Some serious research, pointed out to me by FT Alphaville, showing that the 2010 Soccer World Cup had a marked impact on JSE trading volumes, patterns and correlation with global markets.
I’m not sure what to do with this information, but it’s remarkable all the same.
The Make a Million competition, as I’ve mentioned before, is an awful idea. It doesn’t promote investing or even “normal” trading, but rather massive, speculative risk-taking trading because the prize for performing well is nothing and the prize for performing best is significant.
I’m continually disappointed that Moneyweb continues to partner with this distraction.
As I’ve done in the past, I’ve analysed very quickly some of the results of the most recent competition. As background to that, the basic rules are:
So let’s be clear, there are no long-term investment learnings here.
The winner did return 165.5% over 3 months, which is not an impressive performance even though it might look like it. The point is, given the volatility of the investment universe available for the competition and the encouragement towards rampant risk-taking, it’s entirely pedestrian performance. It’s very likely an individual’s performance will be good given the wide range of possible outcomes.
Let’s look at some other statistics
| Average performance | -18.4% |
| Annualised average performance | -73.4% |
| Proportion making a profit | 26% |
| Total amount won | -R1 020 762 |
| Standard Deviation of performance | 48.0% |
| Annualised standard deviation | 96% |
These are not performance statistics of which to be proud. They are similar to the losses incurred in prior competitions.
So in short, the competition cost the entrants in total just over a million rand. Losing a million rand is a great way to Make a Million.
Best practice for matching non-profit annuities in most countries, certainly from a risk perspective, is still to cash flow match (or at the very least, match key durations) using government bonds.
The theory is that the insurer isn’t then exposed to changes in the term structure on interest rates, only exposed to illiqudity/reinvestment risk to the extent of mortality fluctuations, isn’t exposed to currency risk and certainly isn’t exposed to credit risk. Without complex margining requirements like some swaps and without the need to roll cash investments over, government bonds should allow ALM teams to sleep well.
Now, Solvency II is likely to adopt a swap yield curve rather than bond yield curve. There are some good reasons here, including arguably fewer distortions from temporary supply and demand imbalances, improved liquidity and so on. The same yield curve is used for liquid liabilities so the allowance for an illiquidity premium over and above the swap curve at some times, in some ways and for some products is still under debate.
But what should Greek insurers do in the meantime?
Frankly, Greek government bonds don’t remove credit risk and the huge credit spreads on these instruments will create huge funding gaps and variability in earnings unless a Greek govi yield curve is used to value liabilities as well. It’s not clear at all that Greece will stay part of the Euro, so German government bonds don’t remove currency risk. German government bonds in any case are show signs of nervousness as yields creep up.
The swap market is exposed to the same Euro break-up risks as bonds. Which banks will survive, what happens to currencies in the meantime and what does that do to long-term Euro swaps? What about Euro-Sterling swaps issued by Greek banks (I’m not sure if these even exist though).
All in all, it’s good to be involved in ALM in South Africa, and even the Middle East just at the moment.
So European politicians have more or less agreed a deal which may, more or less, push some of their problems to one side for a period. Yes, I’m not madly optimistic about this as a cure-all. This is not the end of the Euro problems.
Part of the deal is a “50% loss for private investors”. Which is part true and part nonsense but will be an effective Greek default when enacted / agreed. (I don’t care how “voluntary” it may be, it’s a default and almost all definitions of default include restructuring of debt in any way that isn’t what was originally promised.)
Why is it only partly true? Well it’s not necessarily a “loss” for private investors. The probability of default on Greek bonds has been just about 100% for a while now. This probability of default is derived from market prices for Greek bonds and market spreads on Greek Credit Default Swaps (CDS) and an assumed Loss Given Default or Recovery Rate for investors when the bonds do default. Actual Recovery Rates vary widely, but often analysts plug in the average Recovery Rate over most of this century on unsecured debt which is around 40%.
So if market prices for Greek bonds assumed 100% default probability and a 40% recovery, then a 50% recovery doesn’t sound so bad. The potential downside is that Greece may still (need to) default on these written-down bonds at some point in the next two decades.
So the real question is what will the new probability of default be? Then we will know whether investors “took a loss” and perhaps gain the market’s view on how successful the deal really will be.
Some interesting papers on the ERP:
Market Risk Premium used in 56 countries in 2011: a survey with 6,014 answers
The Equity Premium in 150 Textbooks
Equity Premium: Historical, Expected, Required and Implied
While Apple’s market cap rose above Exxon-Mobil’s recently, that is only one measure of company size. ArsTechnica has an interesting analysis of a few different metrics of company size, showing the results of each of these measures.
Short selling bans – memories of 2008
Apple overtakes Exxon-Mobil to become NYSE’s most valuable company, and therefore probably the world’s most valuable company. $337.2bn market cap at close of the NYSE today.