Dollars and Jens
Monday, May 31, 2004
That Company Whose Financials I Complained About Last Week
I'd just like to mention that I'm a little less cynical than I was then, but I'm still wary. According to more recent financial statements, that weird put option is no longer on the books. I'm investigating the tax accounting thing -- if anyone knows anything about the "asset and liability method" of tax accounting (and/or SFAS 109), please let me know.
Friday, May 28, 2004
Weird Financial Statements
For my internship, I'm populating a spreadsheet with financial data on a company which seems to have written a put option on its own stock. Of course, considering how many calls they've been writing on their stock, it probably balances out. These call options are disclosed in the footnotes, natch, not on the income statement itself -- for one recent quarter, they would have eaten 90% of income.
I'm also somewhat concerned that they don't have a line for income taxes. They have operations. They have (a very little) income from operations. Even if they don't have to pay cash taxes -- and this company does have plenty of accumulated deficits -- shouldn't there be a line for deferred taxes?
All this leads me to wonder whether I'm wasting my time on this spreadsheet. If a company isn't worth buying at any price, there's no point in working out a detailed model, is there?
UPDATE: My mistake -- they didn't write a put option, they sort of bought a put option, but they're required to exercise some of it (so it's part put, part future). The exercise price is based on the market value at time of exercise, and is at a discount to the market price. Maybe it's the only way they could raise capital.
Wednesday, May 26, 2004
Oil dropped 70 cents, to still over $41. There was a strong housing report, and a very slightly better than expected confidence number; I think one reason or another got it started and traders chasing their tails kept it going.
Tuesday, May 25, 2004
I don't pay as much attention as I once did to daily movements in the stock market, but I've noticed a few stories, including an email alert from the Journal, attributing today's substantial rise in the stock market to decreasing oil prices. But I checked prices on some oil/gas producers, and they're all up, too. So I'm wondering whether something else is at work here.
I'm not wondering enough to try to figure it out. But I am wondering.
More Personal Stuff
Since I blogged job-search related stuff a few days ago, I thought I'd mention this as well.
I had a phone interview Monday with a company which I respect quite a bit (and like even more after talking to them). I'd have to relocate. I think I'd accept a job from them immediately if they were around here. As it is, I'd have to think about it.
I think the interview went relatively well -- not perfectly (when does it ever?), but well. There was one point at which one of the guys (their voices were too similar for me to distinguish) announced that he was going to ask me some accounting questions, and my heart stopped for a moment. Then he asked why a company might report growing earnings and shrinking cash flows from operations. "Oh," I thought, "so not hard accounting questions." I had feared the sort of thing I've been studying for my CFA test, such as consolidation of foreign subsidiaries that use different currencies.
Re:2 Derivatives and promotion
I assume the reason the fed funds futures, eurodollars, the CPI index, etc. are quoted the way they are is because it is expected that T-bill traders will be interested in them. The price of a 1-year T-bill is 100 minus the interest rate, in a certain sense of the word "interest rate".
Monday, May 24, 2004
Re: Derivatives and Promotion
Inflation is certainly similar to an interest rate, in being a cost of stuffing your money under the mattress. But I agree more strongly with your characterization of their quoting convention as "weird". Do you happen to know why they do that?
Went shopping for an odd battery at Radio Shack this weekend. Is that the first place one thinks of for weird batteries? I was musing about this as I left; just as when I was ordering checks from Deluxe a few weeks ago, I thought, "I hope they're ripping me off, because to do otherwise would be a violation of their fiduciary duty to their shareholders."
That's a bit glib, but is the way I think. What I mean, of course, is "I hope they're getting a good mark-up on this." They have to pay the rent, and the way they do that is by charging a mark-up; the best place to get that is "wherever they can", viz. on those items on which they have the least competition.
derivatives and promotion
Some time ago the CME launched a CPI future with the same weird quoting convention as the rest of the interest rate products — we agree with the CME that this is an interest rate product, right? — and the Board of Trade responds with a paper arguing that the fed funds future is a better way to hedge inflation risk, at least for the time being. The argument is actually a market call — he asserts that anyone trying to hedge inflation risk with fed funds contracts will find themselves on the right side of the real funds rate. In short, it's something that wouldn't appear here but for marketing; the CBOT doesn't want to lose business to the CME.
Trivial Personal Stuff
I've been job-searching, and was recently turned down by a big mutual fund company for a position as an equity analyst. I saw my buddy on the inside over the weekend. He told me that the Director of Equity Research, with whom I had spoken, thought I was too analytical and not enough of a salesman.
If that quote were on the record, I think I'd add it to my resume.
Sunday, May 23, 2004
A Paean to the Blogosphere
The 15th season finale of the Simpsons ended with a celebration of the blogosphere, sort of.
The story [spoiler alert] is that Burns, upon discovering (as he did in at least one previous ep, but never mind that) that he's unpopular, decides to buy out all of the town's media. Lisa is publishing her own paper, though, and continues through a certain amount of harassment. At the end she gives up, but everyone else in town starts their own newspapers.
You don't need a license to be a blogger, and you don't need heavy financing. All you need is an internet connection and a little too much free time on your hands. Information worth spreading tends to spread.
Speaking of free time, I have about 700 pages to study in the next twelve days.
Friday, May 21, 2004
Check out Virginia Postrel's NYT column looking at whether highway spending is providing a good return.
Monday, May 17, 2004
Monkeys with Typewriters
A sufficiently large number of monkeys with typewriters, given sufficient time, will eventually produce the works of Shakespeare. A single monkey with a free half hour between lunch and feces-throwing is more likely to come up with this chain-email I recently received:
---------------------------- Original Message ----------------------------Capitalization, punctuation, and spelling as in the original. If I had time, I might try to educate by dissecting the attempted analysis. As it is, I'm just going to let the already-educated have a mild laugh.
Subject: DON'T BUY GAS MAY 19TH!
We should all make it a point to do this. I just want to see what will really happen. These gas prices are out of control and there's really not a legitimate reason for it.
> IT HAS BEEN CALCULATED THAT IF EVERYONE IN THE UNITED STATES DID NOT
PURCHASE A DROP OF GASOLINE FOR ONE DAY AND ALL AT THE SAME TIME, THE OIL COMPANIES WOULD CHOKE ON THEIR STOCKPILES.
> AT THE SAME TIME IT WOULD HIT THE ENTIRE INDUSTRY WITH A NET LOSS OF
OVER 4.6 BILLION DOLLARS WHICH AFFECTS THE BOTTOM LINES OF THE OIL COMPANIES.
> THEREFORE MAY 19TH HAS BEEN FORMALLY DECLARED "STICK IT UP THEIR
behind " DAY AND THE PEOPLE OF THIS NATION SHOULD NOT BUY A SINGLE DROP OF
GASOLINE THAT DAY.
> THE ONLY WAY THIS CAN BE DONE IS IF YOU FORWARD THIS E-MAIL TO AS
MANY PEOPLE AS YOU CAN AND AS QUICKLY AS YOU CAN TO GET THE WORD OUT.
> WAITING ON THIS ADMIINSTRATION TO STEP IN AND CONTROL THE PRICES IS
NOT GOING TO HAPPEN. WHAT HAPPENED TO THE REDUCTION AND CONTROL IN PRICES THAT THE ARAB NATIONS PROMISED TWO WEEKS AGO?
REMEMBER ONE THING, NOT ONLY IS THE PRICE OF GASOLINE GOING UP BUT AT
> THE SAME TIME AIRLINES ARE FORCED TO RAISE THEIR PRICES, TRUCKING
COMPANIES ARE FORCED TO RAISE THEIR PRICES WHICH EFFECTS PRICES ON EVERYTHING THAT IS SHIPPED. THINGS LIKE FOOD, CLOTHING, BUILDING MATERIALS, MEDICAL SUPPLIES ETC. WHO PAYS IN THE END? WE DO!
WE CAN MAKE A DIFFERENCE. IF THEY DON'T GET THE MESSAGE AFTER ONE DAY,WE WILL DO IT AGAIN AND AGAIN.
> SO DO YOUR PART AND SPREAD THE WORD. FORWARD THIS EMAIL TO EVERYONE
YOU KNOW. MARK YOUR CALENDARS AND MAKE MAY 19TH A DAY THAT THE CITIZENS OF THE UNITED STATES SAY "ENOUGH IS ENOUGH"
Friday, May 14, 2004
The Association for Investment Management and Research has changed its name to the CFA Institute, on the grounds that the CFA certification program is the main thing they do. I think the old name is cooler and more grandiose and impressive, which probably makes the change appropriate.
Um, the CFA exam grading is blind, right?
Thursday, May 13, 2004
331,000 initial claims of unemployment. The four-week rolling average is the lowest since the Clinton administration, and I'd give 2-1 odds will drop again next week.
Wednesday, May 12, 2004
Trade and Chinese demand for oil
Incidentally, on another note, Cowen suggests that free-traders shouldn't argue that China buying oil harms the United States. I'm not sure I get this. Surely ceasing to import oil would drive domestic prices higher, and is no solution, but that doesn't mean that our benefits from trade can't be reduced by the actions of other countries. What am I misunderstanding?
Update:Before I even get this up, it looks like someone else has made alomst the same point, though I prefer the way I put it, and am thus still posting this.
corruption and doing business
A friend working for the government of Cambodia related an argument he's heard there against cleaning up corruption: the opportunity for graft is part of the salary offered to prospective employees, and so attracts better employees than the government can afford to hire honestly. Surely it would be better to assess the bribes as taxes, and pay them out as higher salaries, but the tax hike would hurt the economy in the conventional ways until the businessmen paying them came to trust that they wouldn't still have to pay the bribes in addition — thus there are transition costs until the regime builds up credibility that it is cracking down on corruption. And there's no telling, politically, whether the regime has the patience to wait out that period of time, which, of course, is exactly the concern of the businessmen during that period of time.1 Catch-22.
Anyway, what brings this to mind is Tyler Cowen's argument that underpriced IPOs are a way of a bank charging for its underwriting services. (N.B. This isn't the only argument he makes.) This feels to me like a very similar argument, and it doesn't feel right to me that hiding this part of the fee under the table would be the best way of getting things done. The idea that the first-day runup creates more interest in the stock, and thereby may enable the company to prosper later from a secondary offering, is one I have heard before; it, too, appeals to market inefficiency, and it, too, may not be entirely incorrect. Also, it, too, doesn't appeal to me; it just feels that by the time that becomes relevant the effect should have worn off to an extent greater than would compensate for the costs. This still leaves us with the question
On top of that, there is a puzzle. Unless you think all of the initial share underpricing is an legitimate fee for services rendered, why have markets tolerated this practice for so long?This has me wondering why corruption developed in Cambodia. Somewhere along the way, it must serve someone's interest to obscure the true cost of doing business, even if everyone has a sense of what it is.
1 It also may be that the costs of the transition would exceed the benefits ultimately accrued from it, though this conclusion doesn't appeal to me, or probably anyone else reading this.
Tuesday, May 11, 2004
income to labor
I should clarify that when I wrote Sunday that income to labor grew at an annualized 7% rate, that was only wage income, and didn't count benefits.
I should also mention why I highlight this number: some of the members of the Open Market Committee have been talking up unit labor costs as an important indicator of late, essentially saying that inflationary pressures will be a concern only when the costs to employers of hiring workers are going up faster than the productive value of those workers. That 7%, then, is to be compared against the 4.2% growth rate announced a week earlier.
The payroll number gets more attention, probably because it's less volatile, but if payrolls expand over a sustained period of time while wages and benefits remain flat, it's not a great threat to the purchasing power of the dollar. In that context it's worth noting that weekly wages were actually down in the March employment report, though they made that up and more in the most recent (April) report.
I wonder whether tax receipts might be a more accurate measure of this than the payroll survey; the latest CBO Monthly Budget Review indicates that Medicare withholding, adjusted for timing of holidays and paydays (viz. Fridays), have been running 6.9% higher than last year. This, again, will tend to exclude non-taxable benefits, so that unit labor costs will actually be running somewhat higher than 6.9% minus (real) GDP growth.
Sunday, May 09, 2004
A couple musings on fed tightening:
- The fed, by broadcasting that hikes in short-term rates are coming, has already triggered a run-up in longer-term rates. Some of the adjustment the economy will have to do will already have been begun by this, even though the fed probably won't hike the funds rate target until its next meeting at the end of June.
- China, a fairly large economy, is looking to tighten its own monetary policy, but its currency is pegged to the dollar. I would think this should have some tightening effect on the dollar economy as well.
Saturday, May 08, 2004
Tyler Cowen on industrial decay.
Some Europeans might regard the decay as reflecting our economic weakness. But they have it backwards: our willingness to let industries decline is a significant source of our economic strength. A country with no declining industries is a country that doesn't have many better new ideas.He goes on to note that, of course, the French are trying to prevent such progress.
I'll genuflect toward the observation that this is hard on the people already in such industries, but the American labor market is really more adept than a lot of people seem to realize, and not just because of attrition. (I've read that the United States has the most flexible labor market in the world, and that this is the primary reason for our economic success.
fed funds futures
Fed Funds futures for July — viz. based on the June meeting — moved 8bp today to indicate 1.23% by then. The market thinks the Fed's going to hike rates.
Friday, May 07, 2004
stock market response to news
I was reading a lot of "markets were held down by interest rate fears in spite of the strong jobs number" this morning and thought I'd reiterate something we all know: the value of publicly traded stock is not affected directly by jobs. It is affected by two things: how much money the companies can spit off to share holders, and what the alternative investments available look like. If a positive jobs report provides previously unavaiable information suggesting profit strength, it would have a positive effect on stock values. After from the effect on interest rates (and thus the attractiveness of other investments, e.g. cash), I would think the next biggest impact the jobs situation will have on stock valuation is the pressure of wages on profit margins; this, too, is not going to excite shareholders. That wage pressures make stocks less valuable isn't a moral judgement against increasing wages; it's simply incontrovertible fact. That consumer demand will be better than if people weren't employed isn't too far behind that, I'd think — these factors will affect different companies differently, but in the aggregate — but good news for the economy isn't always good for shareholders, or vice versa.
Update (Tuesday, May 11): For example, Betsy Stark, on ABC's May 7 World News Tonight:
Well, Wall Street interpreted today’s strong jobs report as another sign the economy is heating up and in its sometimes perverse fashion used that as a reason to sell stocks.
April non-farm payrolls are up 288,000; unemployment is down an other tenth of a point to 5.6%.
Thursday, May 06, 2004
This oil piece plays up the possibility of political turmoil in Saudi Arabia, on the grounds that not only do the Saudis produce 8 million bbl of oil per day, but they also have better capacity than most countries to pick up the slack if supply drops off elsewhere. What might be more important, though, is that this excess capacity only amounts to 3 million bbl/day, against an 80 million bbl/day -- and growing -- global demand. Other regions may also have some excess capacity, but from what I understand, not much.
If demand for energy keeps growing, it will either have to find a substitute, or prices will keep going up, or both. The right answer in this sort of economic problem is almost always "both".
Det är cross-posted.
Tuesday, May 04, 2004
Berkshire Meeting Notes
As I expected, Whitney Tilson's meeting notes are on the web (in Microsoft Word format). He also has a summary (in HTML) at the Motley Fool.
Saturday, May 01, 2004
Berkshire Hathaway Annual Meeting
I feel like I should say something about the Berkshire Hathaway meeting, but I'm not going to provide detailed notes, because I'm tired and because I expect Whitney Tilson -- who, incidentally, asked a question at the meeting -- to do it better than I would.
Just a few comments, not all of them important:
- Heading into the meeting, I came within two feet of Maria Bartiromo, whom I recognized immediately after I passed her.
- The new digs are nice, but the acoustics could have been better, and the screens they projected things onto were too small from the back, where my dad and I sat.
- Charlie was more talkative than usual.
- Buffett made a few positive comments about Google, mostly on their inclusion of an "owner's manual" in their S-1 (which they explicitly said was inspired by Berkshire Hathaway's owner's manual), and management's indication that they wouldn't jimmy their quarterly numbers to please Wall Street.
- Buffett, asked about CALPERS trying to get him off of the board of Coke, said it was good that they were trying to take an active interest in a company they part-own, but that they weren't thinking so much as looking at checklists.
I commented to Dean that Buffett does have some conflict of interest from the fact that McLane is a significant purchaser of Coke products, but that if you take that principle as an absolute, nobody who drinks Coke could be on the board of directors. There's obviously a line to be drawn somewhere, but when Berkshire Hathaway owns 8% of Coke, I think any conflict has to be pretty overwhelming to deny Berkshire a seat on Coke's board.
- Charlie suggested "Deep Simplicity", which is not yet available in the United States but soon will be.
- Buffett has been reading "A Short History of Nearly Everything".
- Warren recommended Phil Fisher's first two books, "Common Stocks and Uncommon Profits" and "Conservative Investors Sleep Well".
- Charlie referred us to the autobiography of Les Schwab, who sold tires in the Pacific Northwest, for examples of well thought-out incentive systems.