Byrne's MarketView

New Address!

2006-11-26T05:09:00.002-05:00

Just in time for Google deploying a CAPTCHA, even for bloggers who've been using their software without spam-related incidents since 2003, I've started a personal blog at ByrneHobart.com, and started an investment research company, Digital Due Diligence.

Confident Weasels

2006-11-21T02:33:00.000-05:00

It's easy to be confident in your plans for reform if they aren't serious plans at all, which is why I'm disregarding the otherwise good news that Treasury Secrectary Hank Paulson wants Sarbanes Oxley enforcement relaxed. Notice that he said enforcement, not the law itself. That's a great way to create a temporary reform (politicians do it with drugs, guns, immigration, and other controversial issues all the time, because it's comforting to be one bad poll away from a unilateral policy reversal). If we're going to have useful markets, we need full enforcement of fair rules, not sporadic enforcement of our current hodgepodge of last-minute reforms of the previous boom's most blatant loopholes.

"Peanut Butter"

2006-11-21T02:24:00.000-05:00

The Peanut Butter Manifesto is a Yahoo! strategy memo spreading fear, uncertainty, and doubt about the company's ability to compete with Google when Yahoo spends so much energy competing with itself. It's almost sad, though:

There are three pillars to my plan:

1. Focus the vision.

2. Restore accountability and clarity of ownership.

3. Execute a radical reorganization.

All of which can be summarized as "Be a couple grad students with a computer, a couple thousand dollars in Angel capital, and a burning desire to take on the corporate goliaths of the world," because at this point, Yahoo! has too many constituencies to please and obligations to fulfill. If they try to get 'radical', they're going to have to remember what happens when the radical reformers inside a big Internet content company fail. Yahoo! needs to stop thinking like a startup, because startups think of Yahoo! as a target -- a small startup can afford to slash and burn a market, because getting 10% of an industry that's only 10% of what it used to be is still a homerun for the VCs and a great payoff for the startup; Yahoo! needs to make markets bigger and make customers loyal, and that means thinking like a consumer products company or a media company. If they're going to succeed, Peanut Butter Style is the way they'll do it.

(Also, don't miss this memo-to-the-memo-guy)

Michael Kinsley is a little late to the party...

2006-11-21T02:07:00.000-05:00

...with his discovery that the stock market is, in fact inefficient. This op-ed is proof that phrasemongers don't make great economists: In his effort to prove that leveraged buyouts are unfair and thus that a perfect free market is a tenuous abstraction based on ludicrous assumptions, he makes the following rather interesting assumptions: That risk-tolerance is constant for all investors; that nobody is aware that executives running a company may know more about the company that all of the investors; that it is, somehow, a massive failure of the capitalism that millions of people aggregating gigabytes of financial data and extrapolating based on all kinds of assumptions into an infinitely distant future can still peg their estimated value of a company to within a couple percent -- when even getting within an order of magnitude would be a computationally intense task.

Even casting that aside, he ignores what a leveraged buyout really means. Management's pitch is usually something like this: "We know that you could read every single SEC filing and ananlyst report and look at every possible chart and still be not entirely sure that our company will be there tomorrow, much less that it'll be solvent and worth more than it was at the previous day's close. Rather than spend the rest of the time you own our stock feverishly hunting for an information edge, why not let us pay you extra for your stock right now and let you never worry about the company again? We'll worry. We'll not only worry about our competitors, and our friends, and our employees and our regulators and everyone else, but we'll have bankers and private-equity partners breathing down our necks until we can get an incomprehensibly huge debt load paid off. You get cash up front and a chance to relax; we get a lottery ticket and a couple years of hell on earth. Sound fair?" Most of the time, shareholders vote 'Yes'. Most of the time, they make the right choice.

Unbelievably Bad Advice

2006-11-21T02:05:00.000-05:00

James Cramer is still bullish on Nymex, and his argument still has a whiff of Money Shamanism. The stock punished late buyers by going up fast; they can only placate it by buying less than they originally intended, and then buying some more later on no matter what happens in the meantime. Come hell, high water, accounting fraud, or a general crash, Cramer still wants you to buy Nymex later in the week. I was going to use "People who made Nymex double its first day of trading" as a benchmark for Polyanish stupidity, but Cramer is -- as always -- a step ahead of crowd.

Update

2006-11-21T01:53:00.000-05:00

I'm visiting family in St. Louis for Thanksgiving, so blogging will be constrained by scheduling (and because my Blogging Chair in Brooklyn is kind of painful, whereas the office chair here is hypnotically comfortable, so I can't get quite the right combination of irritation and haste when I post. Also, the Internet situation is just awkward enough to get in the way of checking my RSS feeds and uploading my posts).

It's Always About the Little Guy

2006-11-18T13:59:00.000-05:00

James Cramer notes that hedge fund disasters only happen because middle-class investors are allowed to invest (indirectly) in hedge funds. This is a striking departure from the populist tone of his first book, in which he argued that regulators were depriving investors of access to the best managers by setting onerous net-worth requirements for hedge fund investors. What's changed? The charitable answer is that Amaranth's collapse convinced him of what Long-Term Capital Management's didn't: That hedge funds are too risky for all but the most sophisticated investors (and that sophistication is directly correlated with wealth; Paris Hilton being a more qualified hedge fund analyst than your average finance professor). The uncharitable answer is that now that he's out of the hedge fund business, he wants to distance himself from the riskier, seedier side -- it's one thing to be associated with an industry that deprived a millionaire of a few spare millions, and another entirely to be the spokesman for the freewheeling traders who accidentally liquidated Grandpa's pension by betting the wrong way on a financial contract that Grandpa didn't even know existed.

Does Social Networking Destroy Quality Journalism?

2006-11-18T13:15:00.000-05:00

This Quality Journalist sure thinks so. He notes that popularity is 1) Gratifying, and 2) Thanks to the rise of link-sharing sites, really easy to measure. He's worried that once writers are allowed to know how popular they are, they'll write just to be popular.

Let's hope this trend doesn't spread to other industries: I'd cower in fear if I knew that restaurants only served food they thought people would like, or if programmers only wrote software their customers would use, or if artists only painted works that they thought people would like to look at. It's a null criticism: Social networking sites homogenize on a superficial level, but they also let users track the individual preferences of a select group of users -- if I find someone who I know is good at ferreting out interesting stories, I'd rather read their list of bookmarked sites than rely on the collective wisdom of any random collective. This isn't new, and it isn't a problem: Popular works have a certain minimum appeal, which usually constrains them from maximum appeal to a single group. This reduces risks and rewards (if I want to completely tune thought out on a long trip, I can grab pretty much any top-20 bestseller and expect to be entertained, but I'd hate to impose my individual literary taste on anyone, even though I prefer my favorites to King, Grisham, and Brown).

This story needs a coup de grâce, so here it is: I found this clever, articulate anti-Digg screed on Digg.

Are High Share Prices Good or Bad? Answer: Yes.

2006-11-18T12:54:00.000-05:00

The Tradesports Maven (just added to my blogroll, along with Midas Oracle, because I'm on a politics-and-gambling binge today) asks: What affect does not splitting a stock have on a company's brand equity?

I suspect there isn't a quantitative change in perceived value; it's mostly qualitative. Companies like Google, Berkshire Hathaway and The Washington Post are necessarily seen as better, but they're certainly seen as 1) Permanent, and 2) Leaders in quality, if not volume. Those qualities can certainly be assets, especially during a flight to quality, but during a garbage-stock runup (à la E-Future's recent post-IPO move from $7 to $48 in about two weeks), they'll get left in the dust. In the long run, it's probably better to have better stock performance (and thus more access to capital) when everyone else doesn't, but that means that a high share price pays off over a decade or more, not quarter-to-quarter. Which, perhaps, is why $500-plus stock prices are so rare and deserve so much attention.

The Money Shaman

2006-11-18T01:25:00.000-05:00

TheStreet.com is running a ten-year Jim Cramer retrospective -- seven pages worth of what was up-to-the-minute a decade ago. I definitely haven't read all of it (or much of it, really -- just auditing to see if his columns match his book). But one column reminded me of a few other Cramerisms, and probably said way more than it meant to: "Red Hots are Candy". Read it!

And then ask yourself: How seriously does he take his whole "The market will hate you if you do the wrong thing" shtick? It comes up in a few other books and columns -- he'll mention selling off his best positions to get back a winning streak -- but I'm not sure if it's meant to be quaint trader lore or an accurate description of his thought process. Perhaps I'm thinking more like an economist than like a trader, but when he says, essentially, "Any one of these stocks will do well, but owning a lot of them will make them go down," he's espousing a view of the market that's best described as Shaman worshiping the rain god or the tree god or the rock god: "Accept the gift of portfolio-saving growth stocks, but don't be greedy or you'll irritate the Bubble God!"

This doesn't make him a bad investor, just worse than he could be. You can accumulate lots of mostly accurate half-truths even operating with a bad model (there's a reason they call a Shaman "Witch Doctor"), but that attitude is still confusing to me and probably harmful to some of his readers. So seriously, Jim: Whether you're joking or just crazy, you really need to stop this Shamanist Trading.

Chinese Math, Redux

2006-11-18T00:42:00.000-05:00

Remember Chinese Math? "If the market is $X billion, and we get just Y%, we'll be rich!" It's happening again. In China, of all places: 24/7 Wall St. notes that Toyota, Ford, and GM have all decided that they're going to beat the competition by raising market share. They'll have to deal with an interesting government stopgap and a local idiosyncrasy if they're going to get too far: Chinese cities aren't really designed for heavy auto traffic. They're mostly built to be an order of magnitude smaller, and full of pedestrians. Rather than build new roads (expensive -- especially since the real estate they'd be built on is incredibly valuable), the government has reduced the number of cars on the road through license plate auctions. But the chance to bid on specific license numbers means that plates can reach ridiculous values -- as high as $34,000 (official exchange rate -- something like $60-70,000 at a more realistic value). If foreign auto companies are going to succeed with Chinese consumers, they'll need to deal with the regulators first.

I'm not sure I'm with them on this one...

2006-11-18T00:11:00.000-05:00

Red Hat, the edgy open-source software maker, is moving to the New York Stock Exchange. According to the expensive, detailed WSJ version of the story:

"It's a very efficient market," said Mr. Peters. He added that he supported NYSE CEO John Thain's move to more electronic trading. "He's a very clever guy," Mr. Peters said.

Some industry experts pointed out that Red Hat, as a proponent of open software like Linux, could use the change in stock listing to help distinguish itself from larger rival Microsoft Corp., which has long been a bellwether Nasdaq stock.

Bad move. It's certainly 'better' for their reputation if a bank or a manufacturer moves to the NYSE, but software -- especially Linux -- is supposed to be a hip, trendy, decentralized sort of business. Having their stock traded by the stodgiest firm possible isn't going to do anything but define them as has-beens.

And if the NYSE really was gunning for Microsoft and got Red Hat instead, they're admitting that they accomplished (by market cap) about 1% of what they intended to. It's a remarkably lose-lose deal.

Collaboration Meets its Match?

2006-11-16T01:20:00.000-05:00

This Wall Street Journal article ($) is a few days behind the curve on the new collaborative book being published by Pearson, MIT, and Wharton. You can join in on their site, but don't expect it to be any good: It's been 395 years since a book written by committee turned out well. It's a noble experiment, but the results are unlikely to be inspiring, though they might be enlightening.

Enforcing Kyoto

2006-11-15T20:22:00.000-05:00

Kyoto signatories have a problem: If everyone signed the treaty, they'd all suffer roughly equally -- but if there are holdouts, those holdouts have an automatic incentive to engage in the same high-pollution activities the treaty tries to prevent. France has a solution: Slap a tariff on goods from non-Kyoto countries. Sounds like a good idea, until you realize that it suffers from more or less the same problem: Now, Kyoto signatories who don't go along with France's policy will get cheaper high-polluting imports. The French government may feel righteous, but this mostly makes them poor.

Pot, Kettle, Youtube

2006-11-15T15:32:00.000-05:00

Google has set aside $200 million to deal with copyright complaints about YouTube. The same day, they sent a cease-and-desist order to a site allowing users to pilfer Youtube videos that Youtube users had pilfered from legitimate sources. They need to make up their minds. Since they started, Google has been in the business of using slices of other people's content -- it's been legally and economically acceptable because it's considered 'fair use' and it's been mutually beneficial, but as Google becomes an easier target, small content providers may try to take a stand and make a name for themselves by suing Google for stealing content. And then Google's previous legal cases will be embarrassing, indeed.

So Much for the LSE Threat

2006-11-15T02:00:00.000-05:00

Not only is the LSE too small to present a serious threat to the NYSE, but seven firms, all traded on the NYSE, are forming a trading platform to compete with it and the other European exchanges. I guess the years of skyrocketing share prices for the exchanges finally convinced people outside the business that there's money to be made. I've held Nasdaq stock for years, but if this trend continues it might finally be time to leave it behind.

News You Shouldn't Use

2006-11-15T00:21:00.000-05:00

Please, please give a big "So, what?" to the news that George Soros' managers are adding lots of equity positions. Look at the roster of stocks they've added -- alternating between bellwethers and stalwarts without a single original idea or outsize position among them. These guys are closet indexers who are finally coming out of the closet. Hopefully the market won't react to the Soros brand name -- it's the same name, but the brand has moved decidedly downmarket.

Icahn Lurking Around Take Two

2006-11-14T23:19:00.000-05:00

Carl Icahn (who according to the book is actually a pretty interesting guy) has raised his stake in Take Two Entertainment (makers of the once-controversial Grand Theft Auto series and the freshly-controversial Bully).

This should be interesting. Icahn is proud to admit that he's "no Robin Hood," and Take Two is so desperate for negative attention that they hid porn in a game about shooting police and selling drugs. So the usual dirt-digging and dirt-dishing phase of the proxy fight (if any) will be great fun to watch. Icahn's stake is just 4%, but growing fast. Keep watching.

Russia: New Deals, Same Old Problems

2006-11-14T18:29:00.000-05:00

Bill Cara sees good things in Russia's future -- they're going to join the WTO, which gives them a little more export leverage. But if you think China's habit of censoring economic disagreement is bad, just take a look at Russia. Investing in a country where bad business is fatal just doesn't sound prudent to me.

Daniel Drezner is Sanguine About the NYSE

2006-11-14T17:22:00.000-05:00

Maybe paranoia isn't the best reaction to the LSE. Daniel Drezner links to a list of possible NYSE competitors, and the reasons they aren't a serious threat. Phew.

WisdomTree is Still a Bad Deal

2006-11-14T17:16:00.000-05:00

Yesterday, their assets under management topped $1 billion. Today, they rolled out another 31 funds. I still think WisdomTree Investments is a terrible deal. Right now, for every $1 you spend on the stock, you get $2.23 in assets under management. Compare that to better-known and better-established companies like T. Rowe Price, where every $1 in market value represents (as of their last quarter, $21.39 in assets under management. Whatever big names are on WisdomTree's board or payroll, I don't think they're worth the 1000% premium.

Inexplicable

2006-11-14T16:36:00.000-05:00

Microsoft's rollout of the new Zune player is not exactly getting a boost from their decision to create an alternative, non-transferable, Microsoft-issued currency to 1) Helpfully disguise the fact that Zune songs cost just 1/4 of a penny less than iTunes songs, and 2) Keep customers from getting their money's worth unless they buy music in increments of exactly $395.

I'm all for alternative currencies -- they're a great way to keep central banks from abusing their quasi-monopoly by manipulating inflation rates -- but I've just found one company I don't want to lead that particular revolution.

"How to Kill a Brand"

2006-11-14T16:26:00.000-05:00

I used to think I was a lone nut, but this 24/7 Wall St. article on 'how to kill a brand' agrees:

Advertising is viewed by most shareholders as an expense. In my view, it is a capital expenditure, not terribly different than building a factory or buying equipment to build revenues, but with a very special bonus attribute...a 100% write-off in year one! Rather than a prolonged schedule of depreciation, Uncle Sam participates in the deduction, all in that first year.

Thank you. It's true: Even in highly volatile markets, the value of advertising doesn't just dissipate -- it accumulates. Witness Coca-Cola. They've been buying brand recognition in every medium they can think of for over a century, and they're paid off. But the fact that these values persist over time doesn't mean that they persist without maintenance. Let's hope, for the sake of their shareholders, that Adidas turns around their ad spending before they fall hopelessly behind.

The Rockstar CEO is Back!

2006-11-14T16:20:00.000-05:00

I just found the excellent Information Arbitrage blog, which has an exciting article on the Web 2.0 Summit. The term "Rock Star" shows up three times, all in reference to .com CEOs.

Of course, this time everything's different: Instead of just a business plan, a dropout, and a dream, we have business plans, MBAs, and proof that (some) dreams come true.

Google is Web 2.0 is Google?

2006-11-14T16:04:00.000-05:00

A while ago, Paul Kedrosky was looking for good Web 2.0 companies to short in the event of a bubble. The first company listed was Google, and I definitely had my doubts: Google is in the very 1.0 business of search-and-ads, and is exploring other businesses. But those other businesses are all more or less venture-stage: Advertising is still 99% of Google's revenue.

Apparently, I was wrong, and Web 2.0 is "All About Google". Now, that column is all speculation, analogy, and froth -- the usual "The Revolution is at hand!" declarations you see whenever a tech company's stock price, financial statements, and brand recognition are all rocketing up the same breathtaking exponential curve. But here's some more convincing evidence: Google has just bought out an online spreadsheet company entirely to make them stop offering online spreadsheets. That's not the behavior of just-another-company in a huge market. That's only economically viable for a near-monopolist. Maybe Google really is Web 2.0 after all.

Yikes!

2006-11-14T01:41:00.000-05:00

Activist hedge funds cause lower profits, no asset growth, and higher stock prices according to a new study. But can we really point to these funds as a cause without looking at the confounding variables? Activist funds go after companies with low stock prices, and those tend to be the companies with low projected growth. And it's rare that ousting an unpopular, incompetent executive will actually hurt fundamentals. Members of the financial media should think hard about spinning this as a warning about activist funds -- it's really just evidence that they bring attention to companies in decline, which is exactly what they're supposed to do.

(Via a tortuous URL-rewriting route starting with Dealbreaker.)

Robert Kiyosaki is at it Again

2006-11-14T01:29:00.000-05:00

And Guruwatch catches him in the act. It's a good read.

I Wish I'd Known About This Earlier

2006-11-14T00:30:00.000-05:00

There's a Festival of Stocks! If only I'd known. If only I'd entered. There's always next week -- but this week's selection isn't half bad. Best report: The founder of Atari and Chuck E. Cheese is running a new public company called uWink. Looks pretty interesting.

Unfortunately, looks interesting to other people, too. The stock is up about 60% since the report was issued.The power of the New Media nets uWink shareholders about $15 million in market cap for their $140,000 company. Bushnell's intelligence and ability are certainly worth something, but I think this is trading on his name -- so kudos to the Value Blogger who posted this for advising caution after the price popped.

Better than one bubble; better than two...

2006-11-14T00:11:00.000-05:00

It's the synergistic bubble combo! Social networking in China. I don't even have to predict that this will be an overpriced, mismanaged boondoggle, but I need to claim credit someday so I'll state it explicitly: Social networking offers nothing new and some bored hacker will kludge together personal pages, blogging software, RSS, some simple peer-to-peer media-sharing program, and maybe a thousand lines of Perl, and wipe them all out. Also, China censors people who talk about how badly their economy is doing. Why on earth would a big, easy-to-sue company get involved in a country where 20% of the search business consists of ripping off music? China's government is a mess, China's economy is apparently a state secret, and Myspace: The Censored Edition! isn't going to be popular at home or abroad. Whatever News Corp. spends on this is way too much.

Great!

2006-11-14T00:02:00.000-05:00

Hank Greenberg is out of retirement and on the prowl, putting in a bid for Tribune Co. The fight for Tribune is finally getting interesting; a few rich, savvy bidders with lots of money and nothing better to do with their time will probably have some entertaining fights over who gets control of the paper. With media assets (especially dead-tree media), the bidding war is more over cachet than cash flow, and between an unknown billionaire and a humiliated one, I'm not sure who thinks he has more to gain.

Will London Catch up to New York as a Financial Center?

2006-11-13T23:51:00.000-05:00

Some say so, I'm not so sure:

New York can still claim higher total value of trading, due to its enormous domestic market. But London already has eclipsed the Big Apple as the big noise in global finance. In the past six months, more money has been raised on the LSE for international firms than either of its larger New York competitors.

Stock exchanges are definitely a winner-take-all, where "All" is a particular kind of business; Nasdaq dominates among smaller stocks, the NYSE has a huge lead in large companies seeking cachet, and the rest of the market is divided among local exchanges whose primary advantage is that they mostly speak the same language. Unless the LSE can offer a Nasdaq-sized quality difference, they're going to be stuck with Nasdaq-sized influence. What do they offer?

They have the local language, which is the lingua franca of global finance, but also an unsurpassed pool of multilingual speakers; a less cumbersome regulatory regime than the expense and distraction wrought by America's Sarbanes-Oxley reforms of 2002, rushed through the U.S. Congress in the wake of the Enron Corp. and Worldcom Inc. debacles; a time-zone advantage by which London straddles North America and Asian markets; and a dynamic LSE chief executive, Clara Furse, a relentless investor in cutting-edge technology that has made the LSE probably the world's most efficient market. (LSE trades can now be executed in less than 10 milliseconds). Furse also is the "get big or go home type." Having beaten back a takeover attempt by Nasdaq in March, Furse now is trying to elbow her way into the NYSE's proposed merger with Euronext, which operates bourses in Paris, Brussels, Amsterdam and Lisbon, proposing a threesome. Furse is also among the exchanges wooing the Tokyo Stock Exchange into a Western alliance.

The City has one regulator, the Financial Services Authority (FSA), that does the work of 10 federal, state and industry bodies in New York. Schumer and Bloomberg cite experts who calculate that U.S. regulatory costs for companies registered in New York are 15 times greater than the amount levied on U.K.-based firms. There has also been a stunning increase in U.S. class-action lawsuits by aggrieved shareholders, from $150 million (U.S.) in 1997 to $9.6 billion last year. Britain and other countries have laws that discourage litigation deemed to be frivolous.

Yikes. But American exchanges have the same linguistic advantages (New York is a pretty polyglot city, and the Nasdaq is everywhere), venture capitalists and the next House Majority Leader are pushing for Sarboxe reforms, and the time-zone issue could be solved by fiat if the NYSE or Nasdaq ever see it as a real threat. London's biggest advantage here is their regulatory laxity -- not the first time, but it's still a surprise. If Sarboxe gets relaxed and the indices stay strong, exchanges should be able to push legislation adding to their competitive edge. When the stakes are being upstaged by the British market for the first time in a century, Congress might just decide that further deregulation is worth the risk.

$1.6 Billion (and all the bad publicity it can buy...)

2006-11-13T23:18:00.000-05:00

Google didn't have bad timing: They made the timing bad. The very day they bought Youtube, traffic growth flattened, and now popular Youtube personalities are complaining that they didn't get a cut of the lucrative deal. Earlier, I noted that the first guys to stop providing a free service are likely to get a chilly reception. We'll see if the first guy to pay people for what they used to do for free is, conversely, seen as a hero.

Carnival of the Capitalists

2006-11-13T23:01:00.000-05:00

Better late than never: The new Carnival of the Capitalists is up at Casey Software. The most useful piece so I found: Brian Gongol's list of 2008 proto-contenders' positions on economic issues, which I've bookmarked for now and will probably refer to in the future. I'd actually suggest that he make it a wiki so interested observers can keep commenting as these views develop.

The best-written entry was "Of Insurance Companies and Morality", which, unfortunately, didn't go into much detail about whether or not the are moral (Answer: Yes, and for interestingly complicated reasons that I'll get to at some point).

Frivolous Complaint or Practical Matter? Newsniks Attack Quotesmiths Over Rates

2006-11-13T22:53:00.000-05:00

I don't know where we'd be without free financial news/information sites, so with a few legal-frivolity misgivings (and as a proud shareholder of both Nasdaq and NYSE), I've got to applaud this official complaint about exchanges overcharging for real-time data. Stock exchanges are small enough -- and insular enough -- to make oligopolistic behavior in parts of their business a possibility, especially since they have so many customers. When a small, insular group of companies collectively raises the price of a widely-consumed good, it's important for buyers (financial websites, and thus all of us who patronize them) to do something about it.

Of course, if this fails I can see a business opportunity for Google to deploy someone who constantly bids for tiny lots of heavily-traded stocks, and reports the sale prices; Google could resell the data for less than what the exchanges charge and make a profit from that. And while it sounds kind of crazy to have to buy a stock to gauge the price, that's what plenty of funds have had to do in the past -- when bids can suddenly disappear as buyers get spooked about a big seller, it's perfectly reasonable for a fund to spend a few thousand dollars in commissions and slippage in order to save many times that from dumping stock on a panicking market.

"Freakonomics" Coauthor Suggests new Tactic for Newspapers

2006-11-13T14:15:00.000-05:00

Stephen J. Dubner thinks newspapers could start profiting from their paper edition with a one-day embargo on online news. Unfortunately, the Internet is redefining what's free faster than businesses can cope; if they stop producing online news, they'll just accelerate the rate at which they lose subscribers -- people are willing to pay for the convenience of a newspaper, but they'll be less likely to patronize the one newspaper that doesn't offer online coverage. Unless they form a cartel, any single newspaper that tries this scheme will look hopelessly outdated and rather misanthropic.

Paul Kedrosky: Bring on the Bubble!

2006-11-13T12:27:00.000-05:00

This is a good point, almost: Disruptive bubbles do lead to lots of investment in products and infrastructure that we'll later use. The railroad boom of the late 19th century gave us a transportation network we ought to be thankful for, and the telecom boom of the late '90's did the same for our communications bandwidth. I'm not sure how you'd measure such a thing empirically, but I have a nagging suspicion that informed, rational people are better economic planners than a delusional mob of gamblers. But bubbles -- and crashes -- are great news for the commentators.

From Bad to Worse

2006-11-12T13:40:00.000-05:00

Zimbabwe's already troubled airline is even worse of than previously thought: They've had to cancel flights to London to keep the planes from being repossessed. Ouch.

(Via Instapundit)

And He Ought to Know...

2006-11-12T10:29:00.000-05:00

Gordon Moore, of Moore's Law fame, claims that Moore's law is dead. I'm pretty sure it's a dirty secret of the tech media that when someone important notes that there are obstacles to Moore's Law continuing indefinitely, the conventional wisdom is that it's eternal, but when there are new advances in chip architecture, the conventional wisdom is that Moore's Law is dead.

Anyway, that misses the point: Moore's Law is descriptive. All it says is that, in the past, transistor density has increased at a certain rate. Any extrapolation into the future ought to be done at the extrapolator's risk. Of course, for the last few decades software has tried to take advantage of the hardware that will be current when it's released, and software sellers have pushed the newest software, so there's a huge financial incentive for the semiconductor companies to keep enforcing The Law.

Your Mind-Expanding Notion of the Day

2006-11-12T04:17:00.000-05:00

Smart Contracts:

If a loan was taken out to buy that car, and the owner failed to make payments, the smart contract could automatically invoke a lien, which returns control of the car keys to the bank. This smart lien might be much cheaper and more effective than a repo man.

Clever. Advancing information technology is a giant process of figuring out what kind of human activity is mindlessly repetitive and having it taken over and repeated by something mindless. It's nice to know that this is being explored outside of science fiction, but a little distressing to know that these contracts were proposed in 1994 and aren't ubiquitous yet.

I'm going to go read the rest of Unenumerated right now (blog entries don't age well; The Bleat and Diveintomark are the best exceptions I've found).

Eric Schmidt's Khrushchev Moment

2006-11-12T02:32:00.000-05:00

First floated as rumor, now confirmed as fact: Google's CEO, Eric Schmidt, believes that free, ad-supported phones are coming. Of course, there's a catch:

The Google executive said his own company had no plans to directly give away phones itself, nor is he aware of any effort by partners such as phone makers Nokia ... or Motorola ... or mobile operators like Vodafone ... to make such a radical move, he said.

So it's going to happen, but he's not going to do it and he doesn't know of anyone else with any plans to do it, but it's still an historical inevitability. If anyone was at the speech, let me know if you can confirm rumors that Schmidt removed his shoe and pounded it on the podium for emphasis.

The problem is, of course, that phone hardware costs money, especially if the phones are sophisticated enough to spam us constantly and make phone calls. Of course, he could be making the trivial assumption that some day we'll all have military-grade matter compilers and anything made of common elements will be costless. It would be a pretty lucky confluence of events if phones got cheap fast enough for us to have the attention to devote to ads -- I can see hundreds of business plans and dozens of startups forming around this scheme, but I can't imagine any profits coming from it.

The Case of the Adversely-Selected Healthcare Lemons

2006-11-12T00:55:00.000-05:00

Slate Magazine's Timothy Noah came out in favor of socializing medicine a few days ago, citing this analysis by Paul Krugman and Robin Wells as a piece that "ought to be read, I'm not kidding, by every American". So I read it.

Krugman's tidy thesis relies on the established fact of adverse selection. The problem, as stated in the original paper, goes something like this: Imagine a market for used cars in which every car is either 'new' and worth $100, or a 'lemon' and worth $50. Only the seller knows what kind of car it is -- the buyer has to guess. Now, at what price should cars be sold? Akerlof cleverly realized that at any price less than $100, the new car owner isn't getting his money's worth, but that at any price over $50, someone buying a 'lemon' will be cheated. As long as information is asymmetric, only lemons will sell -- and they'll only sell at lemon-prices. This is a problem for used-car dealers, who can't offer variety, and a problem for new-car owners, who don't have liquidity (it's also a problem for economists who convince themselves that it's all theoretical).

But the 'lemons' theory isn't "Assuming a variation in quality, markets will be inefficient." It actually states that "Assuming a variation in quality, the reason markets are inefficient is that one side has more information than the other." That's actually quite refreshing, because it offers two solutions: 1) Inform both sides. 2) Use financial engineering to make them the same side.

1) Is the reason Carfax could afford all those obnoxious ads. If the 'information gap' between a buyer and a seller gets narrowed to zero, 'lemons' and new cars can both trade at fair prices, because there are now two markets: Instead of a monolithic bunch of used cars, there are discrete markets for discrete quality levels.

2) Doesn't happen much, but probably could: Instead of simply swapping a car for cash and calling it a deal, buyers could buy an allegedly new car only if the previous owner paid to have it insured. This puts the financial burden of a 'lemon' back on the person who has the information -- the used-car buyer is fully hedged, since any 'lemon'-related costs will be recouped by the seller. Alternatively, reputation and culture can accomplish the same thing: If lying about the state of your car branded you a liar, the cost of dishonesty might be high enough for well-informed sellers to be completely upfront about the state of their goods.

Back to Krugman: He posits a 'lemon' kind of market. If health insurance is offered at a fixed price, the only people with an incentive to buy it are the ones who expect to get sick. For everyone else, it's a bad deal. Of course, if only secretly-sick people buy health insurance policies, the health insurance companies need to ratchet up rates to compensate. The higher their rates, the sicker their customers, until they give up. Or until they try options 1) or 2).

1) As applied to health insurance would be to let customers share their health data with potential insurers, so both parties were equally informed. Short of a Dreaded Lump or Disturbing Ache that the patient hasn't shared with doctors, it would be pretty difficult for one side to deceive the other if they're all looking at the same information. This, of course, would raise the price of insurance for potentially sick people and lower it for healthy people (which sounds bad until you think of it in terms of any other market: Charging for gas by the gallon raises the cost of gas for people who use their Hummer for 50-mile commutes, and lowers it for people who bike). It's pretty fair for people to pay as much for healthcare as their healthcare costs providers -- we can't effectively prioritize unless the cost to us represents our cost to others.

2) Is also easy enough to map onto the healthcare market. Not only can health insurance companies purchase reinsurance (which, because reputations are centralized and information is shared, doesn't have the same 'lemon' issues as the individual market), but they can offer bonuses to customers who follow the right health guidelines. This keeps customers from 'lemonizing' themselves after they've gotten a good deal on an insurance policy. Culture is already starting to make inroads on unhealthy behavior: From indie documentaries to nightly sitcoms, thinness is second only to bored cynicism in our virtue pantheon.

What's truly irksome about Krugman's essay, though, is that it ignores performing the same kind of analysis on its own ideal. If healthcare is socialized, "Adverse selection" is simply replaced by "Moral hazard": If people don't suffer for bad health decisions, they're going to make more of them. Being healthy is its own reward, of course, but that doesn't free us to ignore financial constraints: There are identifiable rewards to healthy food, exercise, and avoiding stupidly risky behavior. If we banish those incentives, we're going to be worse off.

"Web 2.0 Bubble" Leads to Simmering Frustration

2006-11-12T00:02:00.000-05:00

Paul Kedrosky is looking for companies to short assuming Web 2.0 is a bubble and comes up rather -- heh -- short. From Old Media (News Corp.) to the last bubble's darlings (Yahoo!), the list is depressing to anyone who's heard but not believed the hype. One commenter suggested Foldera, and I added Tucows, but overall it looks like investors will have trouble actually profiting from a crash in Web 2.0 values.

Which might be a sign that there isn't a bubble after all.

Jack Welch: Gone but not Forgotten

2006-11-11T23:45:00.000-05:00

What happened to former powerhouse GE after the retirement of their superstar CEO Jack Welch? If you're willing to plant tongue firmly in cheek, you'll agree that he went to Siemens. And that brings up a new question: Isn't it time we reconsidered his record?

Another Great Nonpartisan Political Idea

2006-11-11T23:40:00.000-05:00

Monty's Bluff has a clever idea: Let's make it easy for the media to hold politicians accountable for their past negative ads. The catchy-and-descriptive moniker: "The Integrity Boomerang Project." Best of all: You can 'recycle' junk fliers and campaign material by sending them to the Project to provide grist for 2008's well-deserved-negative-rumor mill.

The Fed: Even Good Data Might as Well be Bad Data

2006-11-11T23:35:00.000-05:00

The Big Picture just won't give the Fed a break: First they get nailed for squabbling with one another over bad data, and now it turns out that even good data are incredibly unreliable: "Zero was within the 90% confidence interval for the monthly change for nearly every month for the past 2 years!"

Orson Card's New Multi-Multimedia Franchise

2006-11-11T23:21:00.000-05:00

Video games are a viable storytelling medium, but the trouble is that video games always have the same protagonist, which is the player. And he always has the same set of motivations, which is to kill and don't die.

Scifi genius Orson Scott Card is writing a new combined novel/videogame (with comics and movies to follow) to take advantage of both media. Like many creative professionals, he's pretty annoyed that the video game industry doesn't give auteurs free reign over their products. That's not quite true, but it can't hurt to have another story-conscious game to make up for the dozens of mindless, plotless, graphics-intensive "Doom" derivatives on the market today

When Good Intentions Meet Bad Economics

2006-11-11T22:57:00.000-05:00

The British government intends to fine criminals who make money selling their stories. I won't debate the morality of what is either a) Letting people profit a second time from heinous acts, or b) Censoring people because you don't like them. But this line stood out: "Ministers insist the move is targeted at the criminal and will in no way affect the publishers of papers, magazines or books." They're forgetting a trivial lesson of economics: The legal incidence of a tax does not affect the economic incidence (unless one side can process the payments more cheaply or they react differently to price changes).

The usual proof for this involves charts, equations, and a college lecture (at least, that's how I learned it), but it's pretty simple when you consider a real-world example. One of the selling points for Social Security is that the employer 'pays half'. From the employee's perspective, this employer half never existed -- it doesn't get deposited into any account the employee can see, but it doesn't get confiscated, either. It might as well never have existed. But to the employer it's a different matter: That extra X% is just another X% added to the cost of hiring someone. All else being equal -- and in cases like this, it is -- that just means that the employer sees a new employee as X% more expensive, and they'll act (through pay cuts or layoffs) accordingly.

Even if the British government's intentions are perfectly noble, they're thwarted by the laws of economics: If they prevent criminals from selling interesting stories to the media, all the clever rhetoric they can muster* won't keep them from hurting journalists and authors, too.

*And if there's one reason to applaud British politicians, it's their rhetorical musterings.

Paul Graham's Latest Essay...

2006-11-11T22:48:00.000-05:00

Mind the Gap:

Once it became possible to get rich by creating wealth, society as a whole started to get richer very rapidly. Nearly everything we have was created by the middle class. Indeed, the other two classes [serfs and lords] have effectively disappeared in industrial societies, and their names been given to either end of the middle class. (In the original sense of the word, Bill Gates is middle class.)

Paul Graham has a new essay. Needs minimal comment. Go read it, then consider this: "In the real world, wealth is (except for a few specialists like thieves and speculators) something you have to create..." I sincerely hope that by 'speculators' he meant 'people who gamble using financial securities', not 'people who invest in securities based on future outlook, rather than present circumstances'. It's pretty hard to write off the latter class as not producing wealth, since they aggregate incredible amounts of data, theory, and extrapolation, and put a single dollar value on rather volatile streams of income. If we didn't have speculators, the law of supply and demand would be myopically constrained.

A Minor Difference of Opinion

2006-11-11T22:39:00.000-05:00

24/7 WallStreet claims that the Microsoft/Universal deal is bad news for Apple, because they'll need to placate the music companies. Not quite: Microsoft is paying a literal penalty for being late to the digital music market, and not being able to promise music companies a revenue stream. Apple is compensating them piecemeal; Microsoft is doing it in bulk. This is more or less what you'd expect, since Apple got to the market first and had no idea what kind of cost they were imposing on music companies. Better to hedge by paying them per song than bet big by paying per player. Microsoft has more information (and more resources), so they can afford to take the route they took.

"Antitrust 2.0"

2006-11-11T22:36:00.000-05:00

Slashdot asks if Microsoft's price increases for Vista are so egregious that the company deserves another antitrust suit. I doubt it: There are better competitors out there already -- at this point, I'd rather use XP than Vista, and I typically alternate between OS X and Linux, but that's beside the point. Antitrust law exists to keep companies from abusing a monopoly position: It says nothing about their decision to charge unnecessarily high prices and lose all of their customers. This is what I tend to think of as a 'pocket lint' antitrust case. Nobody I know of sells pocket lint, so if I offered to sell someone pocket lint at $600/ounce, I would 1) Be a monopoly provider, and 2) Be demanding a ridiculously high price. It might be a tad sanguine of me, but I'm not too worried about being slapped with an antitrust suit.

"Personal reasons"

2006-11-11T22:28:00.000-05:00

Usually, 'personal reasons' is the Null Excuse for quitting: It can mean anything from personal scandal to incompetence to boredom to disagreements with other managers. What it almost never means is 'personal reasons'. At least usually. The story is slightly tragic, and reassures us that either honesty is still alive or the Broken Clock Principle remains valid.

Minimum Wage Hikes Aren't a "Free Lunch"

2006-11-11T22:26:00.000-05:00

To picture how this works, think about the grocery bagger in the supermarket, a classic low-wage service job. Supermarkets hire grocery baggers for the minimum wage, or close to it, because it's a perk that makes their customers' experience a bit nicer and helps move the lines along, possibly requiring fewer cashiers, who cost more to hire than grocery baggers.

Now, if you pass a law saying everyone, including grocery baggers, has to be paid $10 an hour, what happens? The supermarket probably hires fewer baggers, or has them work fewer hours. Perhaps they decide they only need baggers between 4 p.m. and 7 p.m. If you put the minimum wage up to $20 an hour, shoppers bag their own groceries. This is so clear that it's taken some time for the defenders of an ever-rising minimum wage to come up with an adequate theory to obscure it.

The Wall Street Journal condemns minimum wage hikes as economically harmful. It's a pretty trivial conclusion: Any time you distort economic behavior (whether you're a government imposing regulations, or a private individual imposing externalities), you prevent people from acting in a way that's economically beneficial. What's weird is that it's turned into a populist talking point that a higher minimum wage helps poor workers. Maybe reframing the argument would be effective. Instead of a 'minimum wage', call it something like "The Poverty Penalty": If you can't earn what we say you ought to earn, you're not allowed to work at all.

My political opinions are usually pretty nebulously pro-market and anti-interference, which doesn't lead to many serious policy suggestions besides "Don't do it!" But there is one law I think would be pretty beneficial: If a bill is passed by a majority, the minority party gets to pick the name. Whatever your political opinions, you've got to admit that this would make political discource 1) More honest, and 2) More fun.

Political Update: Gridlock Still Worse Than You'd Think

2006-11-11T22:10:00.000-05:00

Peter Schiff waxes Wildean on the prospect of gridlock:

However, my fear is that we actually get something far worse: bi-partisan cooperation. The most likely result of both parties "working together" is Democratic support of Republican pork, in exchange for Republican support of Democratic pork, which will wreak further havoc on the country's already dismal balance sheet. In addition, grandiose and ill conceived pet programs on both sides have much better chances of actually being passed. The last thing we need is Democrats and Republicans actually working together.

Couldn't have said it better.

More Coase!

2006-11-11T22:01:00.000-05:00

Thursday's of the Microsoft/Universal pact was just the beginning: Today, Limewire, the filesharing company, has promised to block distribution of Adobe software. Irate software pirates excluded, this is a great move for everyone. As more software/hardware companies cooperate to deal with the proliferation of filesharing, they're probably going to adopt the same negotiating tendency. Coasian bargaining over easily-shared software needs a snappy psuedo-GEICO slogan: "A fifteen minute call could save you months of legal wrangling, millions of dollars in legal fees, and legions of irritated customers complaining to BoingBoing about being treated like thieves!"

General Update

2006-11-11T21:36:00.000-05:00

You might notice some slight formatting changes to this blog. Due to the slightly kludgy nature of Blogger's template code, I can either have a reddit submission button on all of my posts or none of them. And I like reddit too much to deprive it of my posts, even when they're four lines and one link. If you don't visit reddit, you should: It's everything the web should have been all along, and the discussions are lots of fun if you're sufficiently thick-skinned.

I've also added two donation buttons: One for Paypal, one for Amazon.com. If you're ever feeling bored and generous and would like to pay for, say, this week's reading or this month's groceries, your unnaturally charitable expenditure is a click away. This blog is definitely fun on its own merits, and it's gotten my foot in the door for a job (which I ended up not getting, unfortunately), but it's taken a pretty significant investment in time and effort, so the occasional tip would be appreciated. I've also slightly expanded the contact information: You can now contact me via AIM (same screenname on Yahoo! IM, too). I'm going to make it pretty tough for me not to notice a breaking story.

Finally: As my profile notes, I'm currently looking for finance-related work somewhere in New York. My blog definitely presents a better (and hopefully more accurate) picture of my qualifications than my résumé does, so I'm currently hoping that some hedge fund maven will stumble on it and consider hiring me for a while. I've worked part-time at a money-management company a few years ago, and (as this blog hopefully demonstrates) I'm pretty obsessed with the stock market. I'm sure there's room at a local fund for one more junior-junior-analyst or assistant-assistant; it's just a matter of staying patient and staying interested. On the other hand, stating it explicitly can't hurt, so: If you or someone you know is looking for a rather cheap, unusually qualified, and unnaturally spirited analyst/researcher/writer/administrator, I'd certainly appreciate hearing about it.

Thanks!

Tech Companies in a Bidding War Over Congress

2006-11-11T18:11:00.000-05:00

Slashdot notes that tech companies gave about two thirds of their money to Republicans this election cycle -- proof that even people on the cutting edge can't handicap political races.* They are, of course, in a petty and harmful bidding war with the telecom companies over net neutrality, which is going to be a windfall for content providers or content transmitters, but definitely not both. It's a tad depressing that companies dumped over a hundred million dollars into arguing about who gets to decide what kind of content is transmitted, rather than investing in the infrastructure and content itself. The sooner Congress reaches a decision -- any decision -- the better.

*Of course it's cynical to assume that they aren't acting on principle, but they're for-profit corporations -- if they gave based on principle, instead of pragmatism, they'd deserve to be sued by their shareholders.

Somebody Get This Man an Etrade Account!

2006-11-11T17:55:00.000-05:00

At SeekingAlpha, Phil Davis uses lots of bold and italicized text to emphasize the especially wrong parts of his narrow and shortsighted understanding of low inflation, which -- straight out of a warmed-over William Jennings Brian speech, is actually a conspiracy to rob the innocent workingman of the spoils of his labor. The argument rests on the usual conspiracy theory tactic of assuming an Us and a Them and nothing in between -- in this case, the "Us" represents consumers and the "Them" are bankers. And it's true that if inflation is unexpectedly high, those of us who borrow lots of money will find our debts easy to pay off, while those who lend money will see the value of their investment diminished. Of course, if inflation is bound to rise, lenders will adjust their rates accordingly, so the only people who benefit will be lucky borrowers; those of us silly enough to save money will see our foresight penalized to subsidize credit card addicts and over-mortgaged real estate flippers.

But it doesn't take an extreme situation to illustrate the fallacy of that argument: Those banks -- the evil beneficiaries of our hard work -- are publicly traded companies. If you think they're a good investment because the deck is stacked against the consumer, you should consume a little less and buy some Citigroup stock. If the only difference between being part of the 'conspiracy' and suffering from it is a single call to your broker, there's no excuse to whine about unfairness when you could be cashing in on it.

At least they're trying...

2006-11-11T16:07:00.000-05:00

Google is tweaking their algorithm some more to punish sites that consist entirely of ads and keywords. Good idea? I'm not so sure: There is (or ought to be) a place in search results for sites that consist entirely of ads. We already have a few of those in the dead-tree media -- trade magazines and certain flimsy weekly papers and exclusively ads, and they still accomplish something for consumers who are looking for a chance to consume, rather than for reading/viewing material.

And anyway, it's not like these sites try to hide their purpose. If they're all ads or keywords, there isn't any room for subterfuge.

The Financial Stanislav Petrov

2006-11-11T14:39:00.000-05:00

Ugly discusses some career advise from futurist and inventor Ray Kurzweil, and how they relate to his fears that human traders will some day be obsolete.

I wouldn't worry too much about this. People are great catalysts for action, even if they need a lot of technological leverage to get that action accomplished, and we're much less linear than computers, which means we'll be able to spot weird and unnatural correlations and opportunities faster than a pure number-crunching machine can. One of my Forex-trading friends recently wondered just why he's necessary: All he really does is back-test patterns, wait for his computer to give a signal, and then input the order. Superficially, there's no need for a flesh-and-blood intermediary in that process. The computer should be able to handle it all. Unfortunately for determinists, futurists, and singularitarians, humans are still able to pick up on what computers miss, which is why I refer to my Forex friend and all his fellow computer-assisted traders as the financial Stansislav Petrovs.

"Does the world's largest philanthropic foundation suffer from the same investing affliction that cripples many mere financial mortals"?

2006-11-10T17:34:00.000-05:00

Henry Blodget blasts the Bill and Melinda Gates Foundation for being insufficiently aggressive with their investments, then backs off a bit to consider the scope of their generosity and some of their future plans. It's worth reading: Sometimes the dollar value of a charitable donation is a poor reflection of the good done by that donation, simply because the gift was invested poorly or spent too soon. The Gates foundation is too valuable a resource to let that happen.

More on Gridlock

2006-11-10T17:23:00.000-05:00

Not so long ago, I noted that gridlock might not be so great for the market, since it turns pork-barrel spending into a bargaining chip for corrupt pols. My paranoia is justified: Several freshman congressmen have terrible records of incompetent work and elastic morals.

Macro Update: Don't Be Scared

2006-11-09T07:04:00.000-05:00

The latest macro data will, of course, rattle investors -- and will inevitably annoy them more than it should: China's trade surplus last month was $23.83 billion, doubling the number from a year ago and blowing away the $17.7 billion forecast. As usual, it's a pretty nice deal for as long as it lasts: Not only do they make US interest rates artificially cheap, stimulating investment growth, but they provide us with the consumer products we'd otherwise sacrifice by investing so heavily in growth. Granted, this needs to reverse, but it's only going to reverse if China becomes a relatively better place to invest, which will only happen if they further deregulate their economy, which (naturally) will mean dismantling some of the protectionist measures that gave them their trade surplus in the first place. The future is uncertain, but it's by no means scary.

It Takes Some Serious Paranoia to Make Microsoft and Universal Play Fair

2006-11-09T04:59:00.000-05:00

I've long been fascinated with Coasian bargaining, so it's nice to see it appear somewhere outside of an Economics exam: Microsoft has promised to pay Universal Music a fee for each new Zune player they sell, to compensate Universal for the inevitable music piracy such sale generate.

I don't want to apply some kind of reflexive political slant to a straight news article, but the timing demands it: Perhaps when they aren't so sure about the motives of the arbitrator, businesses are willing to fix externalities through negotiation, instead of by petitioning the government. For now, it's an isolated example, but if we see more businesses preemptively settling possible disputes rather than roll the dice with lobbyists and left-leaning legislators, it could be the beginning of a (minor) new era. Cross your fingers if you must, but I won't hold my breath.

On Cargo Planes and "The Flying Luxury Hotel"

2006-11-09T04:47:00.001-05:00

24/7 Wall St. argues that FedEx's recent decision to cancel a major Airbus order is proof that the Airbus A380 is obsolete. While I definitely respect the thesis (smaller planes are behind Southwest Airlines' success; they're faster to unload and thus more efficient), I do feel the need to point out that some new technologies are moving in exactly the opposite direction.

Of course, that weird post-blimp is being built by a tiny startup in California.

Slashdot Solves Exactly the Wrong Problem

2006-11-09T04:38:00.000-05:00

Now that Diebold is losing friends over their comparatively small voting machine business, which has cost the company more in bad associations than it could ever earn in profits, they're considering ditching voting machines altogether and returning to their earlier tradition of ATM machines. Slashdot got ahold of a particularly Slashdotty alternative that includes publishing bug reports, testing in public, and hiring well-known geeks for troubleshooting and suggestions.

Slashdot is a site devoted to the joys of tinkering with new and weird technology, so this is exactly what you'd expect of them. Unfortunately, they're forgetting that in the corporate world, sometimes the best solutions is to ignore the problem and move on to something else. Diebold has nothing to gain and more of a reputation to lose if they keep selling faulty voting machines with the same brand that billion-dollar banks need to rely on. It's time for them to write off electronic voting as an experiment best continued by someone else.

Is Gridlock Really Beneficial?

2006-11-08T23:12:00.000-05:00

Even before the first votes were cast, the consensus I heard was that this election would be good for the markets because gridlock keeps the government from effectively interfering with business. As has been noted before, politicians respond pretty strongly to contributions, and any obstacle to letting them reward their benefactors would, of course, make the overall economy more efficient. Even the normally partisan James Cramer thinks that gridlock is good for the government, and Democrats are not.

I beg to differ. As Reason's Julian Sanchez notes, gridlock turns pork-barrel spending into a negotiation tool. When there's a large majority behind any given bill, extra appropriations don't need to be tacked on (not that they won't, but the probability is lower). But when it only takes a single vote, or half a dozen votes, to get a bill passed, the temptation to tempt fence-sitting representatives with extra spending in their district is pretty irresistible.

So even though I think Cramer's on to something when he points out that a Democratic majority is anything but pro-shareholder, I'd honestly prefer it to the House lashing out with random construction projects and useless military bases every time a bill's passage looks doubtful. As more pundits point out just how moderate (see point three) the new representatives are, they're giving politicians all the evidence they need that fence-sitting and side-switching will be tolerable for the next two years.

Later in his analysis, Cramer makes an even better point:

Domestic security's a winner today. Has to be. The Democrats love to spend, just like the Republicans, but they like to spend it on homeland security to demonstrate domestic toughness.

Unfortunately, the purest plays in domestic security tend to be pretty junky stocks: L-1 Identity Solutions, which I've been following since just after the 9/11 attacks, is unprofitable, deeply in debt, and incapable of growing its way out of the problem or shrinking itself enough to make the situation manageable. One of my old favorites, IPIX, now languishes at penny-stock status: Even their vaunted political connections didn't do much but temporary bolster the stock price.

The IPIX disaster is instructive. The company was a timely play with some serious political backing, at a time when the US's domestic policy could have subsidized them for years. Unfortunately, they squandered that investment. The stock trades at $.03, down from $27.34 in their heyday. The moral of this cautionary tale: No matter how perfectly the political stars align, it's pretty easy to lose money in small companies with heavy hype.

At the same time, larger security companies dissipate the benefits of being in that industry by being in plenty of other industries, too. FLIR Systems, one of Cramer's explicit recommendations, lists "condition monitoring, research and development, manufacturing process control, airborne observation and broadcast, search and rescue, drug interdiction, surveillance and reconnaissance, navigation safety, border and maritime patrol, environmental monitoring and land-based security," as uses for their cameras. A major boost in airport security orders would be a minor blip on their next quarterly statement, and such blips are not the stuff fortunes are made of.

It's easy to be pessimistic about the political situation no matter what the results are, because it's right to be pessimistic. No matter who we elect, they're going to owe favors and make promises, most of which require taking from one group and giving to another. Unless you're extremely lucky and well-connected, you're more likely to find yourself on the losing end of these deals, especially when you consider the transaction costs and uncertainty. It's probably best to just write off the lottery of elections and policy as yet another cost of doing business.

A Long-Delayed "Good Day"

2006-11-08T22:45:00.000-05:00

Vista is finally done, and will ship on time. Rejoice and be glad, or just quote Microsoft apparatchik Jim Allchin: "It's rock solid and we're ready to ship. This is a good day." A while ago, TheStreet.com had an article (which I can't locate at the moment) on Microsoft's stock performance in the year after a major OS release. It was usually positive. On the other hand, the last release was in 2001, and Microsoft's performance from their IPO to the tech crash is legendary; it could just be a reflection of the general trend. The market isn't too enthusiastic about Vista so far -- probably because MS's investors are exhausted from waiting so long. As usual, I can't think of a good reason to upgrade to Vista when superior eye-candy and security are available for free. Perhaps consumers will confound me and common sense once again and rush out to buy Vista.

Partisan Portfolios

2006-11-08T22:42:00.000-05:00

I'll get to the election in a bit, but this article from a few days ago struck me as notable: As it turns out, Republicans and Democrats in Congress tend to buy pretty much the same stocks you'd expect them to.

For example, it turns out that oil giants BP and ExxonMobil as well as tobacco/food company Altria are overwhelmingly favored by Republicans, while Democrats are heavily into tech stocks such as Sun Microsystems, Texas Instruments, and Vodafone, the British-based mobile-phone giant.

The only really surprising result: Republicans favor BP, despite the company's vast investment in alternative energy and even vaster investment in pro-green PR. Both sides are savvier than we'd be tempted to give them credit for: They saw right through the hype.

Company Summary: Brink's Co.

2006-11-08T22:24:00.000-05:00

When I invest, I tend to use stock screens to find interesting companies. Unfortunately, most of the best companies I've found (or missed) wouldn't show up on a typical screen. Good returns can come from statistically undervalued stocks, but great returns tend to result from companies that are either qualitatively superior to their peers or have an unexpected turnaround. With that in mind, I've started picking companies more or less at random to see if there's anything of interest in their financial statements, annual reports, proxies, etc. Should be fun -- or at least informative. I'm trying to balance S&P 500 companies with smaller, less well-known enterprises. For the first group, I'm just working my way up a list of all 500 index members in order of annual revenue. For the second, I'll look at whatever catches my eye.

First up: The Brink's Company, a $2.62 billion market cap security firm mentioned on this 13D Tracker post. The latest news: Activist firm Steel Partners owns 8% of their stock. Reading through Brinks' most recent annual report (.pdf) is pretty dismal: In the last five years, they've managed anemic revenue growth of about 7% per year, while earnings per share have dropped 33.9% (even as book value per share increased 58.6%). The last five years haven't exactly been unkind to the industry as a whole, so these numbers are particularly disturbing. There's a definite trend of underperformance apparent in that kind of result.

Brink's is in the rather risky business of physically transferring currency: They operate armored cars, restock ATMs, and have recently branched out into home security. In past years, they've been involved in a few unrelated raw-materials businesses, which gave them plenty of easy profits and legal headaches, so in the past few years they've divested, streamlined, and dumped the returns into a stock buyback program.

The shareholders' letter describes the same mediocre performance noted above in more glowing terms: The company has recently ditched their coal subsidiary and the attendant legal liabilities to focus completely on the security business. I've read enough about conglomerates to see this as the great news it is, but it's a bit premature to label this turnaround a success given that it 1) Just started, and 2) Hasn't produced any noticeably good results.

Interestingly enough, their actual 10-K filing belies the earlier statement about shedding liabilities. In the second paragraph of their description, they note that:

In prior years, the Company disposed of its coal, natural gas, timber, and gold businesses, however, the Company retained significant liabilities from these operations.

Later in the shareholders' letter, they elaborate on their growth strategy, the classic 'leveraging our brand' trick of selling a specialized product to a narrow group of customers (in this case, security to banks) and hoping it will appeal to a much larger group (selling alarm monitoring services to residential customers).

Interestingly enough, the strategy looks like it might work -- even though their earnings and revenue don't have much to show for it, the home security segment of the company increased its customer base by 11% last year and 10% the year before. Assuming the cost of acquiring a customer is more front-loaded, this growth in assets could start positively impacting their financial statements as soon as they give up on chasing growth.

Deep in the 10-K, they disclose the actual size of their legacy liabilities. Retiree medical benefits (including Black lung compensation) total a brutal $672 million, even accounting for the money they've set aside to pay for it. This is more than 15 times their last year's profits from continuing operations -- meaning that there's a definite time limit to their plan to keep sacrificing current profits in the name of future growth.

More recent filings are slightly more optimistic. As of their latest quarter, annualized earnings from continuing operations total $2.12/share, for a P/E of 25.4. A heady multiple, especially for a company that hasn't proven its current strategy or fully left behind the mistakes of previous tactics. Perhaps Steel Partners sees something I don't -- the most cynical strategy would be to find a way to skirt paying their medical liabilities -- but at this price, Brink's looks overpriced.

Morgan Stanley Faces Down the New York Times

2006-11-08T21:13:00.000-05:00

The New York Times reports (perhaps grudgingly) that Morgan Stanley is playing dissident shareholder and demanding that they change their corporate structure to give shareholders who aren't part of the Sulzberger clan a voice. I've held stock in NYT for a while, and a lot of what drives that investment is the hope that they'll stop treating it like a family plaything and start running it like the competitive media company it is. Management has invested a lot in making the New York Times brand a valuable asset, and it's time to assure shareholders that they're going to get a fair return on that investment.

More on the Fed's Disputes with the Fed

2006-11-08T21:09:00.000-05:00

I mentioned earlier that members of the Fed were feeling a little peeved that they acted on what turns out to be some pretty bad data. Safe Haven points out that they could have avoided the whole problem if they'd just be a little less ambitious.

Let me offer an alternative prescription to a Fed bent on macro-managing: Look at data series that never get revised or that have a lower probability of major revisions. Now, just because a series never gets revised doesn't necessarily imply that it sends a strong message about the performance of the economy. But if such a series does regularly send an accurate signal, it might be worthy of the Fed's consideration and, even more importantly, investors' consideration. Two series that come to mind are the ISM manufacturing index for New Orders and initial jobless claims.

Not That we Need to be Reminded, but...

2006-11-08T21:03:00.000-05:00

Many highly confident prognosticators have no idea what they're talking about. This handy chart matches crazily optimistic statements to a chart of the stock market from 1927-1933. It's depressing (or amusing, if you're into that sort of thing) reading.

Does Morningstar's Low Opinion of ETFs Reveal a Conflict of Interest?

2006-11-08T21:02:00.000-05:00

Random Roger is properly outraged at this discussion of Morningstar's bias against exchange-traded funds. One would think that since ETFs tend to track an index, while mutual funds are usually actively managed, any bias would go the other way: Unmananged indices tend to outperform mutual funds, even before fees. But Morningstar has a financial interest in keeping mutual funds popular, since such funds are a major revenue source for them. One possibility: ETFs don't usually have a 'human face'. Actively-managed funds get a great PR boost from having managers who are willing to chat with Morningstar's analysts or other members of the media -- an advantage ETFs are missing.

How do you get Euro-Socialists Excited About Making American Hedge Funds Richer?

2006-11-08T03:04:00.000-05:00

Get them to invest in Uranium. This is one of those bull markets based on blind faith in a very foolish assumption. Right now, that assumption is that uranium will continue to be the cheapest way to stay within the bounds of the Kyoto protocol, despite the fact that its price has gone up 66% this year alone. When French and German politicians realize that a significant portion of their government deficit is showing up on the profit statements of American hedge funds with long positions in uranium producers, they'll probably switch to wind or solar and the bubble will burst.

An "Idiot Call" or a Misunderstanding?

2006-11-08T02:20:00.000-05:00

The usually-reliable 24/7 Wall Street blog misses a rather obvious point with this critique of A. G. Edwards' analysis of Tribune Co.. The problem, as stated, is that if the company isn't acquired, it drops $3 or $4, but if it is acquired, it rises $9. According to A. G. Edwards, that makes it a sell; according to 24/7, it's an obvious buy. I'm afraid I need to take the side of Goliath here and point out that all the analyst is pointing out is that it's much more likely for the company not to be bought out (the odds would be at least 3:1 against for this prediction to make sense). A binary outcome doesn't always imply an equal probability, options theory notwithstanding.

The Next "Next Google"

2006-11-08T02:02:00.000-05:00

Angel investors and venture capitalists have pitched in another $12.5 million for a stake in yet another Google killer. This time, the killer feature is natural language recognition (the article provides a tasteful example of how this works). While this could be disruptive, it's pretty difficult for anyone without Google's finances and clout to seriously challenge them. Most of the Google users I know don't mind typing in a slightly obscure shorthand to get the best results possible. In fact, it's likely the Powerset's investors are really angling for an acquisition by Google or Yahoo!. There isn't much room for a new standalone search company, but Google and Yahoo! are voracious.

TheStreet.com Botched This One

2006-11-08T02:01:00.000-05:00

TheStreet.com usually charges for their commentary, so I have no idea how good it is. But some of the free advice they give is downright awful, as in this penetrating and incisive report on how funds with concentrated portfolios of small companies are, in fact, more volatile than diversified funds of large companies. It's one thing to repeat frequently-ignored wisdom; it's another entirely to imagine that investors are oblivious to a rather obvious fact and then berate them for their irresponsibility.

Now they tell us

2006-11-08T01:50:00.000-05:00

It's not much of a slowdown yet (and might only be a hiccup), but as the Big Picture blog reports, members of the Fed are already blaming each others' bad data for the low rates that prompted the housing boom in the first place.

Mr. Fisher noted that subsequent revisions show PCE inflation was actually a half a percentage point higher than originally estimated. "In retrospect, the real Fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been," Mr. Fisher said

As another frequently-blamed government official might put it, you make your policy with the Fed you have. If Fisher had genuine issues with the data he was seeing, it would have been better to bring them up when it was still possible to avert whatever disaster he's worried about, rather than now.

Political Interlude

2006-11-08T01:24:00.000-05:00

Ron Sen is pithy.

Sometimes, it's Nice to be Bored

2006-11-08T00:59:00.000-05:00

In its 76-year history, Dodge & Cox has launched precisely four mutual funds. The firm doesn't advertise and has no marketing department. Yet investors are so taken with its funds that it has had to shut half of its tiny lineup to new customers to stanch the flood of money.

D&C have done something very clever: They've given up on being clever, and stuck with doing what's already been proven to work. They buy and sell rarely, lurk in unknown or unloved sectors, ignore mainstream financial opinion, and have a great record to show for it. Anyone who's tired of digging through 10-Qs or coming up with new trend-tracking algorithms would do well to stash some money in one of their funds -- the best of which are unfortunately closed to new investors.

Did Buffett's last prediction miss the mark?

2006-11-08T00:55:00.000-05:00

The New York Post has some unreasonable fun at Warren Buffett's expense: Last year, Buffett derided the purchaser of his Laguna Beach home for a price that amounted to $60 million per acre. A few hundred thousand dollars in improvements and six months later, and the house was sold for nearly $2 million more than the original price. If Buffett had been calling a peak in the real estate market, it woul be one thing -- all he really said was that the price was too high to make sense. As with plenty of past bubbles, the fact that a price is absurdly high doesn't mean that it can't go higher -- but the fact that it can get higher doesn't mean it's not bound to crash some day.

When a price hike is more than a price hike

2006-10-28T13:18:00.000-04:00

I hope I never have to file this under the 'could be worse' category, but fares for Zimbabwe's national airline are up 500%. They cite the usual excuses: Official inflation at 1000% per year, unofficial inflation at 4000% per year, but a better answer might be 'cluelessness'. Not, of course, that Zimbabwe in particular happens to be clueless: It's just generally true that some commodities are really hard to accurately price; they have weird supply/demand equations with multiple optimum-looking intersections, and at different prices, two services that appear the same can actually be viewed as radically different.

At black-market rates before the price hike, it cost $250 or so to fly from London to Zimbabwe. At that rate, if the airline was trying to play any particular role in the economy, it was trying to provide a subsidized good to an interest group (as some observers note, third world governments are incredibly effective at subsidizing their own apparatchik). At the new price, 1) It's more of a luxury good, and 2) As such, more likely to be used by official travelers -- who, themselves, will be slightly more likely to use the official exchange rate instead of turning to black-market sellers.

By simply changing the price of the product, Zimbabwe's airline radically affected the nature of what they were selling, and had an outsize impact on customer behavior. Economic history is full of even more radical examples: Ford repricing cars so they competed with other transportation providers instead of other luxury goods; Gates raising the price of software consulting until it was at the forefront of the industry, instead of an afterthought; not to mention the combination of high bandwidth and large hard drives forcing music to undergo the opposite change, from product back to service. This price hike isn't just a symptom, and it isn't just a stopgap: It's profound.

Whatever happened to the "Five Dumbest..."

2006-10-27T12:16:00.000-04:00

I used to mention TheStreet.com's Five Dumbest Things on Wall Street This Week column. It used to be a great deconstruction of financial doublespeak and confused assumptions, but over the last few months, it's gotten formulaic, gimmicky, and boring. The latest column repeats essentially the same punchline over and over: If these guys really meant what they said, everything they said sure would be inane. Marginally funny the first time, but it gets pretty old when it's repeated five times a column for one column each week.

Whats next for 'Social Networking' sites?

2006-10-27T11:53:00.001-04:00

The Wall Street Journal reports that social-networking sites are losing visitors according to everyone who doesn't work for a social networking site. Understandable: Facebook, Myspace, Friendster, and the like don't offer anything that wasn't already showing up on personal pages a decade ago. The only actual value they add is 1) Forms to fill out instead of blank pages, and 2) Aggregation of information from selected 'friends'. The inanity of the entire trend lends itself pretty easily to parody, but it ought to make a savvy entrepreneur think: These sites host a few kilobytes of text and a much larger volume of movies, pictures, and music, but the only reason all that content gets centralized on a single page is that no one has found an effective way to decentralize it. The day someone learns to replicate Facebook's 'feeds' and Myspace's 'bulletins' (hint: It's a matter of getting people to comply to standards, not making up a new technology), those sites won't have a viable product, nor will they have any realistic source for revenues. Between user defection and inevitable obsolescence, they don't have a chance.

More on Vista

2006-10-27T10:32:00.000-04:00

The Wall Street Journal's Walter Mossberg recommends 1) Not buying Vista yet, if you're going to buy it, 2) Not upgrading to Vista, if you're going to upgrade, and 3) Avoiding it altogether by buying a Mac, if you really care. All sound advice. As Microsoft has gotten more dominant, its new systems have gotten more lackluster; now that Vista is the default choice for computer buyers, the company has reacted in kind and made a pretty cautious release that catches up to fringe competitors (Linux, OS X, the BSDs), without doing anything daring or risky. This is pretty reasonable for Microsoft, since the only way to lose their current franchise is to actually risk it, but it doesn't do much for people who just want a decent computer. OS X (and, to a lesser extent, Linux) do exactly what any kind of software should do: Let you accomplish what you want, and lull you into forgetting that the software is even there.

That's Certainly One Strategy...

2006-10-27T10:12:00.000-04:00

Microsoft's basic version of Vista will be so terrible that everyone will immediately upgrade. I have no idea if this is true: Vista looks like a pretty solid product with a few kinks to fix. Most of what the basic Vista package doesn't include is pretty useless anyway; the kind of thing that some people will pay extra for but that nobody will miss (I've gone without Aero or Media Center for all of my life. I think I can stand waiting a few months for the price to drop). Of course, if Microsoft's strategy really is to make a terrible product that everyone upgrades, it's a pretty last-ditch move: Their next round of corporate customers will probably just decide that it's easier to switch to Linux. Making customers pay you to stop irritating them isn't a sustainable business model.

""Now, I'm thinking I've got negative cash flow, I've got the credit line. I need to do more deals.""

2006-10-24T17:01:00.000-04:00

Now we know a little more about why the real estate market has been so overheated: Incomeptent twentysomethings armed with real estate seminars, leverage, and a strategic ignorance of the law. There's not much to add to it -- for a USA Today article, it's surprisingly well-written and informative.

Coca-Cola: Turning Pretense into Truth and Truth into Cash

2006-10-23T13:26:00.000-04:00

The engaging, readable, and probably pretty inaccurate For God, Country, and Coca-Cola has an epilogue about just what would happen if someone could steal the formula for Coke and start selling a knockoff. Test subject #1 didn't get too far: Coca-Cola has gotten the courts to deal with it, thus keeping the discussion of flavor-versus-brand and quality-compared-to-reputation question remains hypothetical. Or so they hope? The point of the formula thought experiment was that "Coke" is an idea, not just a flavor, and that even if you could mimic everything about it except the brand name, you wouldn't have a chance of competing. This case actually reinforces it: The only thing valuable about the formula is the mystique of a secret formula. It's pretty well-documented that any flavor you can dream of, someone can synthesize. What keeps Coke special is the extraordinary lengths they go to to keep it special. Probably a good lesson for anyone trying to create or preserve brand mystique -- a few of my coffee-aficionado friends complain that Starbucks just sells burnt coffee. While that may be true, they're also selling Starbucks.

When Nepotism is the Best Option

2006-10-23T11:18:00.000-04:00

Wrigley is up 13.52% today, on news that they've appointed Nike's William Perez as the first non-family-member CEO. It must be gratifying for him to know that the company's stock is worth a bit more because of who he is, and agonizing to know that most of that gain comes from who he isn't. Family businesses can certainly last a while -- someone worried about protecting a hundred-year legacy is way less likely to do something stupid to make the next quarter look good. It probably depends on the business, and in a business like Wrigley's, avoiding mistakes is much more important than making good decisions. The gum business just isn't going to change all that much, and bringing in someone familiar with sports shoes and bugspray just to put a new name on the letterhead causes more problems than it solves: If Perez is ever going to be anything other than Mr. Non-Wrigley, he'll need to do something revolutionary with the company, and a revolution is exactly what Wrigley doesn't need.

The Walmart Paradox: When did caution get so exciting?

2006-10-23T11:07:00.000-04:00

Figures. The day after I argue that big brand-name companies in the US can expand indefinitely, one of the biggest of all gains about $11 billion in market value by announcing that it's not going to grow so fast. So the secret reason Walmart's stock has been so tepid for the last few years was that they were chasing too much growth. Who knew?

During the next fiscal year, the company is targeting square footage growth will be around 7.5%. International square footage is expected to increase about 10% and U.S. square footage is expected to increase about 7%.

That's still a lot of new acreage to devote to generics and unknowns at disturbingly low prices. But it's definitely a good sign when at least a few executives know that the best amount of sales growth isn't always "More."

Missing the Point

2006-10-23T09:43:00.000-04:00

Not financial, but still interesting: 400 years ago, everyone completely missed the point of books. Now, we're all completely missing the point of computers. Some surprising data, some entertaining anecdotes, and the usual call to indefinite action: It's everyone's favorite kind of polemic.

Goldman Sachs: Investment Bank or Zaibatsu?

2006-10-23T09:23:00.000-04:00

Goldman Sachs has always been an alarmingly successful investment bank (the kind of place where, if Jonathan Knee's The Accidental Investment Banker is to be believed, 90% of employees think they're in the top 10%). But they aren't behaving like a traditional investment bank any more. In the 80's, a few banks tiptoed into taking a position in the transactions they backed, which had memorably awful results with the Southland deal, in which Salomon Brothers and Goldman ended up having a not inconsiderable sum tied up in a highly-leveraged deal in the middle of the most precipitous stock market decline in history.

As usual, this time everything's different. The locales are new, the profits are higher, and instead of $600 million lent to a chain of convenience stores, it's a $4 billion profit on a $2.6 billion investment in a Chinese bank. That's after six months (for an annualized return of 544%). While those numbers are incredibly impressive, they're the result of a Chinese investing public rabid for new stocks and a government desperate not to see one of their pet IPOs fail too soon. As long as everyone in China keeps finding mattressfuls of uninvested Yuan and the government remains as interested in keeping unpleasant secrets secret, this kind of profit will be normal. Of course, nobody is going to subsidize American investment bankers' yachts, Benzes, and third homes just so China will still look good on paper. All I can do is prepare myself to have told them so.

(This, by the way, isn't a recommendation to short any of the stocks mentioned. They can stay crazy longer than anyone can stay solvent, and for all I know they're going to extricate themselves from the mess just before it collapses. Goldman has drifted away from the i-bank tradition of making money off the house edge, but as long as they can still count cards or stack the deck, they'll be all right. I'm just noting that it's not as permanent as it might look.)

Don't believe the anti-hype

2006-10-23T08:56:00.000-04:00

Ford announced that their losses from normal operations went from $284 million to $1.2 billion, and by some strange coincidence they happen to have just realized that they also suffered massive derivative losses over the last five years, which they're writing off, too. This is a classic bad quarter turned into rotten opportunity: All of Ford's executives know that at a large enough scale, investors are pretty indifferent to the exact size of an extraordinary loss -- it's just a huge, unreal number. However, investors are incredibly sensitive to minute differences in profits. The more alchemically-minded accountants know that turning a single huge loss into a series of small profits is a pretty easy matter of juggling assumptions and tweaking estimates, so when an excuse comes along, this is what they do. I'm not sure whether the huge amounts that Ford is writing off now were showing up in 5%-above-estimates quarters past or will show up in quarters future, but either way I'd advise you not to believe the hype.

Yahoo! Finance should stop publishing Robert Kiyosaki, who is a mercantilist hack

2006-10-22T18:20:00.000-04:00

Others have already done a better job of debunking Robert Kiyosaki in general, but right now he's said a few ridiculous things that need to be debunked in particular. His recent essay on the declining value of the dollar promises more than it tries to deliver, and still delivers nothing worthwhile. His thesis is pretty unoriginal: We're importing stuff and exporting dollars, and it can't go on forever. All as true as it needs to be, but reciting the facts doesn't give you any information on how to benefit from them. That's where financial literacy comes in -- or, in its absence, Kiyosaki's blatherings.

He starts with a charming story about black-market currency trading in Hong Kong, pointing out that "Although the money I saved wasn't substantial, the lessons it offered in currency exchange were priceless." Interestingly enough, he never gives us these lessons. We have no idea what his 2% return on currency trading taught him, because the rest of the essay never mentions the incident or anything one could learn from it (noticing a price discrepancy should teach you that when governments have a stated rule but limited means of enforcement, breaking an economically nonsensical law can be net beneficial. That's an argument for a different post).

In 1971, President Richard Nixon changed everything by removing the U.S. dollar from the gold standard. Suddenly, the dollar was still the world's currency, but now it was backed by nothing. The United States was free to print as much money as it wanted, and the world went along.

All currencies are 'backed' by the fact that exchanging dollars for whatever you want is much easier than bartering for what's wanted by the person who has what you want. This isn't inconsequential -- it's basically true of any commodity that anyone has ever owned but not intended to consume. Currencies just happen to be a highly evolved and very specialized manifestation of the same concept that underlies everything from math to language to art: It's usually easier to think about, manipulate, and analyze representations of a thing than the thing itself. Money, as a representation of value, has a value greater than the 'zero' Kiyosaki offers as a fair price for the US dollar.

Because of this change, understanding foreign exchange became a bit more complex. Today, to understand the world of currency, you need to think a little differently -- essentially because things don't make sense.

What doesn't make sense? Since the end of the Bretton-Woods agreement, currency prices have been determined by supply and demand, just like everything else in the economy.

For example, today, the United States is perceived to be the richest country in the world. In reality, though, we're the biggest debtor nation in the world. And who are we indebted to? What many consider to be a Third World country: China.

Wealth and debt aren't mutually exclusive. Just look at KKR. Financial markets exist because the people with money are not necessarily the people who can earn the best return on money. As it happens, many foreign investors are entirely willing to bet that the US will remain an excellent place to invest. And as long as they're giving us the capital, why not make it so? The alternative is for us to accept lower returns in exchange for giving foreign companies lower returns (and, of course, decreasing the value of what we can import from them, harming their economies and making us materially worse off). To the extent that Kiyosaki isn't recommending reduced trade, his statements don't make sense. To the extent that he is, his statements are wrong.

The irony is that many Americans think we're rich and China is poor. Exactly the opposite is true.

I seriously doubt that anyone in the US or China (besides Kiyosaki himself) believes that this is true. Since Adam Smith explained it all, no informed economist has associated wealth with the quantity of savings that a government has built up. On the contrary, wealth is the result of trade, and trade is the result of non-interference with trade, whether by politicians or the demagogues who egg them on.

This excess funny money causes people to feel rich and almost everything to be more expensive. Today, stocks, real estate, automobiles, and gasoline become more expensive as the dollar becomes cheaper.

As usual, this is only marginally true. If we borrow money to import cheap cars and gas from overseas, it's pretty doubtful that our cars and gas will get more expensive. Inflation is caused by excess liquidity -- and if foreign central banks are sitting on bales of cash instead of putting it in the hands of consumers, they're obviously decreasing liquidity. And that should make you pause for a moment: Why would anyone hoard dollars if dollars are likely to decline? If Kiyosaki is right, Chinese and Japanese central banks are leaving billions on the table by stockpiling when they should be selling like mad. Unless they know something he's oblivious to (a nearly infinite domain). Every time a bank exchanges Yen or Renminbi for dollars, it's making a bet that Yen and Renminbi will underperform dollars. It's one thing to claim that they're making a misguided bet -- another entirely to pretend that they're completely ignorant of the consequences of their decisions.

While some people do become richer in this system, funny money actually punishes working people who save money. It devalues the value of your work and your savings, even though you may feel wealthier.

Finally! There's a hidden good point (though a bit of a cliché) in the essay: Inflation does, indeed, devalue savings while making you feel richer. If your bank account compounds at a merry 5% per year while the dollar loses 10% of its purchasing power each year, at the end of a decade you'll see a 63% nominal gain that actually amounts to a 43% real loss.

Since they can't spend those dollars at home, they simply lend them back to us so we'll buy more of their products. That would be like me going to my local grocery store and asking them for a loan so I could buy their tomatoes. A logical person would say, "That makes no sense." Yet it's exactly what happened after 1971, and to many highly educated people -- bankers and politicians, for instance -- it somehow does make sense.

The analogy breaks down in two places. First, the grocer's IOU, in this case, is an incredibly liquid product that can be exchanged nearly anywhere for approximately anything. If the grocer doesn't have any comparably liquid place to keep his financial resources, the trade could make sense. Second, we aren't just squandering money by buying 'produce'. We're using the investments to create the chips, software, movies, and music that more or less every global consumer is going to end up paying for. One thing macroeconomists tend to forget is that Americans are among the world's most jaded consumers -- we've been bombarded with ads all our lives, and tend to have a pretty decent memetic immune system for shrugging them off. Third-world consumers aren't so lucky; American clichés and catchphrases can be resurrected elsewhere with impunity and used to market all sorts of goods that American consumers have gotten tired of. This is, of course, one of the reasons we're hated for 'invading' other countries with brand-named, trade-marketed, mass-marketed goods. But it's also why McDonald's, Coca-Cola, and Starbucks have remained growth stocks for longer than anyone could have expected. Most of us have learned not to discount American companies' tendencies to never run out of third-world markets to overrun, giving us high-margin exports that simultaneously justify our trade deficit and other countries' investment in our companies.

Over the years, the yen got stronger and the dollar got weaker simply because we, as a nation, printed more and more money, all the while consuming more and producing less. Japan would lend us money and we would buy their products. Japan's economy boomed, and so did ours.

That's half of the story. It's the half that you'd guess if you hadn't done any research. What actually happened was a bit more complex: The Japanese central bank kept their currency artificially valuable to stimulate exports so they could accumulate foreign assets, which scared a few people and ended up harming them more than anyone else. They're still dealing with the consequences of that move, one of which is a persistently overpriced currency and an incredibly tortuous banking system.

The irony is that we accuse China of playing games with their money. It's more honest to say that China just isn't willing to play the game we want to play.

There are some sloppy collective nouns, here. "We," the consumers and investors of America, are indeed borrowing more than we save, importing more than we export, etc. But "China" is a bit more monolithic: Their fiscal policy is not determined by collective actions of hundreds of millions of individual agents -- it's artificially decided by their central banks, which have, indeed, been keeping the Yuan at a specific and artificial value. An action that makes sense when allowed is not the same when coerced (this is the difference between accepting a free sample and shoplifting an equally free sample, or saving for retirement instead of being taxed to pay for someone else's retirement). Drawing some kind of equivalence between what one group of individuals decides and a decision imposed on another group of individuals explains nothing.

If the oil-producing nations stop accepting the dollar and switch to gold or the Euro, things will definitely get sticky. The world might be tipped into a global recession and possibly even a depression.

Economic events are usually more continuous than that. An increasing number of countries may switch from the dollar to the Euro (if only to satisfy their more esoteric needs), but this will be reflected in gradually changing exchange rates, which will tend to produce exactly the actions that correct for the problem in question: As the dollar gets cheaper (because, for example, it's being dumped for Euros), US exports get cheaper for overseas consumers, while overseas goods get more expensive for Americans, tilting the balance in the other direction. The only way currencies can be persistently out of whack is if some form of regulation keeps them from tending towards their proper value. And since Kiyosaki can't reduce US imports by force of argument or force of will, it looks like his only serious hope would be to push for legislation. In short, the only way this imaginary problem will become real is if we take his advice and try to solve it.

The Corus offer: Not a great sign

2006-10-17T09:27:00.000-04:00

Steel is another business suffering from M&A overeat: An Indian company (representing 1.3% of the country's GDP) is offering $8 billion for a British steel company. The odds that this isn't an effort to keep up with Mittal Steel's acquisition-driven growth strategy are pretty low. But there isn't any good reason for a steel company to do anything but throw off dividends and diversify out of steel. The business as a whole has gone through about a century of overinvestment (first because the developed world's entrepreneurs overestimated long-term demand, then because the developing world's command economies associated steel with growth). The fact that these companies are doubling down on a dying business is just weird.

Kiyosaki and Trump are a waste of time

2006-10-17T09:04:00.000-04:00

The usual term for what I'm about to admit to is "Confirmation bias" -- making up a conclusion and then agreeing with any data that support it. Usually, confirmation bias is a bad idea, but when it comes to mocking popular bad ideas, we need all the confirmation we can get. As the WSJ reports, charlatans Donald Trump and Robert Kiyosaki are as unreliable as ever. Trump's career is barely worth considering, and Kiyosaki's has been exhuastively considered. But it's still nice to know exactly why they're wrong this time -- when I saw their latest collaboration in Barnes & Noble, I ignored it without a second thought. As the review notes, that was a good instinct.

"Raise rates, reduce coverage, and deny claims"

2006-10-17T08:47:00.000-04:00

Eugene Anderson and William Pasannante wonder why insurance companies make so much money from disasters. In the short term, of course, they should lose from unexpected disasters; in the long term, it shouldn't have any effect (underinvestment and overinvestment are, in the long term, equally implausible for about the same reason). What the authors ignore is that in the long term, two things will determine the profitability of the insurance business: Risk tolerance and the cost of knowledge. The less we're willing to take risks, the more valuable we consider insurance. On the other hand, the better we're able to predict things like floods or hurricanes, the less valuable it is to turn that risk-assessment over to large-scale data aggregators. In short, the insurance business is in a long-term campaign against better technology and the general tendency to gamble. In light of that, the fact that they're harvesting profits now is pretty understandable.

CME/CBOT

2006-10-17T08:36:00.000-04:00

The exchange boom is turning into an exchange bubble. As of six minutes ago, Bloomberg reports that the Chicago Merc has bought the CBOT for $8 billion in stock. Everyone in this business seems pretty desperate to get bigger, but the benefits of scale just aren't that great: The biggest exchange is the exchange of first resort, and the rest need to provide something unusual to compete. Buying them out is just a tacit admission of inadequacy, which for a market leader is not a great sign.

On the other hand, the market has been bidding their stock up on the rumors, so maybe the traders who sent this company's shares up more than tenfold in less than four years know something I don't. Or they're giddy and unthinking. Time will tell.