Ativo Capital

Rigorous Thinking


Financial and economic commentary reflecting Ativo’s world view:

Does the Stock Market Really Ruin the Economy?

Wednesday, February 10, 2016

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Last week’s Wall Street Journal (2/1/2016) featured an article (Does the Economy Ruin the Stock Market Or Does the Stock Market Ruin the Economy, gated) citing recent work by UCLA economist Roger Farmer questioning whether the recent market rout simply reflects the economy, or whether a weak stock market is crashing the economy. After summarizing the conventional perspective that discounted future earnings determine market pricing, the article conceded that maybe, just maybe, stock market patterns could be influencing the real economy. Our reaction? What took you so long?! We’ve been making that case for more than thirty-five years. Of…

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Capital Gains and the Candidates

Friday, September 4, 2015

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Alan Reynolds’ piece in the Wall Street Journal (September 2, 2015) reminded us of recent internal discussions regarding the link between Presidential campaigns, tax proposals and equity prices. These deliberations centered on the degree to which recent market turmoil could be attributed to talk of substantial increases in capital gains tax rates. Ativo has long believed that the interaction between inflation and taxes strongly influences the real cost of equity capital and therefore stock prices. Briefly, stock prices reflect investor expectations of a relatively stable real after-tax return. The cost of capital adjusts to offset the effect of inflation…

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Ativo Highlights Diversity Support and ESG at Industry Conferences

Thursday, June 18, 2015

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Senior Portfolio Manager and Head Trader Adan Galvan is back in the office after his presentation at NASP’s Annual Pension and Financial Services Conference.  Speaking on the topic of “Trends and Hard Truths about MWBE Brokerage,” Adan shared Ativo’s track record in using minority brokers, described the importance of rigorous due diligence and best execution, and stressed Ativo’s commitment to supporting minority brokers, which reflects our own diversity in ownership and staffing.   Ativo, an equity sponsor of this year conference, was well-represented with Mike Brooks and new Relationship Manager Kelly O’Malley also attending. Ativo has been particularly active at…

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Seven Principles for Managing Cybersecurity

Friday, February 13, 2015

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Emerging Manager Monthly published our article on Cybersecurity in their February 2015 issue: Cybersecurity has become one of the hottest topics in the asset management industry. Not a week goes by without dire notices of new security vulnerabilities. The SEC announced a major cybersecurity initiative this past April, with subsequent bulletins and news releases drawing ever-increasing attention to the topic. Our inboxes are filled with cybersecurity articles and webinar announcements, produced by hordes of consultants peddling expensive solutions. Yes, cybersecurity presents enormous risks and clearly warrants attention as a critical priority. But it also has the potential to become…

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Signals from Shiller’s Cyclically Adjusted PE Ratio?

Wednesday, January 7, 2015

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A long-time client asked what we thought about a recent Journal article that suggested weak future equity returns based on Robert Shiller’s cyclically adjusted price/earnings (CAPE) ratio. Here’s our reply: First, a caveat.  Since our mandates are always to be fully invested, we don’t really focus on asset allocation.  Please keep that in mind as you consider this email. In some ways an Earnings/Price ratio approximates a real discount rate , 1/CAPE should be roughly comparable to the real Cost of Equity Capital that Ativo measures on an onoing basis. Here’s a plot of the two series.  (Click on…

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“Sometimes Markets Are Stupid”

Thursday, December 18, 2014

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Writing at Bloomberg View, Noah Smith puts his description of yet another market inefficiency in the proper perspective: “Of course, experienced traders are laughing as they read this, because it’s obvious to anyone who has ever traded.” Even so, we appreciate his contribution. We at Ativo also believe in long-run market efficiency, but efficiency doesn’t happen automatically. Efficient markets require active managers to systematically search out and correct the countless inefficiencies that continually crop up. So when an active investor beats the benchmark (on a risk-adjusted basis, of course), just think of it as compensation for keeping markets efficient.

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Financial crises are caused by cross-border investment flows, not misbehavior, says economist Robert Aliber

Friday, October 31, 2014

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Financial crises are widely believed to be caused by greed, corruption, or lack of regulation. But what if the cause is simply the variability of cross-border investment inflows? That’s the model developed by Robert Aliber, professor emeritus of international economics and finance at the University of Chicago Booth School of Business. Aliber, editor and co-author with Charles P. Kindleberger of the 1978 classic Manias, Panics, and Crashes: A History of Financial Crises, predicted the Icelandic banking crisis 18 months before it happened. In an interview with CFA Institute Magazine, Aliber offers a different view on the cause of financial…

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Thomas Piketty and the Long-Term Investment Outlook

Wednesday, August 6, 2014

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Thomas Piketty’s Capital has been one of the best selling books by an economist, the timing of the publication was propitious, since there is a lot of angst that the distribution of income and wealth has become more unequal. His central argument is that the share of income and wealth accruing to the top one percent, the top 0.1 percent, and the top 0.01 percent has been increasing because the rate of return on capital is higher than the rate of growth of GDP. He implicitly assumed that the rich reinvest most of their income from capital. That’s a…

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Alan Greenspan on Stock Price and Capital Spending

Monday, April 21, 2014

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Taking a few vacation days this past week has given me time to read Alan Greenspan’s latest book, The Map and The Territory.  His comments on page 84 were particularly interesting: The ratio of stock price to cost of construction of capital assets correlated quite well with machinery orders (capital investment) going back into the 1920s.  I recently updated the 1959 analysis and was amazed at how well this simple relationship still works, even tracing the recent years’ sharp fluctuations in real private capital investment.  Since 1993, for example, a 10 percent change in stock prices relative to the…

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More U.S. Firms Use Nonstandard Accounting Measures to Figure Executive Payouts

Monday, March 3, 2014

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Last Wednesday’s Wall Street Journal reported that an increasing number of firms are using non-GAAP measures as the basis for executive compensation awards. Despite the overall negative tone of the article, our perspective is that moving away from GAAP measures isn’t necessarily a bad idea.

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