Executive Edge

The sound of Nobel Prize-winning bubble alarm

Jeff Brown, Special to CNBC.com
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Recapping the day's news and newsmakers through the lens of CNBC.


The good news: U.S. stocks have had a stupendous year.

The bad news: U.S. stocks have had a stupendous year.

Nobel laureate and Yale economist Robert Shiller says he's worried that stocks are edging toward bubble territory, thanks to Fed stimulus and speculation. The S&P 500 is up nearly 27 percent this year. Although many experts think stocks can rise more given projected corporate earnings, Shiller worries that the stock gains are out of sync with the weak economy. Another concern is the fast rise in real estate prices in the U.S. and elsewhere. Oh, and what did Shiller win his Nobel in economics for this past October? Work on forecasting asset prices.


"I'm not sounding the alarm yet. But in many countries the stock price levels are high, and in many real estate markets prices have risen sharply. ... That could end badly. I find the boom in the U.S. stock market most concerning."—Shiller

"The market is now up almost 50 percent in 18 months with no 10 percent correction. It's basically been a straight shot up."—David Kostin, chief U.S. strategist at Goldman Sachs

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The Supreme Court v. Jeff Bezos


Online retailers suffered a setback today when the U.S. Supreme Court refused to take up a challenge to state laws requiring Web firms to collect state sales taxes. Amazon.com and Overstock.com had challenged a New York law requiring the tax collections even by firms that have no physical presence in the state. The court's decision not to decide leaves that and similar laws in other states in place.

Amazon and Overstock had cited the Constitution's Commerce Clause, which limits the states' authority to regulate interstate commerce. Consumers are required to pay sales tax on online purchases from out-of-state providers, but few do.

Harvard University
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At elite universities, money managers flunk


The brainiacs at elite universities have just received Ds and Fs for their sub-par endowment results. In a new five-year ranking of returns, top schools like Harvard, Brown, Cornell, Stanford and Yale all earned less than if they'd had an allocation of 60 percent stocks, 40 percent bonds. Columbia was the only top school to beat that benchmark.

Granted, the institutions may have willingly sacrificed some return to minimize risk, but the results do make one wonder why a university would pay top dollar for investment managers when index funds would do better. Harvard, for example, did the worst of the 12 studied, earning just 1.7 percent a year over the five-year period, trailing the 60/40 portfolio by 4.5 percentage points a year. The head of Harvard's endowment was paid $5.27 million in 2011, the latest year reported.


"One common trait among the various endowments is their use of so-called alternative investments like hedge and private equity funds, real estate and more. Those can diversify and help juice returns, but they can come at a high cost in terms of fees paid to third party managers. In short, they don't always improve returns."—CNBC's Lawrence Delevingne

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In defense of plain vanilla


If the previous item made you wonder if alternative investments are worth the trouble, you're in good company. A recent survey shows that although 89 percent of investment advisors use alternatives sometimes, only 25 percent use them regularly. Advisors say they don't use alternatives more because they are hard to explain to clients, who think they are risky. The definition of alternative investment is somewhat loose, but it includes hedge and private equity funds, some funds that use long-short strategies, commodities and some non-publicly traded real estate investment trusts. Advisors who like alternatives often cite their ability to zig when the market zags, but they are generally seen as too complex for the average do-it-yourself investor.


"For about 80 percent of the client base, you stick to plain vanilla alternatives, such as ETFs, REIT mutual funds or long-short mutual funds ... In all honesty, everyone should be talking to an advisor before investing in alternatives."—CFP Catherine Valega, owner of Green Bridge Wealth Management

By Jeff Brown, Special to CNBC.com