Author Archives: pranavrk

Tempering an IPO bubble

Earlier this year, I wrote about many investors shying away from the “app” scene, in favor of sure profits.  In many ways, this mirrored what was going on in January with a “flight to quality”  and many investors chased after safe returns which would ostensibly be hardware.

Ultimately the flight to quality in tech companies didn’t catch as much steam as the general market.  Undeterred by this slight blip, many major tech companies are launching IPOs this year.  According to CNBC there have been 53 this year that have raised $8.5 billion, far more than in any other year and many investors believe that the volume of companies going public is a bit dangerous and almost bubble like.

Which probably explains why recent filings have fallen short.  The reasoning being for many, that the next early stage drug developers, or the next big cloud computing firms do not offer as much promise and many models are not sustainable or worth getting burned on if things go south quickly which they can.

Should we be worried though by a reluctance to invest in Tech?  Typically growth stocks such as those early stage drug developers or cloud computing firms are lapped up and quickly rise in a strong economy and for many hedge funds and large investors to avoid the risks can’t bode well.  However, this might not be all bad.  After all, the Wall Street Journal believes that many of these hedge firms and investors are just investing “defensively” rather than staying fully averse.

This kind of logic is fairly understandable given that the market has been in some turbulence and many companies that are listing themselves as of late either have been in very specific markets or have merely caught on.  Weibo is a unique microblogging site in China and opened up with fairly underwhelming results.  Alibaba is about to announce the date for PO and while they are very diversified in terms of services, how they will change direction or specialize has some United States investors concerned that perhaps the IPO market is overplaying its hand and other indicators in and around the market aren’t strong enough to support blindly going after the biggest tech stocks.

That’s not to say defensive investing is a bad thing, nor is it a sign of worse things to come.  We’ve seen fears of bubbles pop up quite a few times over the past year.  When it was rumored that the Fed’s QE programs were creating an asset bubble, but ultimately stocks corrected somewhat and expectations tempered appropriately without going overboard.  Likewise in tech, now is just not the best time, especially with so many IPOs, investors would expect a few to fail or produce underwhelming results.  By pursuing this strategy, investors and hedge funds are managing to remain fairly optimistic about the market as a whole, and temper the rise in tech.

Ethics based Price discrimination

Businesses more often than not are concerned with doing what is ethical and their sense of social responsibility.  Occasionally some businesses do breach a code of ethics and might do something underhanded but those instances are usually well publicized and do more harm than good when exposed.

Looking at ethics from the consumer’s side, consumers do seem to have a preference for goods that are produced in a humane way or with good materials and would be willing to pay more for it.  Remi Trudel and June Cotte wrote about a study which appeared to show that consumers do alter their preferences significantly based on ethical standards.  They found that for a pound of coffee, if the consumers had no information on the circumstances the coffee was produced, consumers would be willing to pay on average $8.31.  If they knew the good was made in an ethical manner, they would pay on average $9.59.  Likewise for t-shirts and other goods, the two saw similar results.

What was more interesting about the article is what would consumers pay for a good that wasn’t ethical.  Many of them said they would buy the product only if it was severely discounted.  The degree of what they expected of consumers affected how much of a discount they would need to purchase an unethical good too as evidenced by the pound of coffee example.  The group with much higher expectations of ethical standards needed a huge discount to buy an unethically produced good but were willing to pay more for a good that was ethically produced.

The study concludes that companies should focus on these consumers with the highest value on ethical standards and raise premiums to profit extensively:  fairly standard consumer surplus and price discrimination theory.  It would be interesting to see how people would adjust their prices based on the gravity of the ethics either not met or violated.  How different would it be for a company who paid their workers exceedingly low wages.  For instance in September of 2013, it was reported that there was obvious flouting of human rights in Apple’s factories in China, with regards to the development of the low cost iPhone 5c.  If consumers had known about these abuses, how low would the iPhone 5c have to be priced in order for consumers to (for lack of a better word) outweigh the abuse for the product.  I’d like to think that the price would have to be extremely low for people with high ethical standards to even consider buying it but that wouldn’t be beneficial to the workers’ anyway who are already overworked and underpaid, since upper level management would derive most of the profits.  But it does create an interesting picture. The second issue would be in practice.  How would companies who are striving to be ethically sound figure out what type of consumers they have to maximize those benefits?  Sure there could be some market research done, but beyond that it is hard to gauge how people might alter their preferences particularly if they discover something about a product.

As far as ethics are concerned, many companies do recognize the value of doing the right thing still, but I think we’re still far away from them being able to estimate and price their goods sufficiently to consumers’ ethical preferences without losing profit.

 

Can we quantify financial literacy?

For those of us who elected to take Econ 411, it is assumed that almost all of us have a decent grasp of the fundamentals of personal finance.  I’m sure we all knew a decent bit about the effects of inflation, interest rates, and diversification to some degree and we’ve had the opportunity to go into greater depth in each of these areas to get a better grasp of the financial system.

Unfortunately, not everyone has this privilege and it is fairly obvious that financial literacy varies by too much for people to plan adequately for their future.  A recent study done by Annamaria Lusardi showed that less than one-third of Americans could correctly answer questions about diversification, interest rates, and inflation.   That is fairly alarming for a country as big as ours with a fairly long life expectancy after retirement.

So what can we do to correct the problem?  Carrie Schwab-Pomerantz, daughter of the founder of Charles Schwab Corp, partnered with a couple foundations to create the Money Matters: Make it Count program which is designed to teach teenagers how to manage their own personal finances.  The intended audience is teenagers aged 13-18 and the program would teach them how to manage all aspects of personal finance, and understand why inflation matters more than just for the immediate prices of goods and services, why the right interest rates are important when deciding to save or consume that next dollar, and when diversification would matter.

Of course, there are skeptics about whether such a program would work.  The first thing to consider is at what point would we consider a person to be financially literate?  It isn’t quite the same as measuring regular literacy where you can determine how well a person can read and comprehend a series of words in a paragraph or a story.  Financial literacy may not translate to financial success and that may be the expectation of many people who enroll in this program.  Seasoned investors have lost money unexpectedly despite fully understanding the basic principles behind personal finance and the importance of risk.  Diversification makes sense in theory but put into practice, what would you diversify and how would you do it?  Sure we could introduce how these concepts would work to teenagers and hope that they make the right decisions.   But does it make them financially literate if a lot of what we observe does not necessarily match up with what we expect to play out.

The second thing to consider is what the program itself actually focuses on.  Budgeting, saving and investing, college planning, credit and debt, and entrepreneurship.  These are all good goals to have but unfortunately if they’re targeting a teenage audience, this only prepares them for the very short term presumably.  College planning and financing should be evaluated as a long term investment, that delicately depends on projected future earnings from the area of study and career goals as much as where they go.  Saving and investing would generally help them cope and understand its impact a little bit better, but it doesn’t necessarily prepare them to anticipate changes.  The course is still being evaluated rigorously for improvements but hopefully they will consider some of these long term issues as things to look at in follow-up programs.

Quantifying financial literacy is a difficult process and I suppose I’m being a bit harsh on what is a well-meaning initiative by the Charles Schwab foundation.  Improving financial literacy is definitely a positive step, but there is still a substantial difference between financial literacy and financial strategy.

 

Reverse urbanization in India

As a member of the BRIC nations, India had established itself in the past decade as one of the premier emerging markets to focus on and many have predicted that eventually India will overtake China as the world’s leading economy.  Much like China, there has been a lot of urban sprawl as rural Indians flocked towards the cities for better lives, wages, and more opportunities to be part of the massive growth that was expected.

Of course, not everyone is able to realize their dreams when they move to the cities because the growth rate didn’t continue to rise as highly as it once did.  In the previous quarter, India’s GDP rose by 4.86%, which is far lower than where they would like to be.  Inflation, has temporarily cooled off, but has otherwise risen to unhealthy levels, prompting the central bank to raise interest rates sharply.  High costs, a decline in manufacturing output and some growth in farming have prompted rural migrants to cities to consider returning home due to high living costs and very low wages.  Another article cites this return to farming trend as a man named Ram Singh only saw his wage rise from $10 a month to $20 a month and eventually $100 a month but that wasn’t enough for him to stay due to high living costs.

It appears that there is a lot of doom and gloom to come in India and many predict that it will take several years before India’s growth reaches those double digit figures.  What was once a very promising prospect of rural-urban shifts have reversed and could eventually cause more people to toil in agriculture as opposed to embracing urbanization and the spoils of growth.

However, that might not be a fair assessment.  It may not be as much of an urban flight issue but more so the number of jobs is not keeping up with the growth in population, and the other costs of living and competitiveness are just catalysts to leave right now.  India’s labor force is expected to add 365 million eligible workers over the next two decades, predominantly from rural communities.  The idea is that with many kids, rural families can essentially create better prospects for more hands around the house and possibly one or two educated kids who can better their lives. Unfortunately for India though, the rate of job growth has to keep up, and with the current policies that are still very tight for new businesses and enterprises, this might not be possible.  India is undergoing parliamentary elections currently and it is very possible that a more business-friendly party could be in charge too which could lend itself to more promising policies for manufacturing job growth and capital investment in the near future.  From a monetary standpoint, India has suffered bouts of inflation before and eventually it should come under control in a very consumer oriented economy.  Eventually, this will prompt rural dwellers to move to the cities and the wages should rise comfortably.  Also if wage markets are efficient, eventually rural Indians will move back to cities. If too many people are working in agriculture, we can expect wages in that sector to fall relative to manufacturing and commercial jobs. People will then move back to cities due to a lack of wage growth, increasingly underwhelming monsoons, and not enough jobs to sustain a life there.

Revised: The impacts of a World Cup economy

In about 2 months, Brazil will take center stage and host the biggest sporting event in the World.  The World Cup is supposed to be the opportunity to show how Brazil has modernized and become an integral part of the global economy.  They will increase their international visibility and hope that it is a positive reflection on Brazil’s progress.

However, everything is not quite as rosy as it seems and perhaps the ideals of bringing the World Cup to the 5 time winner isn’t going quite to plan.  Brazil, after being one of the strongest growing economies in the world for the past 10 years is projected to grow at only 2% for 2014 and 2015.  A slowdown in growth rates isn’t necessarily a bad thing as many other emerging markets are experiencing slowdowns too.  But 2% is a bit worrying for a couple of reasons. Mark Mobius highlights a couple of reasons why Brazil is at risk of a recession.

  • Brazilian companies and stocks are considered mid-range which isn’t bad for investors who already have assets there
  • However, there is a growing level of public and private debt which may curtail consumption and spending.
  • High inflation could tempt the government to make cuts and the central bank to raise interest rates too quickly which would be problematic for investors

Of course there is also a high rate of youth unemployment in Brazil too.  When coupled with all these factors, and the government cutting some essential programs in favor of hosting the World Cup, it all boils towards an environment that is unsuitable for the long term.  A recent poll showed that a majority of Brazilians do not support hosting the World Cup.

As for the event itself, the World Cup might not bring as much growth as promised, and whatever growth that might occur will be too small to notice.  The major industries that will probably get a big boost are airlines, rented cars, and beer sales.  As for many of the other cash crops and other economic drivers in Brazil, there is a danger of local economies stagnating due to high traffic and an inability to meet sales demands locally.  That too, the World Cup will only last for a month so the benefits are even more fleeting.  Looking at the types of projects that Brazil has invested in, some nice airports and infrastructure may do the country some good in terms of transportation and the flow of goods and services; however, the stadiums and hotels that are being built for the event are not likely to be used to the same capacity as they once were.  Any other growth and revenues that occur during the games, will be taken in by FIFA to fund their rising operational costs.

It’s interesting to look at what has happened to South Africa since they hosted the 2010 World Cup.  The economic outlook there has been less than spectacular since then with persistently high unemployment rates and underwhelming growth rates as an emerging market economy. As we can see from the brief data below, growth rates didn’t increase substantially in South Africa after the World Cup.  Growth rates continued to average about 3% despite the substantial investment for the event and the infrastructural development.

south-africa-gdp-growth

Granted, Brazil is in a much better economic state and they can perfectly handle the level of expenditure needed. That being said though, the World Cup is unlikely to live up to its billing. Even if Brazil are favorites to win the competition, a victory would certainly be a hollow one from an economic perspective.

Small businesses dealing with the middle man…with another middle man

Small business growth is often considered a big indicator of confidence in the economy and the willingness to start a new venture can be an encouraging sign.  When things are going well, there will be a higher willingness to start a business as it will be perceived to overcome obstacles and lend itself to success.  When confidence is low, that willingness drops a bit as more people fear their business will run through a lot of hurdles with bureaucracy, a lack of demand, economic issues, dealing with other middlemen, or just a failure to receive the idea well.

If you’re one of those people who fall into the latter group, fear not because while there might not be an app for your idea yet, there is an Ombudsman to help you: And his name is Brian Castro. Rhonda Colvin of the Wall Street Journal writes about how entrepreneurs worry or complain about the impact of government regulation.  Brian Castro is a lawyer whose purpose is to listen and answer concerns that small business owners or other entrepreneurs have about new regulations, licensing, permits, or fines for violating such rules. Castro acts as the eyes and ears for the Small Business Development Agency, and has attempted to evaluate how other governmental bodies (Homeland Security, Department of Defense, etc.) respond to the claims and whether or not they attempt to solve the problem.  He then rates these governmental agencies/departments by their effectiveness.

This is a very thoughtful move that the US Small Business Development Agency is making and it appears to be a show of solidarity with small business owners.  The statistics give us a clear indication that small business owners are concerned with many other issues that are not just about their ideas or their business plans themselves.  About 1 in 10 respondents for the survey are most concerned about the impact of future government regulations.  According to Mr. Castro, most of these concerns surrounded visas, employee healthcare coverage, and late payments which was a specific concern by government contractors.  These are all administrative issues that small businesses should ideally never have to worry about.  But each governmental department has several ongoing projects, contracts, and clients that need to be taken care of so it is very easy for these issues to get backlogged and possibly ignored.  Normally inserting another middle man in the process does not deal with the whole issue as the work will merely transfer to them, but in this case Mr. Castro’s position was specifically created to reassure entrepreneurs that their concerns will be addressed and that those issues should not stop them from making their business plans work.

We’ve spoken a lot about the importance of job growth, healthy inflation, and continually declining unemployment as indicators for whether or not the economy is in good shape.  While some of the figures have looked promising (the unemployment rate for example) there’s still a lot of concern that the state of the economy is somewhat illusory. Having small business owners confident and happy that their concerns are being addressedis a big step in the right direction. This neat infographic, from Visual.Ly does seem to indicate that small business owners have a largely positive view of the economy, despite the market noise.  The US SBDA’s initiative to allay concerns maybe defies conventional wisdom a bit in terms of getting another middle man, but Mr. Castro seems well-equipped to handle those day to day challenges and it definitely clears up some of the more external factors that may deter an entrepreneur and his project.

 

Yelping for attention

Yelp is a fairly useful app for exploring new places or looking for something peculiar.  Often times, it helps to see reviews of a new restaurant or of a particular service so that consumers can decide for themselves if the experience will be worthwhile.

However, there is a dark side to Yelp and store owners/small businesses are not happy with some of the reviews they’re getting.  Angus Loten of the Wall Street Journal is currently covering a lawsuit in Virginia against Yelp.  The case against Yelp cites how reviews suddenly become very negative very quickly and how many of the reviewers have never used the service.  Joe Hadeed, a local carpenter, found 7 negative reviews that severely hurt his business and intended to sue the users for defamation of character.  After being unable to identify the time or location of the users, he demanded that Yelp Inc. reveal the names of those reviewers, presumably because they would collect enough data to identify them.

This creates an interesting dilemma between the first amendment, which is Yelp’s claim, and the right of small businesses to understand who is saying what and how they could either address the concerns or identify slanderous reviews that negatively impact their businesses.  On one hand, Yelp does have a point that users should not feel intimidated to post a negative review if they truly feel that way.  If users aren’t anonymous, a business owner might try to get the comment removed, or possibly point out that he or she has never interacted with that user in particular.  In other words, Yelp is trying to reason that the small business owner is out to get them.

But on the other hand, many of these users could have more malicious intentions.  Mr. Hadeed’s view and that of many other small businesses who get slammed by reviews, is that their refusal to advertise or rejection of an advertisement pitch, leads to negativity.  This could potentially cause a negative spiral of reviews coming from other advertisers or possibly competitors through anonymous usernames or bots. Alternatively, competitive businesses could be caught in a prisoner’s dilemma as each tries to undermine the other in the belief that their sales could benefit.  This of course can be very costly and could lead small business owners to seek damage claims, which even then wouldn’t correct the long-term reputation damage they would suffer. Negative reviews seem to be far more influential than positive reviews, meaning it’s far easier for businesses to lose customers for a few negative reviews than it is to gain customers from a few positive reviews.

Of course the case in Virginia is one of many that Yelp faces unless of course they try to block themselves from future lawsuits.  The Huffington Post picked up on how Yelp has hired a lobbyist to push for libel reform.  If they are successful in giving themselves immunity from libel suits, it could be very detrimental for most business owners who could still suffer despite having quality service. While Yelp is seeking to protect its users, it is deeply alarming that many of them do not recognize the consequences of their reviews for businesses they’ve never used.  After all the purpose of Yelp is to identify good services and to show how other businesses can improve their model, not to be a forum for users to ‘troll’ or ‘get revenge’ unless they truly feel that they have been wronged by the service.

 

Yet another Smartphone Patent suit

Here is an interesting exercise for those of you with smartphones.  Look at your smartphone.  Look at the manufacturer. It’s probably an iPhone, or a Samsung Galaxy, a Nexus, Blackberry, etc.  But chances are your phone has a variety of patents which are currently being fought for in a court somewhere around the world.  Financed by Silicon Valley, the best and brightest patent lawyers are hard at work trying to scrutinize very minute features that they hope will lead to a huge bonus after they find one phone has infringed on a feature from one of their client’s phones.

Of course this is not a new process at all and has largely devolved into a petty fight between Apple, Samsung, HTC, Research In Motion, Nokia, and virtually every company that has an interest in the smartphone wars.   A few months before his death, Steve Jobs was quoted as saying about Android

“I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40 billion in the bank, to right this wrong,” […] “I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this.”

It appears as though Apple is finally going to go “thermonuclear” in their most recent patent suit against Samsung.  Daisuke Wakabayashi of WSJ wrote about how Google is central to Apple’s latest case. Among the patents in question, Apple believes Samsung infringed on background data syncing, detecting and converting links in messages, universal search through voice command, auto-complete features, and “slide to unlock”.  The reason why Google is involved is because Samsung said that many of these features were licensed to them by Google.  This claim has an element of truth given that Samsung’s previous user interface is under investigation for other patent violations.  Because Google licenses Android for free this isn’t usually a problem.

Apple has never gone after Google with a patent suit, although Steve Jobs would have been confident enough that Apple would win out. But it does appear that Apple is getting a bit more desperate.  Florian Mueller of BGR notes that in 2010, Apple wanted a $30 cut on all future Samsung smartphones for violation of all their patents.  Now though, Apple is demanding $40 on all Samsung phones for a violation of just 5 patents that are fairly innocuous, standard features on most smartphones nowadays.  Samsung did try to offer a counter argument but only wanted a flat rate damage fee of $7 million, far smaller than anything Apple is demanding and a sign that they do not view Apple as a long-term threat. Getting Google involved-because Samsung has claimed that they were using Google licensed software-now means that Apple is fighting not just the most dominant smartphone producer in the market, but also the most dominant mobile software developer too.  This does not bode well for Apple’s end game and definitely not for the future development of other products.  Understandably they want to continue to be dominant in a market they largely revolutionized, but it makes more sense to tap into new markets. Rumors of a revamped Apple TV and heavy bandwidth purchases indicate they are planning something big.

There is obviously no love lost in this ongoing war, and settlements seem very unlikely.  I’ve previously written about how the smartphone does not have a lot of innovative potential left, and this only serves to reiterate what I talked about earlier  This lawsuit appears to be a fight between two middle aged men over a fight that happened in the 8th grade and it won’t end well for either party involved.

Revised: Fears of European deflation growing

There were some positive signs around Europe, where it appeared that Spain’s unemployment rate had bottomed out in late 2013.

Perhaps talk of Europe’s recovery has come a little too early. While there were signs of positive growth in countries like Spain and Italy over the past few months, inflation was very low, and even more so inflation expectations.  David Roman of the Wall Street Journal wrote about a significant deflationary risk in Europe and how officials are expecting the European Central Bank to take the appropriate measures necessary to stem the tide. Josef Makuch, Slovenian Central Bank governor-rightly-feels that deflation could cause even more problems in the long term.

“Several [ECB] policy makers are ready to adopt nonstandard measures to prevent slipping into a deflationary environment,”

It appears that there might be more to this issue, than simply highlighting the risk of deflation.  The article was largely skimming the surface of what could become a wider problem later on.  Demosthenes Tambakis, a professor at the University of Cambridge, wrote for The Economist, outlining his opinion on why the Eurozone is at risk for deflation in further detail,  He points to very low inflation expectations across Europe and that alone increases a risk in deflation.  While he admitted that this risk shouldn’t rise so dramatically based on expectations alone, he does point out a few other institutional design elements that could contribute; Most notably, the European Central bank’s mandate, and the Zero Lower Bound.

The European Central Bank mandate is a bit pedantic in terms of legislature but it can play a role in the eyes of most economists.  The ECB, cites Tambakis, is committed to just below 2%, in contrast to say the Fed who wants to maintain a 2% average over time.  Tambakis believes that this causes an asymmetry which assures everyone that while they do not have to fear runaway inflation, they should worry when prices are too low because the ECB by design would be more reluctant to embark on expansionary monetary policy (increasing the money supply) than they are to contract.  While this point could make some sense in that the ECB might be unintentionally ‘guiding’ people to expecting less inflation in the medium-run and long-run, I would be surprised if this had a serious impact on inflation expectations.  Given the low levels of inflation in Europe, most economists and investors would likely expect lower levels to continue especially with the reduction in German growth rates.

The more likely argument seems to be the one about the Zero Lower Bound.  These risks are determined by the Shiller Index which predicts the long-run frequency of international stock market crashes.  Europe has faced two issues, in that they’ve suffered from the original financial crisis of 2008 and then the individual debt issues that each country faces. So, the natural reaction would be to cut interest rates to stimulate demand, but the Zero Lower Bound in Europe threatens to create a liquidity trap for the Eurozone.   In tandem with the dual mandate language set by the ECB, everyone already has very low expectations of inflation and the inability for countries to set monetary policy and stimulate demand individually threatens to worsen the situation for the Eurozone as a whole.

While there could be some legislation to create a more unified Europe fiscally and financially, the best thing the ECB can hope to do now is if they are going to be rigid about keeping inflation below 2% they should be more flexible about the Zero Lower Bound and allow the interest rate to hover in a broader range of negative interest rates.  The process will be rather painful because inflation expectations could plummet but in the long term, Europe could be better for it and escape the dangers of a long-term liquidity trap.

Arbitrage Pricing Theory vs. CAPM: ‘A Random Walk’ post

Burton G. Malkiel, in his book, “A Random Walk Down Wall Street” focuses much of the third part of his book on pricing models and investing strategies designed to combat or minimize risk.  In Chapter 10, he talked a bit about the arbitrage pricing model, and goes on to explain the model in more detail, and how it compares to the CAPM.

Arbitrage Pricing Theory is different from the CAPM model in a couple of ways.  While the CAPM states that the only risk that matters is systematic and that each individual asset’s risk is insignificant, the Arbitrage Pricing Theory states that everything cannot be simplified into one systematic risk coefficient.  There are several other existing systematic risk measures which can affect asset prices and this would produce a more accurate estimate.

The tradeoff appears to be one of precision vs. convenience.  The CAPM allows investors to make a relative, general assessment on what their investment would pan out to be by looking at the Beta coefficient, which measures the sensitivity of a stock to changes in the portfolio.  If investors get a better than expected return, the CAPM could give us a general assessment as to how much they beat their return by some other coefficient alpha. Arbitrage Pricing Theory on the other hand tries to attribute the variance of returns or risk factors to multiple problems both within the system and outside of the system.  By outside of the system, the APT allows for the presence of macroeconomic noise factors.

While Malkiel does explain both models pretty adequately, he does seem to criticize the CAPM on the basis that it is too general and does not really tell us much about what investors should expect; however, he did not scrutinize the Arbitrage Pricing model the way he did with the CAPM by providing results of the Fama French study). For practical purposes, he was willing to admit that there is no perfect predictor of risk.  I was inclined to agree that Arbitrage Pricing would be better backed by the data, since it had more relaxed assumptions by including the risk of the asset and macroeconomic risk. There are varying conclusions as to whether it holds up.  A couple of studies done in Italy and in Zimbabwe (before 2005), seem to confirm that the APT is better supported by the data, but even then it is not nearly accurate enough to make proper predictions about asset variance.  The APT in the Italian study was able to explain 43% of total variance, but that is not nearly enough to satisfy a risk-averse investor who would want to be a little safer with the knowledge that s/he could understand what risks could occur and why.

In time though, with algorithms becoming more advanced and further developed, perhaps we could see better computerized improvements on the Arbitrage Pricing model.  Arbitrageurs (people who look for mis-priced stocks to capitalize on) could use this to their advantage, even if the window for such arbitrage would become infinitely small with the ability of high frequency traders.