Dollars and Jens
Friday, October 31, 2003
The Nasdaq is overvalued
Happy Halloween.

Thursday, October 30, 2003
The release from the Bureau of Economic Analysis. The tables at the bottom provide a cornucopia of information. In particular, one of my questions was "How much did government spending contribute to this?", and the answer is "Not very." Last quarter growth was 3.3%, but half of that was due to government expenditures; this quarter government contributed almost nothing. It's a real number, folks.

latest numbers
GDP came in at 7.2%, well ahead even of the expected 6.0%; consumer spending did well, nonresidential fixed investment was at 11.1% (annualized), and the trade deficit narrowed. Initial claims at 386,000 again.

Tuesday, October 28, 2003
FOMC statement
The full statement. The money quote:
The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level.

FOMC statement
Rates unchanged as expected, expects to be able to maintain an accommodative stance for a substantial period of time. Bonds reactive slightly positively.

latest numbers
October Consumer Confidence 81.1 (79.3 expected), up from a revised 77.0 in September.

latest numbers
Durable goods up .8%; as Steve indicates, 1% consensus. FOMC has a one-day meeting today, any change in rates would be a major shock, so we'll be watching the statement and the bond market response to it 5 hours from now.

Monday, October 27, 2003
Latest Numbers
Existing home sales in September were reported at 6.69 million, against consensus estimates of 6.3 million. August's number was revised to 6.46M from 6.47M.

New home sales were 1.145M (1.125M expected); prior month revised to 1.147M from 1.15M.

Tomorrow morning we get September durable goods orders (1% increase expected, vs. -1.1% for August) and October consumer confidence (79.3 expected, against 76.8 from September).

Market Design and the PAM
An article last week in Science News discussed the design of efficient markets, using the ill-fated Policy Analysis Market as a hook. Interestingly,
Hanson and Ledyard have come up with a new structure that, they say, performed better in studies with volunteer traders than previous designs did at squeezing the most information out of a small number of participants. The design incorporates two new elements.

With the first element, called conditional bidding, participants can bet on outcomes that emerge from complicated combinations of circumstances, such as, "What are George W. Bush's chances of being reelected if Howard Dean loses the Democratic primary?"

The thing is, if you're using the market to decide on policies, this is exactly the kind of question you need to be asking; "Are we better off doing A or B?"

(The other element is making sure liquidity is provided, and is hardly new in the financial world. They're called "market makers" on the Nasdaq and at ECNs, and they're called "specialists" at the NYSE.)

By the way, I occasionally include a post both here and at Jens and Frens if I think it has cross-over interest. They may be different versions, though I'll try to keep that to a minimum as I wouldn't want anyone to have to read these things twice.

Friday, October 24, 2003
Ben Stein Says, "Yes, You Can Time the Market"
There's an interesting Morningstar interview with Ben Stein, who is talking about long-term "market timing" in his book ("Yes, You Can Time the Market") with co-author Phil DeMuth. They are really talking more about valuation (though mostly relative to 15-year moving averages, rather than to fundamentals). I assume the title was chosen to sell books.

I like his reference to "this second bubble in the Nasdaq that's going on right now," which he seems to presume everyone recognizes as unwarranted. I think there is something holding up stocks besides "bubble mentality" -- specifically, interest rates -- but I'm short enough QQQ that my portfolio is roughly market-neutral.

Thursday, October 23, 2003
Stock market
JBLU today, like AMZN yesterday, is being slammed after reporting better than "expected" earnings. Some of the high P/E stocks have been propelled by unachievable expectations. The last time that happened on a large scale, it ended badly.

latest numbers
Initial claims at 386,000, again significantly below 400,000.

Wednesday, October 22, 2003
Japan and restructuring
An article at Slate includes discussion of why the Japanese economy is screwed up.

I'd like to point out, because it's extraordinary, that Japan is an issue on which I largely agree with Paul Krugman. If they want to pull their economy out of its funk, they have to let go of the notion (all too current even in the United States) that for a company to go out of business is something society should prevent at all costs, and the Bank of Japan should be irresponsibly reflationary. A point I've not seen made by anyone but me is that it may be that the Japanese honestly do prefer their funk to the medicine that would be required to relieve them of it. (The reason this is less likely to happen to the United States than to Japan is that we haven't quite the cultural attachment to stability that Japan does.) It does hurt the United States economy for Japan not to fix its economy, but on a certain level, if that's their choice, it's largely their business.

Monday, October 20, 2003
The New Deal
How FDR exacerbated the great depression.

Sunday, October 19, 2003
Gillette v. Schick
Since I just mentioned one of the two ongoing lawsuits I'm following, I'm going to mention the other one: the patent-infringement lawsuit filed by Gillette against Energizer over Schick's new four-bladed Quattro razor (Schick being a subsidiary of Energizer).
Specifically, Gillette charges that Energizer has illegally incorporated the proprietary progressive blade geometry technology of the Mach3 system in the Schick product. Progressive geometry positions the blades to extend gradually closer to the beard, allowing for the closest, most comfortable shave in a single stroke.
Energizer has denied the charges:
Energizer denied that the QUATTRO infringes the patent; that it misappropriated Gillette's patented technology; and that a progressive geometric configuration for blades of a multi-blade razor is sufficiently innovative to be the subject of a patent. In addition, the company denied Gillette's assertions regarding Gillette's purported technological leadership over Schick. Energizer also denied that a four blade razor, such as the QUATTRO, would need to use the progressive geometric blade configuration which Gillette claims is protected by patent. In its filing, Energizer also asserted several defenses against Gillette's allegations, including that Gillette's patent is invalid and unenforceable.
I'd like to emphasize first that I'm not a patent lawyer, or even a non-patent lawyer, or a law student, or anyone to whom you should pay any attention on any issue that might be construed to be related to the law. None of this will prevent me from saying a few words about the assertion that "a progressive geometric configuration for blades of a multi-blade razor is [not] sufficiently innovative to be the subject of a patent." First, in case you are unaware of what this even means, a patent has to be "novel" to be valid (and, in theory, to be granted). This means that a reasonably-trained person in the razor-design industry should consider the innovation to be non-obvious. I'm under the impression that the defendants in most patent-infringement lawsuits challenge the validity of the patent on these grounds. At first glance, they would seem to have a good case here -- it doesn't seem all that remarkable to align the blades to be progressively closer to the skin. But -- as I read in the Boston Globe -- Gillette spent 20 years trying to make a three-blade razor that wouldn't irritate the skin. And -- again, this is a non-lawyer -- anything that takes 20 years to figure out can reasonably be supposed to be non-obvious.

Moving along, Energizer also said it would respond to the motion for a preliminary injunction by October 2. I haven't seen any news indicating whether that happened, or whether the injunction has been granted (neither company's press release web site mentions it). I have seen ads for the Quattro recently, but have not noticed whether the product is in stores.

One last interesting sidenote is that Energizer has sued Gillette over the slogan "The Best a Man Can Get", claiming that it amounts to false advertising. I have trouble seeing that lawsuit going anywhere, but -- as you may have read -- I'm not a lawyer.

A Premise Short of a Full Argument
SCO Group Shares Jump on Analyst's Upbeat Comments:
The volatile shares of SCO Group Inc. jumped as much as 39% Wednesday after a brokerage analyst recommended the stock and set a price target nearly triple its closing price Tuesday.

Brian Skiba, software analyst at Deutsche Bank Securities, started coverage on SCO Group with a buy rating and a $45 price target. He said the Lindon, Utah, company is "a call option on a substantial lawsuit against IBM and the potential to capitalize on Linux."

SCO Group made headlines when its sued International Business Machines Corp. in March claiming IBM had transferred some of its intellectual property into the popular Linux operating system. IBM denied the claims and filed a countersuit. SCO is also trying to collect royalties from Linux users.

"The IBM lawsuit and the potential for Linux licensing deals offer plenty to be excited about, while failure would render the shares worthless, in our view," Mr. Skiba wrote in a research note.

Mr. Skiba said he isn't attempting to predict the outcome of the legal case and doesn't know whether SCO Group's claims have merit. He warned the "risks are numerous and the shares should be considered speculative."
Let's review. Skiba stipulates that if SCO loses its lawsuit, its shares are worthless. He states further that he has no idea whether the suit has merit. On that basis, he declares it worth three times its then-current price. In response to this report by somebody who admits that he has no clue whether the company is worthless, the share price jumps.

For the record, I'm probably almost as ignorant as Skiba, but I'm hoping SCO will lose its suit, and am -- based on what I know -- optimistic. I did a back-of-the-envelope calculation a few weeks back which put an upper bound on the value of SCO -- assuming they win the suit -- at $100/share. I have no position in the stock (I'm too ignorant to go short, and I know it).

Saturday, October 18, 2003
Analyst Recommendations
The most interesting part of the Bill Donaldson interview on Rukeyser (which I mentioned earlier) was the following question by Marty "Eeyore" Zweig:
Bill, Zack's just came out with a study: over the last four years the stocks most favored by Wall Street analysts have gone down 30%, and the 600 stocks that were least favored have gone up 45%. We all make mistakes -- that's not the point. Mutual Funds have to give out track records -- do you think that there should be more transparency, and that analysts should have to give out their track records?
I looked for this study on the web, but haven't found it. If you know more about it, please let me know. It has seemed to me that analyst recommendations have tended to be excellent lagging indicators of stock performance.

Incidentally, Donaldson gave a non-committal answer approximating, "sure, why not?"

Friday, October 17, 2003
latest numbers
Housing starts up 3.4%, Consumer Sentiment preliminary up to 89.4 from 87.7, both better than expected.

Welcome to Dollars and Jens
We've had a few entries, but I'd like to take this opportunity to officially introduce us and welcome you to our new blog.

The Dean and I are twin brothers, he based in the Chicago area, I based near Boston. We've been blogging for a while at Jens 'n' Frens, mostly about politics and current events, but generally about whatever we felt like commenting, or just websites we felt like pointing out. We decided to bring financial matters over here, partially to avoid alienating either of our regular readers, and partially to try to attract a new audience.

The Dean writes and maintains software for a Chicago-based trading outfit, which works primarily with bonds and bond futures, and is the largest Eurex player in North America. I am studying investment management at BU, have passed the first exam toward the CFA, and am looking for a job -- if you're in the industry, hiring, and I seem clever to you, check out my résumé.

I don't think we know yet exactly what our audience is -- in particular, whether we're aiming at people who don't know what a "market cap" is (or what differentiates it from a "market beanie"), or whether we're going to get into arguments with people more knowledgeable than us about what the Fed is likely to do and why. You can count on the style being informal, though, and infested with a dry sense of humor.

Thursday, October 16, 2003
latest numbers
Might as well post here that initial jobless claims came in at 384,000, so the four-week average is down to 391,000. CPI .3%, core .1%, inventories down .4%. None of these is shocking, but it's nice to have confirmation that the job market is doing a bit better.

SEC chairman Bill Donaldson will be on Rukeyser
tomorrow night at 8:30 Eastern time, repeated three hours later, on CNBC. If you don't get CNBC, your public television station may well carry it over the weekend.

Wednesday, October 15, 2003
Corporate Governance
The most shocking practices seem normal to people who are used to them. Until 140 years ago, it was possible to own an other person in the United States, and until 160 years ago, give or take, it wasn't much commented on. In the early days of the United States, it was accepted that only land-owners could vote -- this strikes the modern American sensibility as unfair. On the other hand, someone from that period might be surprised that we allow governments to assess property taxes against non-resident land-owners without allowing them to vote.

Similarly, I believe that somebody unfamiliar with the way public corporations work in the United States would be stunned by the way elections of directors are conducted. For the unaware, what a shareholder gets is essentially a Soviet ballot -- the nominating committee of the board of directors presents the shareholders as many nominees as there are openings, and shareholders are allowed to vote for or against each. Shareholders may (I believe) produce their own ballots and distribute them to their fellow shareholders, just as political parties once printed ballots for voters. But when political parties printed ballots, the government didn't print and distribute its own ballots, paid for by the taxpayer, and bad politicians were always opposed. In corporate America, bad directors are often renominated, and shareholders rarely commit the resources to distribute alternate proxies.

In short, it would be possible for ballots to be too easy to get onto, but that's not the state we're in.

I bring this all up partially just because it bugs me. But it also happens to be timely: the SEC's latest proposal (warning: that's a long document) would allow shareholders to nominate directors in a very limited fashion. As described in a WaPo editorial:
For the first time, shareholders would have the right, albeit in limited circumstances, to have their proposed candidates for directors included for a vote on the official corporate proxy ballot.

It's a good idea; even the prospect of such a challenge could be enough to get management's attention. Currently, corporate democracy is more illusion than reality. Shareholders' right to vote for directors is generally limited to ratifying those chosen for them by corporate nominating committees. If shareholders are unhappy with management, their only option may be to sell their stock, which may not be the best outcome for either investor or corporation.

Nonetheless, opening proxies to shareholder nominees is a powerful and potentially dangerous weapon, one that requires significant safeguards against casual or frequent deployment. Boards require a blending of skills, backgrounds and personalities; shareholder nominees could disrupt the balance. Giving shareholders access to corporate proxies also presents the possibility of special-interest mischief, with outside groups such as labor unions, environmental groups or corporate raiders using the power for their own purposes rather than the good of all shareholders.

The SEC proposal tries to guard against these dangers by erecting a two-tiered, two-year-long process for shareholders to gain access to the proxy. In the first year, shareholders who have held more than 1 percent of the company's stock for at least a year could propose opening the ballot to shareholder nominees; they would have to win a majority vote for such a contest. Alternatively, more than 35 percent of shareholders would have to withhold votes against a board nominee. Then, during the next two years, a group that has owned more than 5 percent of corporate stock for at least two years would be able to nominate its own director candidates. It could put forward one to three names, depending on the size of the board, and its nominees couldn't have any financial ties to the shareholder groups.

Business groups say these hurdles aren't high enough.
I think they're far too high.

Let me first dismiss all of the objections except the expense and confusion that could be generated if a California ballot were proposed. These are essentially objections to democracy -- the complaint, condensed and boiled down, is that if we allow a majority of shareholders to elect a bad director, they could do so. Now, I'm less populist than your average bear, and I like the existence of some restrictions preventing majorities from overrunning minorities. To revert to the political analogy, I like that the first amendment to the U.S. Constitution prevents the Congress from shutting down a newspaper because it says unpopular things. What the Constitution doesn't do -- and shouldn't do -- is to prevent people from running for Congress for fear that they will try. Similarly, the way to limit the authority of majority special interests in corporations is to restrict by law what actions a board of directors may take, not to restrict nominations to the board.

It's hard to guess how many outsider nominees would be generated by the proposal, but there's one analogy that provides a starting place: shareholder resolutions. Anyone who has owned more than $2000 worth of stock in a company for more than a year can submit a resolution (though there are also restrictions on the subjects a shareholder resolution can cover). With that hurdle -- much lower than what the SEC proposes for director nominations -- one typically sees two or three shareholder proposals on the proxy statement for a large-cap company. This is hardly an unwieldy flood.

Tuesday, October 14, 2003
This is two years old, and nobody else is going to post it (and with reason), so I will, as much as anything because I find the interviewee's story interesting; he was a mutual fund manager fired in March of 2000 for refusing to buy overpriced tech stocks.
I started shorting Yahoo! presplit at 125 and it went to 500 on a presplit basis. Now it's to down to around 10 [after a 2-for-1 split in early 2000] . I never [covered] a share and shorted more all the way up.

Sunday, October 12, 2003
Expectations and Stock Prices
To follow up on The Dean's thoughts (and to announce my presense): occasionally you'll see stock prices move down even when they beat expectations. There are two main reasons for this. The first reason is that the announced expectations aren't what the market is actually expecting. Around 1999 this was particularly common among tech stocks -- the "consensus estimate" for a quarterly earnings report would be nine cents per share, but the well-known "whisper number" was eleven cents, so if the company reported ten, it would drop. If it strikes you as stupid that analysts published fake numbers as estimates and announced serious numbers as well, then you're ahead of where a lot of investors were in 1999. I haven't heard much about whisper numbers recently, but it's still possible (if rare) for the market to have a different impression than the concensus estimates put together by First Call.

More common these days, I think, is that a company will report earnings in line with -- or even slightly better than -- the estimates, but will indicate that the longer-term future is less rosy than had been thought. Stocks don't trade solely based on the next quarter's earnings.

Friday, October 10, 2003
I mentioned to my brother that, about the time he suggested this thing to me, I heard a guy on TV (Bob Sirott; Chicagoans may well have heard of him) mention that he doesn't understand why stocks will go down when the companies announce increased profits. So let's test the blog by pointing out that people buy and sell stocks based on what they think the company will acheive in the future, and only on what they have done in the past insofar as they think that's an indicator of the future. If I expect Microsoft to earn 25 cents per share, against 21 cents last year, and it reports 23 cents, then my assessment of its value is less than it was before the news came out.

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