In the mood to trade? Weather may influence institutional investors' stock decisions

Weather changes may affect how institutional investors decide on stock plays, according to a new study by a team of finance researchers. Their findings suggest sunny skies put professional investors more in a mood to buy, while cloudy conditions tend to discourage stock purchases.

The researchers conclude that cloudier days increase the perception that individual stocks and the Dow Jones Industrials are overpriced, increasing the inclination for institutions to sell.

The research paper, "Weather-Induced Mood, Institutional Investors, and Stock Returns," has been published in the January 2015 issue of The Review of Financial Studies. The research was collaborated by Case Western Reserve University's Dasol Kim and three other finance professors (William Goetzmann of Yale University, Alok Kumar of University of Miami and Qin Wang of University of Michigan-Dearborn).

Institutional investors represent large organizations, such as banks, mutual funds, labor union funds and finance or insurance companies that make substantial investments in stocks. Kim said the results of the study are surprising, given that professional investors are well regarded for their financial sophistication.

"We focus on institutional investors because of the important role they have in how stock prices are formed in the markets," said Kim, assistant professor of banking and finance at Case Western Reserve's Weatherhead School of Management. "Other studies have already shown that ordinary retail investors are susceptible to psychological biases in their investment decisions. Trying to evaluate similar questions for institutional investors is challenging, because relevant data is hard to come by."

Building on previous findings from psychological studies about the effect of sunshine on mood, the researchers wanted to learn how mood affects professional investor opinions on their stock market investments.

By linking responses to a survey of investors from the Yale Investor Behavior Project of Nobel Prize-winning economist Robert Shiller and institutional stock trade data with historical weather data from the National Oceanic and Atmospheric Administration, the researchers concluded aggregated data shows that seasonably sunnier weather leads to optimistic responses and a willingness to buy.

The research accounts for differences in weather across regions of the country and seasons. They show that these documented mood effects also influence stock prices, and that the observed impact does not persist for long periods of time.

A summary of the research was also recently featured at The Harvard Law School Forum on Corporate Governance and Financial Regulation.

Journal Reference:

W. N. Goetzmann, D. Kim, A. Kumar, Q. Wang. Weather-Induced Mood, Institutional Investors, and Stock Returns. Review of Financial Studies, 2014; 28 (1): 73 DOI: 10.1093/rfs/hhu063

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First measurement flight: Research aircraft HALO explores trade wind clouds

Which climate effects do clouds have? Under what conditions do they warm or cool the atmosphere? Today, after more than five years of preparation, the specially equipped research aircraft HALO (High Altitude and Long Range Research Aircraft) takes off for its first measurement flight in atmospheric research. Prof. Bjorn Stevens and Dr. Lutz Hirsch from the Max Planck Institute for Meteorology (MPI-M) leave Oberpfaffenhofen in Germany for a ten-hour flight to Barbados.

They will operate numerous measuring instruments on board HALO on behalf of the German atmospheric research: "A day we have eagerly awaited," says Stevens. "It is the first major mission to exploit the novel capabilities of HALO to measure vertical profiles of all components of atmospheric water -- like vapor, liquid and ice, in both cloud and precipitation forms, as well as the aerosol particles upon which cloud droplets form -- from a high altitude. A new era of airborne atmospheric research." The aircraft, equipped with a large amount of advanced technology, is an initiative by German climate and environmental research institutions (see below) and is operated by the German Aerospace Center (DLR).

The flight is part of the NARVAL project (Next-generation Aircraft Remote-Sensing for Validation Studies) and will provide the scientists with more detailed information on the constitution of tropical clouds (Fig. 1). The transatlantic flights from Oberpfaffenhofen to Barbados will complement the stationary measurements of the cloud observatory on Barbados. The collected data will contribute to a better understanding of cloud and precipitation processes and will help to reduce uncertainties in climate models.

Remote sensing instruments, located in the "Belly Pod" underneath the aircraft?s hull, will detect vertical profiles of temperature and humidity and the distribution of droplets and aerosols (Fig. 2). Additionally, so-called dropsondes will be released during the flight. These radiosondes usually ascend from Earth with the help of a weather balloon and perform measurements on their way through the atmosphere. This time, they will be dropped by parachute and will glide back to the ground.

The first measurement flight is a joint project of the MPI-M with the Meteorological Institute of the University Hamburg, DLR, Universities of Cologne, Leipzig and Heidelberg and the Forschungszentrum J?lich. It will take the scientists on a long-haul flight to Barbados, where the MPI-M cloud observatory is located, and back. Ideally, comparison measurements with the satellite CloudSat will be performed during the flights. The satellite measures the Atlantic clouds in trajectories crosswise to the flight route. Short flights of HALO in parallel with these satellite trajectories make it possible to verify the satellite?s measurements (Fig. 3): the aircraft flies at a lower altitude than the satellite and can therefore detect the clouds much more accurate.

In total, the air route Oberpfaffenhofen -- Barbados and back should be flown three times in December 2013 ("NARVAL South"). During the second flight, a local flight from Barbados eastward through the trade wind clouds is planned. The aim is to detect clouds that are directly heading for the Barbados cloud observatory and to compare them to the land-based cloud observatory data.

The second part of the mission will be carried out under the direction of the University Hamburg in January ("NARVAL North"). HALO will be based on Iceland to examine the backsides of fronts over the North Atlantic. The amount of precipitation on the backsides of fronts is a controversial topic in science because satellite observations and model calculations provide different results. "Measured values are missing?? because ships do not sail in these typical storm zones" says principal investigator Prof. Felix Ament from the Center for Earth System Research and Sustainability (CEN), University of Hamburg. "A successful HALO mission could provide important facts and eliminate a 'blank spot' on the map of science."

The research aircraft HALO is an initiative by German climate and environmental research institutions. HALO is funded by: Federal Ministry of Education and Research (BMBF), German Research Foundation (DFG), Helmholtz Association, Max Planck Society, Leibniz Association, Free State of Bavaria, Karlsruhe Institute of Technology (KIT), GFZ German Research Centre for Geosciences, Forschungszentrum J?lich and German Aerospace Center (DLR)

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Japan's first trade deficit since 1980 raises debt doubts (Reuters)

TOKYO (Reuters) – Japan first annual trade deficit in more than 30 years calls into question how much longer the country can rely on exports to help finance a huge public debt without having to turn to fickle foreign investors.

The aftermath of the March earthquake raised fuel import costs while slowing global growth and the yen's strength hit exports, data released on Wednesday showed, swinging the 2011 trade balance into deficit.

Few analysts expect Japan to immediately run a deficit in the current account, which includes trade and returns on the country's huge portfolio of investments abroad. A steady inflow of profits and capital gains from overseas still outweighs the trade deficit.

But the trade figures underscore a broader trend of Japan's declining global competitive edge and a rapidly ageing population, compounding the immediate problem of increased reliance on fuel imports due to the loss of nuclear power.

Only four of the country's 54 nuclear power reactors are running due to public safety fears following the March disaster.

"What it means is that the time when Japan runs out of savings -- 'Sayonara net creditor country' -- that point is coming closer," said Jesper Koll, head of equities research at JPMorgan in Japan.

"It means Japan becomes dependent on global savings to fund its deficit and either the currency weakens or interest rates rise."

That prospect could give added impetus to Prime Minister Yoshihiko Noda's push to double Japan's 5 percent sales tax in two stages by October 2015 to fund the bulging social security costs of a fast-ageing society.

The biggest opposition party, although agreeing with the need for a higher levy, is threatening to block legislation in parliament's upper house in hopes of forcing a general election.

Japan logged a trade deficit of 2.49 trillion yen ($32 billion) for 2011, Ministry of Finance data showed, the first annual deficit since 1980, after the economy was hit by the shock of rising oil prices.

Were Japan to run a current account deficit, it would spell trouble because it would mean the country cannot finance its huge public debt -- already twice the size of its $5 trillion economy -- without overseas funds.

Japanese investors currently hold about 95 percent of Japan's government bonds, which lends some stability to an otherwise unsustainable debt burden.

Domestic buyers are less likely to dump debt at the first whiff of economic trouble, unlike foreign investors, as Europe's debt crisis has shown.

The trade data helped send the yen to a one-month low against the dollar and the euro on Wednesday.

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Graphic on 2011 trade data http://link.reuters.com/mev26s

Dec trade balance http://link.reuters.com/vyq65s

Exports by destination http://link.reuters.com/far65s

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"HOLLOWING OUT," AGEING POPULATION

Total exports shrank 2.7 percent last year while imports surged 12.0 percent, reflecting reduced earnings from goods and services and higher spending on crude and fuel oil. Annual imports of liquefied natural gas hit a record high.

In a sign of the continuing pain from slowing global growth, exports fell 8.0 percent in December from a year earlier, roughly matching a median market forecast for a 7.9 percent drop, due partly to weak shipments of electronics parts.

Imports rose 8.1 percent in December from a year earlier, in line with a 8.0 percent annual gain expected, bringing the trade balance to a deficit of 205.1 billion yen, against 139.7 billion yen expected. It marked the third straight month of deficits.

Japan managed to sustain annual trade surpluses through the Asian financial crisis of the late 1990s and the post-Lehman Brothers global recession that started in late 2008, which makes the 2011 dip into deficit all the more dramatic.

A generation ago, Japan was the world's export juggernaut, churning out a stream of innovative products from the likes of Sony and Toyota.

Much like China today, Japan's bulging trade surplus became a source of friction with the United States and other advanced economies, who pressed Tokyo to allow the yen to rise more rapidly in order to reduce the imbalance.

A 1985 agreement between Japan, the United States and Europe's big economies -- known as the Plaza Accord after the New York hotel where it was signed -- pushed the yen higher against the U.S. dollar.

Many economists argue that sowed the seeds of Japan's current debt woes. After the Plaza Accord, Japan's economy weakened and its central bank slashed interest rates, which contributed to a credit boom that eventually spawned a financial crisis and led to two decades of economic stagnation.

Bank of Japan Governor Masaaki Shirakawa said on Tuesday he did not expect trade deficits to become a pattern, and did not foresee the country's current account balance tipping into the red in the near future.

But Japan's days of logging huge trade surpluses may be over as it relies more on fuel imports and manufacturers move production offshore to cope with rising costs and a strong yen, a trend that may weaken the Japanese currency longer term.

A fast-ageing population also means a growing number of elderly Japanese will be running down their savings.

Chief Cabinet Secretary Osamu Fujimura said the government wants to closely watch the trend of exports and imports.

"There are worries that the yen's strength is driving Japanese industry to go abroad," said Fujimura. "We have to create new industries ... implement comprehensive steps to boost growth. It is important to secure employment within the nation."

($1=77.71 yen)

(Additional writing by Leika Kihara; Editing by Linda Sieg and Emily Kaiser)

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