Weekend Reading

31 March 2017 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

The High-Speed Trading Behind Your Amazon Purchase (Christopher Mims, @mims, WSJ)

There is a surprising world behind the price listed on Amazon’s website. “It’s like a stock market, complete with day traders, code-slinging quants, artificial-intelligence algorithms and, yes, flash crashes.” Some of Amazon’s products are supplied by multiple vendors. These vendors are updating the prices for some of their products thousands of times a day. This can lead to vendors competing for business and driving the price down, which is great for Amazon and it’s customers.

Sluggish Housing Recovery Took $300 Billion Toll on U.S. Economy, Data Show (Laura Kusisto, @LauraKusisto, WSJ)

Over the past 60 years, the average percentage of GDP related to housing is 19%; in 2016 it represented 15.6%. This gap represents ~$300 Billion. Some of this decrease is attributable to the tighter lending standards caused by the financial crisis in 2008. “I’m not suggesting that we go back to the maverick days, but I do think that there are a lot of people that could afford to repay their loans but are not buying because they’re afraid to go in for the inquisition of trying to get a loan,” Ed Brady said.

The Active Equity Renaissance: Rejecting a Broken 1970s Model (C. Thomas Howard, CFA Institute)

Passive investment vehicles have received massive inflows over the past decade. Looking at the performance of many so-called active managers, it’s no wonder. When you look under the hood, many of these funds hold hundreds of companies – essentially, they’re closet indexers. When you hold that many companies, your performance starts to mirror the benchmark. Once you subtract their fees, they’re going to constantly underperform. In a true active strategy, there is no point to hold that many companies. The author’s study finds that “The top 20 relative-weight holdings generate fund alpha, while the low-ranked holdings destroy it.”

Those Indecipherable Medical Bills? They’re One Reason Health Care Costs So Much. (Elisabeth Rosenthal, @RosenthalHealth, NYT)

For some, the part after the medical procedure can be almost as traumatic as before the procedure. It’s the daunting influx of cryptic medical bills in the mail. Part of this is caused by the medical billing process in the US and their use of codes and different coding systems. There can also be disagreement between coders at the hospital and the coders at the insurance company. This difference of opinion can result in thousands of dollars. Based on the documentation and interpretation, one coder may bill for a slightly different disease “If after reviewing a hospital chart of, say, a patient who has just had a problem with his heart, a hospital coder indicates the diagnosis code for “heart failure” (ICD-9-CM Code 428) instead of the one for “acute systolic heart failure” (Code 428.21), the difference could mean thousands of dollars.” This can cause a lot of back-and-forth between hospitals, insurance companies, and patients; all which drive up the cost of health care.

Whatever happened to free trade? (Bob Davis and Jon Hilsenrath, @bobdavis187, WSJ)

Globalization was the driving force of prosperity across the world for over half a century. This period “also expanded the labor pool globally, pitting workers in wealthy nations against poorly paid ones in developing nations. That greatly boosted the fortunes of the world’s poor, but also created a backlash in the U.S. and Europe.” But, this isn’t new. As humans tend to do, we’re repeating history. Prior to World War 1, the world experienced another period of globalization (from 1870 to 1913). After World War 1 (1918), the world saw a rise in trade barriers, which “played a role in the Great Depression of the 1930s.”

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