Saturday, 26 January 2013

Canadian House Prices - January 2013

There is always lots of interest in determining if housing prices in Canada are too high. There is even some talk that the Canadian housing market is in a bubble (Macleans). The Economist has a really nice interactive tool that allows users to compare housing markets in different countries around the world. One way to compare housing prices across time is to follow the ratio of house prices to income. According to the chart, this value for Canada was 100 in 1985 and then rose quickly to 155 in 1989 (a 55% increase in just 4 years!). After 1989, the ratio of house prices in Canada to income slowly dropped throughout the 1990s. In 2001 the ratio of house prices to income in Canada started to increase and now stands at a record high of 180. Notice that for any particular year, the ratio of house prices to income in Canada is larger than the corresponding value in Britain or the US. Of the countries shown in the chart, the Canadian house price to income ratio is most similar to Australia (although this ratio for Australia has been weakening in the past few years).
So what is the upshot for Canada? High ratios of house prices to income are not good for Canadians because many home buyers need to borrow money to buy a house. Borrowing money means taking on debt. Taking on debt today is easy because of the low interest rates, but once interest rates start to rise, mortgage payments for many are going to be a big problem. For foreign buyers with lots of money, rising interest rates are probably not much of a concern.

Wednesday, 23 January 2013

Predicting the Future

I am always interested in predicitions about the future.

"As we begin a new year, BBC Future has compiled 40 intriguing predictions made by scientists, politicians, journalists, bloggers and other assorted pundits in recent years about the shape of the world from 2013 to 2150." (BBC)

Tuesday, 22 January 2013

US Airline Woes

More travelers are flying than ever before and yet airlines have a difficult time making money. The airline industry is a tough business to be in. Airplanes, fuel and people are the three biggest costs to airlines. New airplanes cost money and borrowed money is vulnerable to interest rate fluctuations. The price of jet fuel fluctuates with movements in the petroleum markets. Airlines require lots of people to make your flight as smooth as possible. The difficulties of running a profitable airline have pushed some US  carriers into bankruptcy and created incentives to merge. US Airways has been through Chapter 11 bankruptcy proceedings twice and United and Delta each once. American recently filed for Chapter 11 and now it looks like a merger with US Airways is in the works. Mergers, however, often do not work out as planned with the anticipated  managerial efficiencies and scale effects failing to materialize.

How efficient are US airlines? Using data published in a recent Economist article, I investigate the efficiency of US airlines.

To calculate technical efficiency I use data envelope analysis (DEA).  DEA is a non-parametric approach to the estimation of production functions. I use four inputs (global capacity, domestic market share, employees, delayed/cancelled flights)  and two outputs (market capitalization, operating profits).  For those interested in the technical details, I use the 2 stage input approach with variable returns to scale (VRS).

The DEA results are presented in the above table. Total technical efficiency (CRS_TE) can be broken down into pure technical efficiency (VRS_TE) and a scale effect. The total technical efficiency measures indicate that US Airways, Delta, Southwest, and Alaska are efficient since their CRS_TE measures are equal to one. These companies are operating on the boundary of the production possibility frontier. The other companies are inefficient with American being the least efficient. American for example, can reduce its inputs by 99% and still produce the same output (measured by market capitalization and operating profits). This really shows the extent of American's problems. Pure technical efficiency (VRS_TE) is a measure of manager effectiveness. American's inefficiency is coming from a combination of managerial inefficiency (VRS_TE) and a scale effect inefficiency. American has the least effective management and the largest scale inefficiency. The unity value in the RTS column indicates that American is operating with increasing returns to scale. American needs to get bigger and become more efficient. I wonder if US Airways knows the extent of these inefficiencies and how difficult it is going to be to get the merger to work.

Monday, 14 January 2013

MBA Price and School Accreditation Have Little Impact on Demand

Here is an article from The Economist that is making the rounds. Rapidly rising tuition fees seem to have little impact on MBA applications.

"A school’s position in The Economist or the Financial Times ranking, however, has little impact on applications. Indeed, where an effect can be seen, it seems that rising in the rankings leads to fewer applicants. The researchers suspect that this may be because weaker students are put off from speculative applications. Another thing that apparently has no effect on applications is whether the school is accredited."

In the US, MBA degrees have grown faster than the population.Between 1971 and 2008, the number of new MBAs increased by a whopping 487.5% while the US population increased by 46.6%.

Can the trend continue?

Thursday, 10 January 2013

Forecasting, Benjamin Graham, and Female Hedge Fund Managers

I do not have time to go into these in great detail, but here is a collection of articles that I found very interesting.

Guru's Can't Actually Predict the Market ( Rick Ferri).

"It only took 2 years and about 200 predictions before the accuracy rating fell below 50 percent in early 2000. The cumulative accuracy has stayed below 50 percent ever since. By 2008, CXO had collected and graded more than 5,000 predictions and the rating stabilized at about 48 percent."

Examining Benjamin Graham's Record: Skill or Luck?  (Greenbackd)

Returns at Hedge Funds Run by Women Beat the Industry (Dealbook).

"An index from the professional services firm Rothstein Kass showed that female hedge fund managers produced a return of 8.95 percent through the third quarter of 2012. By contrast, the HFRX Global Hedge Fund Index, released by Hedge Fund Research, logged a 2.69 percent net return through September."

"Female financiers can have particular advantages over their male counterparts, including being more risk-averse and better able to avoid volatility, the report says. The Rothstein Kass hedge fund index, based on 67 hedge funds with female owners or managers, may be a case in point."

Wednesday, 9 January 2013

Jobs and Unemployment in 2012

Since I have an undergraduate degree in physics and astronomy, I found this story about jobs with the highest and lowest unemployment rates in 2012 and the enclosed table particularly interesting.

Top 100 Hedge Funds

Bloomberg recently ran a story on the top 100 hedge funds of 2012. The data on assets and returns are for the 10 months ended on Oct. 31, 2012. The story is here and includes a downloadable pdf.