Brett Hutley's Blog » finance

Evaluating Bio-Techs

brett — Fri, 13 Nov 2009 11:15:49 +0000

Clinton Chee has posted a list of factors he thinks is important when analyzing Bio-Tech stocks. This list is summarized below:

P : Price of stock
NTA : Net Tangible Assets (Total Assets minus Intellectual property and other intangibles)
P/NTA : Ratio of Price to NTA - a value of 3 or below is considered underpriced and worth buying. A value of 9 or above is definitely not worth buying
TEAM : Rating system based on the qualifications of the directors
1. Professor = 1.5
2. PhD = 1.0
3. Master = 0.8
4. Hons = 0.7
5. MBA = 0.6
6. Biotech Exp (10year) = 0.5
BurnPeriod (Runway) : the number of quarters left before cash runs out, based on the previous quarters cash burn rate. Over 4 quarters is fair. Over 8 quarters is worth investing.
ProductPipe : the stage of the product development ranging from pre-clinical tests to commercialization. Over a value of 5.0 is a good sign.
1. Phase 1 = 1
2. Phase 2 = 2
3. Phase 3 = 3
4. Market Approved = 4
5. In Market =5
ForeignMarket : Companies with products that sell internationally are more highly rated. (see key below). Over a value of 3 is a good sign.
1. Plan to Enter = 0.5
2. Just Entered = 0.9
3. 1-3 years = 1.5
4. Over 3 years = 2.0
Cash/Debt : the ratio of cash to debt of the company.

Financial models need more complexity?

How the Market Cap of Financial Firms has changed

brett — Mon, 14 Sep 2009 16:23:33 +0000

The New York Times has a great interactive graphic on How the Giants of Finance Shrunk, then Grew, Under the Financial Crisis. It's really interesting seeing how, if the Market Capitalization of each firm is represented as an area, the each firm shrinks massively during the financial crisis, and now how the firms are rebounding.

Financial models need more complexity?

brett — Mon, 14 Sep 2009 09:23:33 +0000

A post over at the New York Times is arguing that one of the main causes of the financial crisis was inadequate quantitative models - models that tended to understate risk because they failed to provide a realistic model of the way the world works - neither incorporating risks such as a failure of liquidity, nor the complexities of human behaviour.

I certainly agree that the current stable of models which are in widespread use are inadequate given that the competitive market has made the spreads on trades so tight that there is no longer any buffer to cover the many short-falls in the models. Back when vanilla options were an exotic trade, the trader would incorporate plenty of fat in their options trades. Intense competition, a market that has steadily grown over the past 20 years (notwithstanding small glitches), and increased familiarity with the trades has served to camouflage the risks the traders were running in their options books.

Quantitative Finance is a very young science. I remember back in the early 90's; the Black-Scholes model was the height of financial sophistication. I did not start working with finite difference methods for valuing American Equity Options until 1994. It was after Barings collapsed in 1995 that regulators started forcing banks to calculate VaR figures and allocate capital based on their calculated risk numbers. How far we have come in the last 20 years!

Of course, nearly all the models created in the early periods of finance have been based on the assumption that returns are normally distributed. Unfortunately this assumption does not correspond to observed reality. Attempts that DO try to create models that reflect the observed distribution lead to models that incorporate jumps, or contain stochastic volatility. Once we lose the normal distribution of returns assumption, we also have problems with correlation as an adequate measure of the relationship between the market factors. Suddenly we are in a whole world of quantitative pain.

There are also the practicalities of having neither the sheer computational power nor the software to incorporate the latest financial models. For some reason, the models currently in widespread use are not the most sophisticated models, but those that strain the limits of computation, software and trader/quant understanding.

It's interesting to contemplate how hard finance will be with far more complex models. We are currently farming out our risk calculations onto large grids of computers. Advances in leveraging graphics cards to create cheap super-computers are arriving just in time, and are a hot topic in finance. The traders are demanding real-time risk figures (and so they should), and yet it is already hard to reliably provide these numbers with the simple models in vogue. It will be much, much harder as models increase in complexity.

Comparison of Downturns

brett — Fri, 20 Feb 2009 13:35:53 +0000

A while ago, I created a Mathematica plot comparing the Great Depression, the Tech Crash and the Oil Crisis with the current financial crisis. This analysis was inspired by a chart I saw last year comparing these recessions with our current situation. Anyway, I thought it was worth bringing the chart up-to-date.

[Edit] The original chart I saw was this one.[/Edit]

Comparison of four economic downturns

Lehman Brothers

brett — Mon, 15 Sep 2008 09:54:55 +0000

I just popped down to the Lehman building here at Canary Wharf to see what was going on. There were a few people standing outside, and news crews filming - but overall it seemed pretty quiet.

My iRex iLiad

Papers on the “Credit Crunch”

brett — Fri, 11 Apr 2008 09:50:32 +0000

Some interesting papers have come out on the "Credit Crunch".

Leveraged Losses: Lessons from the Mortgage Market MeltdownThis paper provides a good overview of the financial market turmoil occurring since August 2007, and discusses how the crisis might impact other areas of the economy.
A Black Swan in the Money Market
This paper examines the sudden jump in spreads between the overnight and term inter-bank interest rates.

More Financial Blogs

brett — Mon, 28 Jan 2008 14:49:10 +0000

Here are some more financial blogs that seem good:

The Aleph Blog - Investment strategies and advice (seems pretty US-centric)
The Epicurean Deal Maker - Sarchastic, sardonic and humerous insight into Wall Street
Going Private - The Sardonic Memoirs of a Private Equity Professional - This is an absolutely hilarious blog about the world of Private Equity. Excellent!
A Fist-full of Euros - An interesting blog focusing on European finance/economics/politics.

Financial Turmoil

brett — Fri, 25 Jan 2008 16:17:46 +0000

This past week has been facinating in the financial markets. After a long slide downwards, the markets tumbled at the beginning of the week, and now they are bouncing back upwards.
Initially the market dive looked like it was triggered by worries over the problems with the Monoline Insurers.
The Fed responded by cutting interest rates by 75 basis points on Wednesday. This seemed to have little effect with various indices falling even further. It did however seem to have a dramatic effect on the probability that the US will go into recession.
On Thursday we found out that Societe Generale lost $7 Bln from trader fraud (leading the market wags to dub it "Shock Gen". This seemed to have little negative impact on the markets with the indices all shooting upwards. They are all up today, albeit not as much as yesterday. It looks like the momentum is leaving the bounce.

So could the massive falls be attributed to Soc Gen selling out of their positions and realizing their losses? Can some of the market euphoria be attributed to proposed monoline bail-out?

I guess we'll see how next week develops!

Financial Blogs

brett — Fri, 25 Jan 2008 14:25:06 +0000

Here are some financial blogs I like:

I'm getting more and more information from blogs and forums these days, so I want to try and get as many diverse and informative sources as I can.