Monday, August 31, 2009

BJ Services Take Under

Am I the only BJ Services (BJS) shareholder out there who thinks that this is a lousy deal? Is there any hope for a competing bid? BJ Services traded close to $40 back in 2006, and was as high as $33 last summer.

So we get .40 shares of Baker Hughes and $2.69 cash for a big total of $16.47. Wow, that's a big $0.63 premium over the previous close for BJS.

I know that the management of BJ Services has a reputation for being cheap, but that's not supposed to extend to when you sell your own company.

Thursday, August 13, 2009

Article Shows That Sell Side Analysts Still Suck

An article entitled "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations" published in the Journal of Business Finance & Accounting examines these issues:

"Whether sell-side analysts are prone to behavioural errors when making stock recommendations as well as the impact of investment banking relationships on their judgments. In particular, we analyse their report narratives for evidence of cognitive bias."

The conclusions:

"New buy recommendations on average have no investment value."

I think everyone already knew that, although I would add that in the short term they can drive the price of a stock up.

"Whereas new sell recommendations do, and take time to be assimilated by the market."

Again, fairly logical since sell side sell recommendations are fairly rare, they are likely to be more noticed.

"We also show that new buy recommendations are distinguished from new sells both by the level of analyst optimism and representativeness bias as well as with increased conflicts of interest."

Just as a review, representativeness bias refers to "A cognitive strategy for quickly estimating the probability that a given instance is a member of a particular category. We use it to judge the likelihood that something or someone belongs to a specific category."

"Successful new buy recommendations are characterised by lower prior returns, value stock status, smaller firms and weaker investment banking relationships."

Small Cap Value stocks with little or no analyst coverage rule.

So what does this all prove? That sell side analysts are humans just like the rest of us and suffer from deviant investment behavior despite what is arguably a higher formal education.

Mokoaleli-Mokoteli, Thabang, Taffler, Richard J. and Agarwal, Vineet,Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations. Journal of Business Finance & Accounting, Vol. 36, Nos. 3-4, pp. 384-418, April/May 2009. Available at SSRN: or DOI: 10.1111/j.1468-5957.2009.02125.x

Wednesday, August 12, 2009

Health Insurance Debate

There has been a lot of media attention on the continuing debate over the Obama Health Care proposals that are tortuously making its way through the U.S. legislative process. Well here is another thing to consider - a new study by the folks at Stanford University, the Rand Corporation and the University College of London entitled:

Does Health Insurance Make You Fat?

The conclusion reached was that "We find stronger evidence that being insured increases body mass index and obesity."


"The prevalence of obesity has been rising dramatically in the U.S., leading to poor health and rising health care expenditures. The role of policy in addressing rising rates of obesity, however, is controversial. Policy recommendations for interventions intended to influence body weight decisions often assume the obesity creates negative externalities for the non-obese."

"We build on earlier work demonstrating that this argument depends on two important assumptions: 1) that the obese do not pay for their higher medical expenditures through differential payments for health care and health insurance, and 2) that body weight decisions are responsive to the incidence of medical care costs associated with obesity. In this paper, we test the latter proposition – that body weight is influenced by insurance coverage - using two approaches.'

"First, we use data from the Rand Health Insurance Experiment, in which people were randomly assigned to varying levels of health insurance, to examine the effect of generosity of insurance coverage on body weight along the intensive coverage margin. Second, we use instrumental variables methods to estimate the effect of type of insurance coverage (private, public and none) on body weight along the extensive margin."

"We explicitly address the discrete nature of the endogenous indicator of health insurance coverage by estimating a nonlinear instrumental variables model. We find weak evidence that more generous insurance coverage increases body mass index. We find stronger evidence that being insured increases body mass index and obesity."

Bhattacharya, Jayanta, Bundorf, M. Kate Kate, Pace, Noemi and Sood, Neeraj,Does Health Insurance Make You Fat?(July 2009). NBER Working Paper No. w15163. Available at SSRN:

Sunday, August 2, 2009

Value vs. Growth

The ancient battle between Value and Growth investing continues, with Barron's weighing in with its take on the issue. It's starting to remind me of the Hundred Year's War between France and England or that Star Trek episode where two planets have been at war for five hundred years.

Value Investing has underperformed growth investing over a six month or three year horizon, but Value Investing outperformed in the second quarter of 2009.

The problem with this and all other like statistics is that it artificially categorizes all cheap stock as Value stocks. Barron's uses the Russell indexes to measure performance, and specifically mentions Bear Stearns, Citigroup (C), Freddie Mac (FRE), General Motors, Macy's(M) and JCPenney(JCP) as being particularly harmful to Value investors.

Just because a stock is cheap doesn't make it a Value stock. This is pretty basic and is one of the first things any investor learns after picking up a book written on Value investing.