

This offered several advantages:

It offered us an easy out with our long-held failing manager, because we are not firing them, just making them a portion of the assets in the value fund.
It would make eliminating them easier in a second step, with less PR damage.
It would make us look like we were taking action and control in a new way for our clients. (They loved it.)
As it was, we did a good job selecting managers, and the funds performed well.
We could negotiate lower fees with the managers,
It gave us a great marketing story.
Our margins and growth improved.

I was critical to the process, being the only member of the team with investment expertise. ?Everyone else was a marketer or the divisional head. ?(I take that back, one member of the marketing area was genuinely sharp with investments.) ?After we chose the managers, I set the allocations.

Now onto tonight’s topic (what a long intro): At the beginning of our relationship with the manager of managers, they did a traditional holdings-based analysis of how a manager managed assets. ?About one year into the process, they introduced returns-based style analysis.

Though the Wikipedia article just cited has a bevy of errors, it will still give you a flavor for what it is. ?Let me give my own explanation:

It takes a lot of effort and wisdom to look at quarterly portfolio snapshots and analyze what a manager is doing. ?You almost have to be as wise as the manager himself to analyze it, but many fund analysts developed the skill.

But returns-based style analysis offered the holy grail: we can understand what the manager is doing simply by comparing the returns of the manager versus returns on ?variety of asset indexes, using constrained multiple regression.

The idea was this: the returns of a manager are equal to his alpha versus a composite index that best fits his performance. ?Since we were dealing with long-only managers, the weights on the index components could not be negative.

The practical upshot to the manager of mangers was: “Whoopee! ?We can analyze every manager under the sun just by looking?at their return patterns. ?No more time-consuming work.”

After the first meeting with the manager of managers, I expressed my doubts, and asked for a special meeting with their quants. ?A week later, I had a meeting with a few members of their staff, of which one was the quant, a nice lady 10 years my junior, who I felt sorry for. ?She started her presentation at a very basic level, and asked “Do you have any questions?” ?I asked, “Isn’t this just an quadratic optimization problem where you are choosing weights on the convex hull?” ?She paused, and said, “Oh, so you *do* understand this.” ?The meeting ended son after that — we agreed on the math, and in math, there is no magic.

But that placed me on the warpath; I genuinely felt the advice we were getting had declined in value. ?I wrote a 16-page report to our manager explaining why returns-based style analysis was inferior.

There is no way to correctly estimate error bounds, because of nonlinear constraints. ?(Note: two years later, I guy came up with an approximate way to do it in an article in the Financial Analysts Journal. ?I called him, and we had a great talk. ?That said, approximate is approximate, and I haven’t seen any adopt it.)
Because many of the indexes are highly correlated with each other, small differences in manager returns make a huge difference in the weight calculated for each index.
If a manager is changing investments because he senses a factor like market cap size or valuation is cheap, it will get interpreted as a change in his index, and will not come out as alpha, but as beta.
If I don’t believe that the CAPM and MPT are valid, why should I believe this monstrosity?
And more… I hope I find my 16-page paper in my files.

After six more months we terminated the manager of managers, and hired a better one.

Lower fees
Lower fees from managers (they had greater bargaining power)
We reduced our fees to clients
Better marketing name
Holdings based manager analysis

After that, things were much better, and we continued to grow.

My years at Provident Mutual were exceedingly fruitful — this was just one of many areas where my efforts paid off well.

All that said, there is no way to fix returns-based style analysis. ?It is a bogus concept and needs to be abandoned. ?Those who use it do not grasp the limits of econometrics, and are Sorcerer’s apprentices.

PS — Need I mention that the originator of the idea, Bill Sharpe, is not all that sharp with econometrics? ?He’s a bright guy, but it is not his strong suit.

PPS — there are not many actuaries with a background in econometrics. ?That is why I have written this.

A Bond Manager Thinks about the Equity Premium

Posted on 31 May 20141 June 2014 by David Merkel

One of the things that annoys me about the concept of the equity premium is that it is an academic creation that does not grasp the structures of the markets. ?Send the academics to be bond and equity portfolio managers for a time, and maybe we would get a better theory than Modern Portfolio Theory [MPT].

Here is the first thing that is wrong with MPT — it doesn’t understand the bond market. ?The best estimate of what bonds will return over time is the current yield less expected losses from defaults and optionality. ?Hold a bond to its maturity, and the standard deviation of returns is low, over the full time horizon.

Thinking about bonds in the current environment, virtually nothing is earned with high-quality short-dated debt. ?The yield curve is still relatively steep, as people expect the economy and lending to pick up.

Think for a moment. what is a longer asset, a corporate bond, or the stock of the same company? ?The stock is the longer asset, because the cash flows of the business in question potentially stretch far longer than the maturity of the corporate debt, at least in most cases.

Also think, in a bad scenario, where insolvency is possible, who has the better claim: the equity or the unsecured debt? ?The unsecured debt, of course.

Longer assets in general possess more risk and should carry higher yields to induce people to take those risks. ?Inverted yield curves are exceptions. ?Also in general, longer corporate bonds have higher spreads over Treasuries most of the time, than shorter corporate bonds.

The one significant advantage that equities have over corporate bonds is that of control. ?Increases in earnings go to the stockholders. ?Buyouts go to the stockholders. ?Bondholders get paid off at best.

That said, in the losing scenario, bondholders get back 40% of par on average, while stockholders get little if anything.

I believe that the equity of a company needs to be priced to return more than the longest unsecured debt or preferred stock of the company.

Thus when I think about MPT, I think they are positing an asset-liability mismatch, comparing T-bills versus a long asset, common stocks. ?The comparison should be broken down into several spreads:

T-bills vs T-notes/bonds of the longest maturity issued by companies like them.
Corporate bond yields minus Treasury yields at the same maturity.
The earnings yield of the stock minus the corporate bond yield.

This takes apart the seemingly simple MPT calculation, revealing the complexity within, helping to explain why beta doesn’t work. ?It embeds an asset-liability mismatch. ?Stocks are long term, T-bills are not. ?There is no reason why their returns should be considered together, without a model of yield curve spreads, corporate spreads, and equity financing spreads.

That’s a sketch of the correct model, now who wants to try to build it out?

An Alternative to the Efficient Markets Hypothesis

Posted on 8 May 20148 May 2014 by David Merkel

I read an article today, The Fallibility of the Efficient Market?Theory: A New Paradigm.?? Good article, made me look through a major article cited:?An Institutional Theory of Momentum and Reversal.

The former article explains in basic terms what the authors have illustrated. ?The latter article, provides all of the complex math. ?I get 50%+ of ?it, and I think it is right. ?This explains value, momentum, and mean-reversion, the largest anomalies that trouble the?Efficient Markets Hypothesis.

This article deserves more attention from quants and academics. ?The only thing that troubles me about it is that they assume a normal distribution for security returns.

Have a read, and for those that can understand the math, if you disagree with it, let me know.

An Idea for When the Market is High

Posted on 22 April 201422 April 2014 by David Merkel

Last night I was at the Towson University?International Markets Summit. ?I’m grateful to the students for inviting me, as it is an honor. ?During the presentation, I mentioned the book “Accounting for Value” by Stephen Penman. ?I reviewed the book two years ago. ?A great book, and one that should lead readers to modify their views on value investing.

But one aspect of the book was easy to implement, he cited his paper that you can read here,?Returns to Buying Earnings and Book Value: Accounting for Growth and Risk. ?Buy the stocks that are the cheapest as measured by the highest quintiles of book value to price, and trailing twelve month earnings per share to price.

I ran this analysis for all US-traded stocks with over $100 million of market capitalization. ?Here are the results:

Company	Ticker	Industry	Country	B/P	E/P
Petrobras Argentina SA ADR	PZE	0606 – Oil & Gas – Integrated	Argentina	1.26	7.95
Pampa Energia S.A. (ADR)	PAM	1203 – Electric Utilities	Argentina	0.83	11.41
OMV AG (ADR)	OMVKY	0609 – Oil & Gas Operations	Austria	1.13	11.33
Validus Holdings, Ltd.	VR	0709 – Insurance (Life)	Bermuda	1	13.3
Everest Re Group Ltd	RE	0715 – Insurance (Property & Casualty)	Bermuda	0.88	15.35
Maiden Holdings, Ltd.	MHLD	0715 – Insurance (Property & Casualty)	Bermuda	0.93	10.11
Montpelier Re Holdings Ltd.	MRH	0715 – Insurance (Property & Casualty)	Bermuda	0.99	11.83
Axis Capital Holdings Limited	AXS	0715 – Insurance (Property & Casualty)	Bermuda	1.01	13.2
Platinum Underwriters Holdings	PTP	0715 – Insurance (Property & Casualty)	Bermuda	1.02	11.25
White Mountains Insurance Grou	WTM	0715 – Insurance (Property & Casualty)	Bermuda	1.07	8.49
Aspen Insurance Holdings Limit	AHL	0715 – Insurance (Property & Casualty)	Bermuda	1.12	9.61
Assured Guaranty Ltd.	AGO	0715 – Insurance (Property & Casualty)	Bermuda	1.18	18.59
Partnerre Ltd	PRE	0715 – Insurance (Property & Casualty)	Bermuda	1.23	10.75
Argo Group International Holdi	AGII	0715 – Insurance (Property & Casualty)	Bermuda	1.27	11.55
Endurance Specialty Holdings L	ENH	0715 – Insurance (Property & Casualty)	Bermuda	1.31	12.55
Gerdau SA (ADR)	GGB	0121 – Iron & Steel	Brazil	1.32	6.84
Gafisa SA (ADR)	GFA	0215 – Construction Services	Brazil	2.04	15.52
Petroleo Brasileiro Petrobras	PBR	0606 – Oil & Gas – Integrated	Brazil	1.67	13.2
Telefonica Brasil SA (ADR)	VIV	0915 – Communications Services	Brazil	0.85	7.58
Companhia de Saneamento Basico	SBS	1209 – Water Utilities	Brazil	0.89	8.57
Endeavour Silver Corp	EXK	0118 – Gold & Silver	Canada	0.89	9.9
Teck Resources Ltd (USA)	TCK	0124 – Metal Mining	Canada	1.33	6.84
TransGlobe Energy Corporation	TGA	0609 – Oil & Gas Operations	Canada	0.85	10.03
Granite Real Estate Investment	GRP.U	0933 – Real Estate Operations	Canada	0.87	7.53
Brookfield Office Properties I	BPO	0933 – Real Estate Operations	Canada	1.08	10.08
Boardwalk REIT (USA)	BOWFF	0933 – Real Estate Operations	Canada	1.14	11.54
Greenlight Capital Re, Ltd.	GLRE	0715 – Insurance (Property & Casualty)	Cayman Islands	0.9	19.45
Sinopec Shanghai Petrochemical	SHI	0103 – Chemical Manufacturing	China	1.52	11
Yongye International, Inc	YONG	0103 – Chemical Manufacturing	China	1.65	43.36
China XD Plastics Co Ltd	CXDC	0109 – Containters & Packaging	China	1.13	22.71
Lihua International Inc	LIWA	0127 – Misc. Fabricated Products	China	2.31	41.21
Xinyuan Real Estate Co., Ltd.	XIN	0215 – Construction Services	China	5.22	42.83
China Automotive Systems, Inc.	CAAS	0415 – Auto & Truck Parts	China	0.99	11.04
China Petroleum & Chemical Cor	SNP	0609 – Oil & Gas Operations	China	0.87	10.11
Concord Medical Services Hldg	CCM	0806 – Healthcare Facilities	China	3.06	12.45
China Telecom Corporation Limi	CHA	0915 – Communications Services	China	1.17	7.03
Xueda Education Group (ADR)	XUE	0969 – Schools	China	0.84	6.63
Changyou.Com Ltd (ADR)	CYOU	1018 – Computer Services	China	1.23	20.92
Nam Tai Electronics, Inc.	NTE	1024 – Electronic Instruments & Controls	China	1.11	21.58
Jinpan International Limited	JST	1024 – Electronic Instruments & Controls	China	1.7	13.36
Semiconductor Manufacturing In	SMI	1033 – Semiconductors	China	0.96	8.06
China Eastern Airlines Corp. L	CEA	1106 – Airline	China	1.05	12.11
China Southern Airlines Co Ltd	ZNH	1106 – Airline	China	1.7	13.19
Guangshen Railway Co. Ltd (ADR	GSH	1112 – Railroads	China	1.34	6.64
Axa SA (ADR)	AXAHY	0709 – Insurance (Life)	France	1.19	9.46
Volkswagen AG (ADR)	VLKAY	0412 – Auto & Truck Manufacturers	Germany	0.94	9.73
Allianz SE (ADR)	AZSEY	0715 – Insurance (Property & Casualty)	Germany	0.92	11.08
E.ON SE (ADR)	EONGY	1203 – Electric Utilities	Germany	1.28	8.17
National Bank of Greece (ADR)	NBG	0727 – Regional Banks	Greece	2	131.03
Capital Product Partners L.P.	CPLP	1118 – Water Transportation	Greece	0.83	10.36
Safe Bulkers, Inc.	SB	1118 – Water Transportation	Greece	0.83	11.99
StealthGas Inc.	GASS	1118 – Water Transportation	Greece	1.32	9.08
Navios Maritime Holdings Inc.	NM	1118 – Water Transportation	Greece	1.32	13.4
Sun Hung Kai Properties Limite	SUHJY	0215 – Construction Services	Hong Kong	1.44	15.22
Hysan Development Company Limi	HYSNY	0215 – Construction Services	Hong Kong	1.66	20.18
Tai Cheung Holdings Ltd (ADR)	TAICY	0215 – Construction Services	Hong Kong	2.11	34.38
Le Gaga Holdings Ltd ADR	GAGA	0509 – Crops	Hong Kong	1.55	14.63
Bank of East Asia Ltd. (ADR),	BKEAY	0727 – Regional Banks	Hong Kong	0.85	8.78
Iao Kun Group Holding Co Ltd	IKGH	0912 – Casinos & Gaming	Hong Kong	1.36	12.89
Cheung Kong (Holdings) Limited	CHEUY	0933 – Real Estate Operations	Hong Kong	1.16	11.07
Seaspan Corporation	SSW	1118 – Water Transportation	Hong Kong	1.05	15.2
Magyar Telekom Tavkozlesi Nyrt	MYTAY	0915 – Communications Services	Hungary	1.34	6.66
XL Group plc	XL	0715 – Insurance (Property & Casualty)	Ireland	1.12	11.72
Fly Leasing Ltd(ADR)	FLY	0939 – Rental & Leasing	Ireland	1.3	17.39
Ellomay Capital Ltd.	ELLO	1033 – Semiconductors	Israel	0.93	10.95
FUJIFILM Holdings Corp. (ADR)	FUJIY	0112 – Fabricated Plastic & Rubber	Japan	1.55	6.64
Kobe Steel, Ltd. (ADR)	KBSTY	0121 – Iron & Steel	Japan	1.47	14.7
Mitsui & Co Ltd (ADR)	MITSY	0218 – Misc. Capital Goods	Japan	1.33	13.26
Wacoal Holdings Corporation (A	WACLY	0403 – Apparel/Accessories	Japan	1.45	7.14
Toyota Motor Corp (ADR)	TM	0412 – Auto & Truck Manufacturers	Japan	0.82	10.5
Honda Motor Co Ltd (ADR)	HMC	0412 – Auto & Truck Manufacturers	Japan	0.92	7.61
Nissan Motor Co., Ltd. (ADR)	NSANY	0412 – Auto & Truck Manufacturers	Japan	1.11	10.04
Nomura Holdings, Inc. (ADR)	NMR	0718 – Investment Services	Japan	1.09	10.18
Mizuho Financial Group Inc. (A	MFG	0727 – Regional Banks	Japan	1.13	14.9
Sumitomo Mitsui Financial Grp,	SMFG	0727 – Regional Banks	Japan	1.28	16.67
Mitsubishi UFJ Financial Group	MTU	0727 – Regional Banks	Japan	1.53	13.67
Nippon Telegraph & Telephone C	NTT	0915 – Communications Services	Japan	1.39	8.93
ORIX Corporation (ADR)	IX	0939 – Rental & Leasing	Japan	0.98	7.59
Ternium S.A. (ADR)	TX	0121 – Iron & Steel	Luxembourg	0.89	7.61
ING Groep NV (ADR)	ING	0709 – Insurance (Life)	Netherlands	1.14	9.46
VimpelCom Ltd (ADR)	VIP	0915 – Communications Services	Netherlands	0.93	13.67
ASM International NV (ADR)	ASMI	1033 – Semiconductors	Netherlands	1.01	74.95
Petroleum Geo-Services ASA (AD	PGSVY	0612 – Oil Well Services & Equipment	Norway	0.81	9.85
Banco Latinoamericano Comerc E	BLX	0727 – Regional Banks	Panama	0.85	8.39
Compania de Minas Buenaventura	BVN	0118 – Gold & Silver	Peru	1.18	10.05
OFG Bancorp	OFG	0727 – Regional Banks	Puerto Rico	0.93	11.04
Popular Inc	BPOP	0727 – Regional Banks	Puerto Rico	1.52	19.77
Triple-S Management Corp.	GTS	0806 – Healthcare Facilities	Puerto Rico	1.79	12.52
LUKOIL (ADR)	LUKOY	0606 – Oil & Gas – Integrated	Russian Federation	1.91	19.08
China Yuchai International Lim	CYD	0218 – Misc. Capital Goods	Singapore	1.2	15.34
Net 1 UEPS Technologies Inc	UEPS	0703 – Consumer Financial Services	South Africa	0.91	6.79
POSCO (ADR)	PKX	0121 – Iron & Steel	South Korea	1.72	6.97
Shinhan Financial Group Co., L	SHG	0727 – Regional Banks	South Korea	1.24	8.42
Woori Finance Holdings Co., Lt	WF	0727 – Regional Banks	South Korea	1.91	9.86
SK Telecom Co., Ltd. (ADR)	SKM	0915 – Communications Services	South Korea	0.89	11.87
Repsol SA (ADR)	REPYY	0606 – Oil & Gas – Integrated	Spain	1.06	7.93
Transocean LTD	RIG	0612 – Oil Well Services & Equipment	Switzerland	1.14	9.54
ACE Limited	ACE	0715 – Insurance (Property & Casualty)	Switzerland	0.84	10.92
Allied World Assurance Co Hold	AWH	0715 – Insurance (Property & Casualty)	Switzerland	1	11.73
United Microelectronics Corp (	UMC	1033 – Semiconductors	Taiwan	1.3	8.02
Silicon Motion Technology Corp	SIMO	1033 – Semiconductors	Taiwan	1.96	19.74
BP plc (ADR)	BP	0606 – Oil & Gas – Integrated	United Kingdom	0.85	15.1
Noble Corporation PLC	NE	0612 – Oil Well Services & Equipment	United Kingdom	1.08	10.05
Subsea 7 SA (ADR)	SUBCY	0612 – Oil Well Services & Equipment	United Kingdom	1.09	7.02
ENSCO PLC	ESV	0612 – Oil Well Services & Equipment	United Kingdom	1.11	12.2
Rowan Companies PLC	RDC	0612 – Oil Well Services & Equipment	United Kingdom	1.3	6.71
HSBC Holdings plc (ADR)	HSBC	0727 – Regional Banks	United Kingdom	0.94	8.09
Vodafone Group Plc (ADR)	VOD	0915 – Communications Services	United Kingdom	1.47	31.68
J Sainsbury plc (ADR)	JSAIY	0957 – Retail (Grocery)	United Kingdom	0.96	10.57
Global Ship Lease, Inc.	GSL	1118 – Water Transportation	United Kingdom	2.11	16.62
Cliffs Natural Resources Inc	CLF	0124 – Metal Mining	United States	1.87	12.76
M.D.C. Holdings, Inc.	MDC	0215 – Construction Services	United States	0.91	23.28
M/I Homes Inc	MHO	0215 – Construction Services	United States	0.92	27.21
URS Corp	URS	0215 – Construction Services	United States	1.16	7.02
Mestek, Inc.	MCCK	0218 – Misc. Capital Goods	United States	0.98	11.53
General Motors Company	GM	0412 – Auto & Truck Manufacturers	United States	0.83	7.98
Rocky Brands Inc	RCKY	0418 – Footwear	United States	1.21	6.82
Johnson Outdoors Inc.	JOUT	0430 – Recreational Products	United States	0.87	7.83
LeapFrog Enterprises, Inc.	LF	0430 – Recreational Products	United States	0.89	17.58
Yasheng Group	HERB	0509 – Crops	United States	11.77	70.4
Seaboard Corporation	SEB	0515 – Food Processing	United States	0.82	6.77
John B. Sanfilippo & Son, Inc.	JBSS	0515 – Food Processing	United States	0.84	8.55
Omega Protein Corporation	OME	0515 – Food Processing	United States	1.01	12.24
Ennis, Inc.	EBF	0518 – Office Supplies	United States	0.92	8.43
ACCO Brands Corporation	ACCO	0518 – Office Supplies	United States	1.01	11.07
Universal Corp	UVV	0524 – Tobacco	United States	0.93	10.8
Hess Corp.	HES	0609 – Oil & Gas Operations	United States	0.86	12.86
Approach Resources Inc.	AREX	0609 – Oil & Gas Operations	United States	0.93	9.48
Equal Energy Ltd. (USA)	EQU	0609 – Oil & Gas Operations	United States	0.96	9.38
Sandridge Mississippian Trust	SDT	0609 – Oil & Gas Operations	United States	1.49	63.59
PHI Inc.	PHII	0612 – Oil Well Services & Equipment	United States	0.85	8.96
Medallion Financial Corp	TAXI	0703 – Consumer Financial Services	United States	0.94	9.13
CIT Group Inc.	CIT	0703 – Consumer Financial Services	United States	0.96	7.26
Goldman Sachs Group Inc	GS	0703 – Consumer Financial Services	United States	0.97	10.16
Ellington Financial LLC	EFC	0703 – Consumer Financial Services	United States	1.04	13.7
Walter Investment Management C	WAC	0703 – Consumer Financial Services	United States	1.11	23.94
Chimera Investment Corporation	CIM	0703 – Consumer Financial Services	United States	1.12	11.58
PHH Corporation	PHH	0703 – Consumer Financial Services	United States	1.19	9.68
EZCORP Inc	EZPW	0703 – Consumer Financial Services	United States	1.58	7.55
WellPoint Inc	WLP	0706 – Insurance (Accident & Health)	United States	0.89	9.52
Employers Holdings, Inc.	EIG	0706 – Insurance (Accident & Health)	United States	0.93	10.46
Reinsurance Group of America I	RGA	0706 – Insurance (Accident & Health)	United States	1.08	7.49
American Equity Investment Lif	AEL	0709 – Insurance (Life)	United States	0.86	16.77
Protective Life Corp.	PL	0709 – Insurance (Life)	United States	0.92	9.76
FBL Financial Group	FFG	0709 – Insurance (Life)	United States	0.96	9.73
Unum Group	UNM	0709 – Insurance (Life)	United States	0.98	9.55
Assurant, Inc.	AIZ	0709 – Insurance (Life)	United States	1	9.67
Lincoln National Corporation	LNC	0709 – Insurance (Life)	United States	1.07	9.76
Symetra Financial Corporation	SYA	0709 – Insurance (Life)	United States	1.23	8.64
CNO Financial Group Inc	CNO	0709 – Insurance (Life)	United States	1.29	12.39
Imperial Holdings, Inc.	IFT	0709 – Insurance (Life)	United States	1.38	37.03
National Western Life Insuranc	NWLI	0709 – Insurance (Life)	United States	1.63	10.85
Genworth Financial Inc	GNW	0709 – Insurance (Life)	United States	1.72	6.87
Fortegra Financial Corp	FRF	0712 – Insurance (Miscellaneous)	United States	1.28	8.18
Allstate Corporation, The	ALL	0715 – Insurance (Property & Casualty)	United States	0.82	8.75
HCC Insurance Holdings, Inc.	HCC	0715 – Insurance (Property & Casualty)	United States	0.82	8.92
State Auto Financial Corp	STFC	0715 – Insurance (Property & Casualty)	United States	0.83	6.92
Stewart Information Services C	STC	0715 – Insurance (Property & Casualty)	United States	0.83	7.96
Safety Insurance Group, Inc.	SAFT	0715 – Insurance (Property & Casualty)	United States	0.84	7.39
Investors Title Company	ITIC	0715 – Insurance (Property & Casualty)	United States	0.86	9.85
First American Financial Corp	FAF	0715 – Insurance (Property & Casualty)	United States	0.87	6.75
American Financial Group Inc	AFG	0715 – Insurance (Property & Casualty)	United States	0.87	9.15
ProAssurance Corporation	PRA	0715 – Insurance (Property & Casualty)	United States	0.87	10.86
Old Republic International Cor	ORI	0715 – Insurance (Property & Casualty)	United States	0.88	10.53
Selective Insurance Group	SIGI	0715 – Insurance (Property & Casualty)	United States	0.9	8.51
Horace Mann Educators Corporat	HMN	0715 – Insurance (Property & Casualty)	United States	0.91	9.6
Kemper Corp	KMPR	0715 – Insurance (Property & Casualty)	United States	0.95	9.64
Baldwin & Lyons Inc	BWINB	0715 – Insurance (Property & Casualty)	United States	0.98	9.42
Hanover Insurance Group, Inc.,	THG	0715 – Insurance (Property & Casualty)	United States	0.99	9.44
Alleghany Corporation	Y	0715 – Insurance (Property & Casualty)	United States	1.01	9.15
EMC Insurance Group Inc.	EMCI	0715 – Insurance (Property & Casualty)	United States	1.02	9.88
United Fire Group, Inc.	UFCS	0715 – Insurance (Property & Casualty)	United States	1.05	10.3
Navigators Group, Inc, The	NAVG	0715 – Insurance (Property & Casualty)	United States	1.09	7.68
Cna Financial Corp	CNA	0715 – Insurance (Property & Casualty)	United States	1.1	8.15
American International Group I	AIG	0715 – Insurance (Property & Casualty)	United States	1.34	12
American National Insurance Co	ANAT	0715 – Insurance (Property & Casualty)	United States	1.4	8.99
MBIA Inc.	MBI	0715 – Insurance (Property & Casualty)	United States	1.45	10.86
FBR & Co	FBRC	0718 – Investment Services	United States	1.03	29.21
KKR Financial Holdings LLC	KFN	0718 – Investment Services	United States	1.05	11.24
NASDAQ OMX Group, Inc.	NDAQ	0718 – Investment Services	United States	1.13	6.66
Piper Jaffray Companies	PJC	0718 – Investment Services	United States	1.17	7.42
Primus Guaranty, Ltd.	PRSG	0718 – Investment Services	United States	1.25	50.12
Arlington Asset Investment Cor	AI	0718 – Investment Services	United States	1.28	11.6
Oppenheimer Holdings Inc. (USA	OPY	0718 – Investment Services	United States	1.34	6.71
CIFC Corp	CIFC	0718 – Investment Services	United States	1.73	9.51
JPMorgan Chase & Co.	JPM	0724 – Money Center Banks	United States	0.98	7.39
First National Bank Alaska	FBAK	0727 – Regional Banks	United States	0.81	6.61
Old National Bancorp	ONB	0727 – Regional Banks	United States	0.81	7
Sandy Spring Bancorp Inc.	SASR	0727 – Regional Banks	United States	0.81	7.28
TowneBank	TOWN	0727 – Regional Banks	United States	0.81	7.52
Fidelity Southern Corporation	LION	0727 – Regional Banks	United States	0.81	10.35
Central Pacific Financial Corp	CPF	0727 – Regional Banks	United States	0.81	21.18
Cascade Bancorp	CACB	0727 – Regional Banks	United States	0.81	22.18
LCNB Corp.	LCNB	0727 – Regional Banks	United States	0.82	6.69
S & T Bancorp Inc	STBA	0727 – Regional Banks	United States	0.83	7.38
Great Southern Bancorp, Inc.	GSBC	0727 – Regional Banks	United States	0.83	8.55
ESB Financial Corporation	ESBF	0727 – Regional Banks	United States	0.84	6.88
WesBanco, Inc.	WSBC	0727 – Regional Banks	United States	0.84	7.15
Trustmark Corp	TRMK	0727 – Regional Banks	United States	0.84	7.28
KeyCorp	KEY	0727 – Regional Banks	United States	0.84	7.3
MidWestOne Financial Group, In	MOFG	0727 – Regional Banks	United States	0.84	8.77
Bar Harbor Bankshares	BHB	0727 – Regional Banks	United States	0.84	9.1
Seacoast Banking Corporation o	SBCF	0727 – Regional Banks	United States	0.84	21.31
First Bancorp Inc	FNLC	0727 – Regional Banks	United States	0.85	7.39
Mercantile Bank Corp.	MBWM	0727 – Regional Banks	United States	0.85	9.45
Heritage Financial Group Inc	HBOS	0727 – Regional Banks	United States	0.86	7.23
MainSource Financial Group Inc	MSFG	0727 – Regional Banks	United States	0.86	7.33
Norwood Financial Corporation	NWFL	0727 – Regional Banks	United States	0.86	7.9
Fulton Financial Corp	FULT	0727 – Regional Banks	United States	0.87	6.82
Pulaski Financial Corp	PULB	0727 – Regional Banks	United States	0.88	6.85
Washington Federal Inc.	WAFD	0727 – Regional Banks	United States	0.88	6.87
International Bancshares Corp	IBOC	0727 – Regional Banks	United States	0.89	7.93
Lakeland Bancorp, Inc.	LBAI	0727 – Regional Banks	United States	0.9	6.84
Northrim BanCorp, Inc.	NRIM	0727 – Regional Banks	United States	0.9	7.67
BCB Bancorp, Inc.	BCBP	0727 – Regional Banks	United States	0.9	7.91
ACNB Corporation	ACNB	0727 – Regional Banks	United States	0.9	8.14
Intermountain Community Bancor	IMCB	0727 – Regional Banks	United States	0.9	9.74
First Financial Corp	THFF	0727 – Regional Banks	United States	0.91	7.44
Farmers & Merchants Bancorp In	FMAO	0727 – Regional Banks	United States	0.91	7.8
Southeastern Bank Financial Co	SBFC	0727 – Regional Banks	United States	0.91	11.29
Isabella Bank Corp	ISBA	0727 – Regional Banks	United States	0.92	6.95
First Merchants Corporation	FRME	0727 – Regional Banks	United States	0.93	6.76
Wintrust Financial Corp	WTFC	0727 – Regional Banks	United States	0.93	7.12
First Citizens BancShares Inc.	FCNCA	0727 – Regional Banks	United States	0.94	7.57
Firstbank Corporation	FBMI	0727 – Regional Banks	United States	0.94	8.03
Century Bancorp, Inc.	CNBKA	0727 – Regional Banks	United States	0.95	10.72
Central Valley Community Banco	CVCY	0727 – Regional Banks	United States	0.96	6.62
PNC Financial Services Group I	PNC	0727 – Regional Banks	United States	0.96	8.94
American National BankShares I	AMNB	0727 – Regional Banks	United States	0.96	9.01
Capital One Financial Corp.	COF	0727 – Regional Banks	United States	0.97	9.95
Provident Financial Services,	PFS	0727 – Regional Banks	United States	0.99	6.92
NASB Financial, Inc.	NASB	0727 – Regional Banks	United States	0.99	11
Flagstar Bancorp Inc	FBC	0727 – Regional Banks	United States	1.01	21.87
First Defiance Financial	FDEF	0727 – Regional Banks	United States	1.02	8.35
MidSouth Bancorp, Inc.	MSL	0727 – Regional Banks	United States	1.03	6.96
C&F Financial Corp	CFFI	0727 – Regional Banks	United States	1.04	13.4
First Community Bancshares Inc	FCBC	0727 – Regional Banks	United States	1.05	7.25
Provident Financial Holdings,	PROV	0727 – Regional Banks	United States	1.05	8.78
Chemung Financial Corp.	CHMG	0727 – Regional Banks	United States	1.06	6.7
Territorial Bancorp Inc	TBNK	0727 – Regional Banks	United States	1.08	7.23
Berkshire Hills Bancorp, Inc.	BHLB	0727 – Regional Banks	United States	1.09	6.61
Regions Financial Corporation	RF	0727 – Regional Banks	United States	1.09	7.73
Old Second Bancorp Inc.	OSBC	0727 – Regional Banks	United States	1.1	113.32
Farmers Capital Bank Corp	FFKT	0727 – Regional Banks	United States	1.14	7.7
Premier Financial Bancorp, Inc	PFBI	0727 – Regional Banks	United States	1.18	10.46
FIRST FINANCIAL NORTHWEST, INC	FFNW	0727 – Regional Banks	United States	1.18	14.46
Intervest Bancshares Corp	IBCA	0727 – Regional Banks	United States	1.19	8.37
MBT Financial Corp.	MBTF	0727 – Regional Banks	United States	1.23	28.89
New Hampshire Thrift Bancshare	NHTB	0727 – Regional Banks	United States	1.26	7.66
MVB Financial Corp	MVBF	0727 – Regional Banks	United States	1.29	10.03
Citigroup Inc	C	0727 – Regional Banks	United States	1.3	8.73
Susquehanna Bancshares Inc	SUSQ	0727 – Regional Banks	United States	1.31	8.42
QCR Holdings, Inc.	QCRH	0727 – Regional Banks	United States	1.44	12.41
First Niagara Financial Group	FNFG	0727 – Regional Banks	United States	1.45	8.28
First Citizens Bancorporation,	FCBN	0727 – Regional Banks	United States	1.5	9.95
Farmers & Merchants Bank (Long	FMBL	0909 – Business Services	United States	0.98	8.05
Kelly Services, Inc.	KELYA	0909 – Business Services	United States	1.02	7.21
Lakes Entertainment, Inc.	LACO	0912 – Casinos & Gaming	United States	1.01	14.29
Black Box Corporation	BBOX	0915 – Communications Services	United States	1.38	7.36
Iridium Communications Inc.	IRDM	0915 – Communications Services	United States	1.72	10.16
Courier Corporation	CRRC	0927 – Printing & Publishing	United States	0.86	6.72
CSS Industries Inc	CSS	0927 – Printing & Publishing	United States	1.08	7.53
Blackstone Mortgage Trust Inc	BXMT	0933 – Real Estate Operations	United States	0.87	145.18
New York Mortgage Trust Inc	NYMT	0933 – Real Estate Operations	United States	0.88	14.44
PennyMac Mortgage Investment T	PMT	0933 – Real Estate Operations	United States	0.89	13.15
Starwood Property Trust, Inc.	STWD	0933 – Real Estate Operations	United States	0.94	7.84
Capstead Mortgage Corporation	CMO	0933 – Real Estate Operations	United States	0.99	7.31
Dynex Capital Inc	DX	0933 – Real Estate Operations	United States	1.02	12.82
Two Harbors Investment Corp	TWO	0933 – Real Estate Operations	United States	1.04	16.24
American Capital Agency Corp.	AGNC	0933 – Real Estate Operations	United States	1.05	14.81
Apollo Commercial Real Est. Fi	ARI	0933 – Real Estate Operations	United States	1.09	7.4
MFA Financial, Inc.	MFA	0933 – Real Estate Operations	United States	1.09	9.89
Anworth Mortgage Asset Corpora	ANH	0933 – Real Estate Operations	United States	1.1	9.07
Resource Capital Corp.	RSO	0933 – Real Estate Operations	United States	1.16	9.91
Rent-A-Center Inc	RCII	0939 – Rental & Leasing	United States	0.97	8.84
Willis Lease Finance Corporati	WLFC	0939 – Rental & Leasing	United States	1.31	9.51
Biglari Holdings Inc	BH	0942 – Restaurants	United States	0.83	23.81
Rick’s Cabaret Int’l, Inc	RICK	0942 – Restaurants	United States	0.92	8.66
PCM Inc	PCMI	0948 – Retail (Catalog & Mail Order)	United States	1.09	7.11
Trans World Entertainment Corp	TWMC	0963 – Retail (Specialty Non-Apparel)	United States	1.68	7.37
TravelCenters of America LLC	TA	0963 – Retail (Specialty Non-Apparel)	United States	1.76	7.55
Tech Data Corp	TECD	0966 – Retail (Technology)	United States	0.87	7.43
hhgregg, Inc.	HGG	0966 – Retail (Technology)	United States	1.32	6.67
Ingram Micro Inc.	IM	1015 – Computer Peripherals	United States	0.84	6.68
Key Tronic Corporation	KTCC	1015 – Computer Peripherals	United States	0.93	9.42
Xerox Corp	XRX	1018 – Computer Services	United States	0.89	8.31
VOXX International Corp	VOXX	1024 – Electronic Instruments & Controls	United States	1.57	10.96
OmniVision Technologies, Inc.	OVTI	1033 – Semiconductors	United States	0.91	8.46
Benchmark Electronics, Inc.	BHE	1033 – Semiconductors	United States	1	9
JetBlue Airways Corporation	JBLU	1106 – Airline	United States	0.85	6.84
Republic Airways Holdings Inc.	RJET	1106 – Airline	United States	1.42	12.1
SkyWest, Inc.	SKYW	1106 – Airline	United States	2.19	8.93
Atlas Air Worldwide Holdings,	AAWW	1109 – Misc. Transportation	United States	1.49	10.44
International Shipholding Corp	ISH	1118 – Water Transportation	United States	1.67	7.41
Gas Natural Inc	EGAS	1206 – Natural Gas Utilities	United States	0.89	6.75

What are my surprises here?

My but there are a lot of foreign companies in this list, far more as a percentage than the 3575 total companies I started with. ?It seems that foreign companies are cheap.
Now, that said, accounting standards are tighter in the US than elsewhere, and particularly, be careful on Chinese companies. ?Many of them are scams.
There are a lot of financial companies listed. ?I would note that earnings quality for financial companies is often poor, so don’t go “hog wild” buying financial companies.

All that said, this could be a good list for starting due diligence, and I will use at least some of this in my next selection of companies for my clients.

What’s that, you say? ?Do I and my clients own any of these firms? ?Yes we do. ?Of the 38 stocks in my portfolio, 11 of them pass this screen, and here is the summary:

Full Disclosure: Long?ENH, SNP, GTS, LUKOY, BP, ESV, RGA, AIZ, NWLI, IM, XRX

On Approximate Valuation Methods

Posted on 17 April 2014 by David Merkel

The growth of corporations is always constrained by something. ?The trick is figuring out what the “something” is. ?Tonight, I am here to simplify it for you.

Financial businesses that are regulated

We value these via book value or tangible book value. ?Capital levels constrain business growth, so look at the return on equity to help modify what the proper valuation level should be. ?Book value and return on equity are what govern.

Non-financial?businesses that are regulated, such as utilities?

Look to the rate base that the regulators use. ?Book value might be a good substitute, but look to see how companies might invest to increase their “rate base.” ?Market Cap as a ratio to what the regulators allow profits on would be ideal.

Unregulated businesses that are mature

These are governed by sales per share, calculating the price-to-sales ratio. ?In general, it is wise to buy these when the P/S ratios are low, and sell them when they are high.

Unregulated businesses that are not mature

This is the complex part of valuation, but in this case the PEG Ratio makes sense. ?Companies that grow their earnings rapidly can justify high P/E multiples, but in general they need to grow earnings more rapidly than their P/E ratio expressed in percentage terms.

I don’t invest in many immature businesses, so this is not so relevant to me. ?I look for places where businesses are neglected, and I buy, while selling businesses that are more then fully valued.

Summary

Think about compounding. ? Ask what will best compound the growth of your capital. ?I suspect that it will resemble what I have written here. ?Focus on compounding and ignore Modern Portfolio Theory. ?Compounding is real business. ?MPT is fakery from men who could not build a business.

I?m Not in This for Love

Posted on 11 April 2014 by David Merkel

Much as I appreciate those who like what I write at this blog, I don’t write to be loved. ?I don’t write to be hated, either. ?I am sensitive to what people think of me, but not to the degree that it changes what I write.

I may have nonconsensus views on:

The Federal Reserve
Gold
Social Security & Medicare (and their cousins around the globe)
The current Bull Market in Stocks and Corporate Bonds
Long Treasuries
and more…..

But I write what I write to disclose the truth. ?I am an active equity manager, but I encourage people to use passive investing via index funds, unless they can find a manager who can reliably obtain outperformance.

I don’t blog for economic advantage. ?If I wanted to do that, I could channel a wide variety of ideas on investing that are popular, but I know are marginal at best in terms of effectiveness.

Some friends of mine have told me, “Why don’t you write about companies that you own, or companies that look attractive to you?”

I’ve been burned by doing that. ?For every ten that you get right, you get the same response from every one you get wrong. ?As with most of the web, the complainers dominate. ?That’s why I don’t trot out many individual stock ideas. ?It’s not that I don’t have them, but I only share them as a group, not as a single idea, most of the time.

Summary

I’m here to tell the truth, even if it cuts against my own short-term economic interests. ?Most of the time, I adjust my portfolio so that it is ready for everything, but sometimes I delay, because I know that changes in the market usually happen slowly.

I do not write to be popular. ?I write to change the consensus, unlikely as that will be. ?Finance is a perverse area of life where fear and greed take over. ?And with academics, they have these lame models that are fit for Vulcans (maybe) but not humans (and certainly not Ferengi).

We need new models that reflect the fear-greed cycle, and make valuation a significant input in risk assessments.

I’m not in this for love; I only want to change the way that we view investment decisions.