Dollars and Jens
Monday, August 30, 2004
Happy Birthday to Warren Buffett, who is 74 today.

It's entirely possible that he doesn't read our blog, but Happy Birthday to him anyway.

Saturday, August 28, 2004
long-standing tradition
Government ministers stated officially that there was no reason for tulip bulbs to fall in price — but no one listened.
From the fifth edition of A Random Walk Down Wall Street.

Thursday, August 26, 2004
latest numbers
New unemployment claims of 343,000, which I'm noting mostly to exhibit my refined smoothing algorithm.

When You're Right 52% of the Time, You're Wrong 48% of the Time
Do you remember my comment that Krispy Kreme looked cheap? I sort of hope not:
Shares of Krispy Kreme Doughnuts fell as much as 17 percent after the company shocked investors by reporting a sharp drop in second-quarter earnings and warning that more of the same was on the horizon.

Krispy Kreme (KKD: news, chart, profile) reported profit fell 55 percent to $5.7 million, or 9 cents a share, from $13 million, or 21 cents, in the year-earlier period. Revenue climbed 11 percent to $177.4 million from $159.1 million.

Operating costs, however, grew 30 percent to $11.8 million.

They're still blaming low-carb diets, but not exclusively. It was around $19/sh when I pointed it out, and it's around $14 now.

Monday, August 23, 2004
CME to adopt European expiry rules
The Chicago Mercantile Exchange Inc. said on Monday it will switch to European-style rules on options expiration and waive fees to boost electronic trading as it fends off a European rival.


Under European-style rules, an options holder may exercise a contract only on the date of expiration. In contrast, under U.S.-style rules, the holder may exercise a contract into a futures position at any time prior to expiration.
It's not clear to me why this change would help them increase volume, except possibly that theoretical models used for pricing options tend to more easily accommodate European-style options than American-style; it may be that some potential providers of liquidity will feel more secure doing so for options that have European-style exercise rules.

Also, if you would have guessed before reading that that the Eurodollar contract is the most heavily traded futures contract in the U.S., you're better informed than I.

Friday, August 20, 2004
Soaring with the Penguins
Richard Branson was once asked how to become a millionaire. "Start out as a billionaire," he recommended, "and buy an airline."
Pollock, in his message to pilots, also rebuked some members of his own union group for dismissing the threat of liquidation.

"I know you've heard it before, but these negotiations are quite likely the most critical ones of our careers. This may very well be our last time at bat, our last opportunity to control the fate of our airline and our careers," Pollock said.
If US Airways is worth more alive than dead, it's because it would be worth so little dead. Sell off those airplanes to whom, exactly? America West, maybe; Southwest doesn't fly most of the airplanes in US Airways's fleet. And certainly not United Airlines, which is worth less alive than abandoned by the side of the road; it is generating a prodigious return on its negative value. I've been doing my "United delenda est" schtick for years now, and it seems Bill Mann is on board, though he misspeaks here:
United Airlines' management would dearly like to emerge from bankruptcy, and the process here is to work among all of the creditor classes to come up with a plan that will give the company financing and a capital structure that will allow it to operate.
No. United has negative operating earnings. United has consistently negative operating earnings. United has very consistently very negative operating earnings. This is not about capital structure, unless you mean to include "bolt United onto an enterprise that is generating even more cash than United can burn through" as a capital structure to consider. The assets should be auctioned off now. I'll bid $25 for the rights to that commercial with the parrot playing Rhapsody in Blue on the piano.

Thursday, August 19, 2004

Wednesday, August 18, 2004
Analyst War Stories
Morningstar's Pat Dorsey had an amusing collection of stories about companies calling Morningstar analysts to complain about their analysis. For example:
[T]he CFO of a financial-services firm called in a huff to complain that our fair value estimate for his firm was "so low that it made the analyst look like an [expletive]." He also noted that our research was "not helping his firm." Curiously, this same firm wasn't interested in talking to us when we initiated coverage a couple of years ago, after we told the firm it was our policy not to allow companies to see our research before it was published. (It's not uncommon for Wall Street analysts to send their research to firms for "fact checking" before publication.) At the time we initiated coverage, the firm also asked whether there was any way it could prevent us from covering it, which seemed like an odd request unless it had something to hide.
It's a quick, entertaining read.

Tuesday, August 17, 2004
CFA level 2 results
CFA results are out. I passed (as did a whopping 32% of those who took the level two exam). In the weeks before the test, I was pessimistic, and some of you told me I would pass -- I hope you won't rub it in.

They break down the results into 24 sections, to help you figure out where you did poorly. They don't give a score for each section, but they indicate >70%, <=50%, or in between. I got 15 >70%s, and eight <=50%s, with only one in the middle. Last year I had a lot more in-betweens.

Part of the reason is that the level one results had fewer sections -- if there are only six points possible, any score except four will be an outlier. More generally, standard deviation as a percentage of the sample size varies with the inverse square root of the sample size. I don't think it was just the smaller divisions, though; the level one exam seemed to cover most of what I studied. The level two exam had questions and groups of questions grilling the test-takers on the details of some topics, completely ignoring others. If you skipped the wrong half-chapter in your studying, you got hurt.

UPDATE: I've been told that one has to be affiliated with the CFA Institute for that second link to work. It's a memo saying basically that the pass-rate has been declining, and that they think it's because people aren't studying enough.

Saturday, August 14, 2004
Holiday in August
Today is a sales-tax holiday in the Commonwealth of Massachusetts (the first ever, I believe). I got pants.

Economists generally frown on sales-tax holidays, because a government can generally stimulate the economy more with less loss of revenue by cutting taxes permanently -- a lot of the extra spending done on a sales-tax holiday displaces spending that would have occurred without the holiday, and would have been taxed. But a point in favor of tax-holidays has occurred to me: it allows a certain amount of price-discrimination.

Price-discrimination, as you may know, is the attempt to offer lower prices to more price-sensitive consumers than to less price-sensitive consumers. For example, a local video-rental chain has two-for-one deals on Tuesdays. People who don't care much about spending the $4.50 on a video rental, but prefer to rent on a day other than Tuesday, pay the higher price. But customers who wouldn't visit the store if they had to pay the $4.50 can wait until Tuesday, and aren't driven off.

By providing a sales-tax holiday, the government can push sales taxes onto those consumers who are more willing to pay them. Consumers who can afford them less -- or who are simply stingier -- will shop on the holiday, rather than being pushed out of buying altogether. Tax holidays don't make for effective economic stimulus, but they might mitigate the inefficiencies that sales taxes create.

Tuesday, August 10, 2004
Federal Reserve Open Market Committee action
The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 1-1/2 percent.
The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity.
And it's well within its rights to believe that.

As for the committee not liking to spook the markets, note this excerpt
The economy nevertheless appears poised to resume a stronger pace of expansion going forward. Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors.

The Committee perceives the upside and downside risks to the attainment of both sustainable growth and price stability for the next few quarters are roughly equal.
and compare to this. And the "measured pace" bit is still there, too.

The out futures for the funds target seemed to find the statement more hawkish than expected; I know that some bond traders were looking for an acknowledgement of last Friday's weak report, and "the pace of improvement in labor market conditions has slowed" may have been less than they were looking for. Another sign that the market viewed this as hawkish: the iShares Japan ETF dipped on the news, as might be expected from perceived relative strength of the dollar against the yen. That very kind of arcane datum is exactly the reason I'm here.

Friday, August 06, 2004
Competition and survival of the fittest
The article is about men shopping for groceries, but what I pick up on is this:
"Manufacturers and distributors and grocery stores do a lot of things to maximize their profit per square inch of shelf and, hopefully, to increase customer satisfaction," Mick says. "They are not idiots. They do a lot of research. They track a lot of data. They know who their loyal customers are. They use this information to set up the store to be competitive."

But even the best marketers and consumer psychologists that money can buy don't ensure that you'll buy everything a supermarket has to sell.

"Do they have this down to a science so that they push everybody's button all the time? No," Mick says. "It is easy to go to an extreme thinking that marketers and grocers know things the psychologists don't even know about getting us to buy things. I don't think they have figured out things quite that much."
And fair enough to say that they aren't perfect, but I'd like to offer that they may be doing things to "maximize their profit per square inch" that "psychologists don't even know", but that the grocers also don't even know. Each company or store will have its own idiosyncrasies, and one that does the right things will have an advantage — will be more likely to stay in business — whether it does those things intentionally, knowingly, or completely unwittingly.

July employment report
The numbers from the payroll survey were famously anemic — the number of jobs apparently created was actually less than the cumulative amount by which previous gains were revised down — but the household survey showed a gain of over 600,000 jobs, pushing the unemployment rate down to 5.5%. The surveys are as they sound; the payroll (or "establishment") survey comes from collecting numbers from a sample of businesses, while the household survey comes from polling households. It is argued by Bush backers that we are seeing a lot of new self-employed workers and new small businesses that fly under the radar of the payroll survey, but it's the payroll survey that is traditionally viewed as more important.

I really don't think the labor market looks robust enough to be a source of inflation yet, but the fed is likely — I'm sure you're shocked by this — to ignore my advice and hike the funds target another .25% at its meeting next week, as it did at the end of June. The market, after this morning's report, has priced in some probability that it won't happen, but not a considerable one; if any of the fed governors, especially Greenspan, makes any kind of public statement before the meeting, pay special attention.

Today in History
On August 6, 1979, Paul Volcker formally became the chairman of the Federal Reserve's Board of Governors. In the next couple years he help rein inflation in from the 20% range to the 4 and 5% range, pretty much the upper limit of where it has been ever since. Much that has gone well with the economy since then can be partially credited to his courageous actions. So happy 25th anniversary of the introduction of competent management to the Federal Reserve.

Thursday, August 05, 2004
Initial claims
The unemployment data buoyed the U.S. dollar as traders braced for a strong U.S. July payrolls report on Friday.

The closely watched four-week moving average of new claims, which irons out weekly volatility, rose to 343,500 in the week ended July 31 from 336,750 in the previous week.
That's successive paragraphs. It has to occur to them that it looks odd, doesn't it?

The lowest single-week number since around the beginning of time was four weeks ago; the uptick in the sliding average is largely a consequence of that. I use a smoothing function that doesn't have this property.

Vertical lines denote quarters — i.e. the end of December, March, and June — while horizontal lines denote multiples of 25,000 claims — i.e. 325,000, 350,000, and 375,000. It's basically been parked at 340,000 for three months, arguably five.

I don't see the decline of which they write in the paragraph after my excerpt; neither am I bracing myself for a strong jobs report tomorrow morning, but what do I know? This, I suppose: that the payroll number has a lot more noise in it than the market seems to realize, and trying to predict it with too much precision is probably a fool's mission. If a physics student of mine indicated that a value was "228,000 +/- 190,000", I'd at least warn on significant digits.

O'Hare delays
I guess it's sort of national news that there have been discussions between the airlines and the Department of Transportation to try to pare back the number of flights scheduled into and out of O'Hare. My solution, as might have been inferred from my post Monday, is to shut down United Airlines. I expect this would be controversial.

Wednesday, August 04, 2004
The Krispy Kreme saga continues.
And while the company has defended its treatment of reacquired franchise rights as being in accordance with GAAP, one attorney said that may not matter to the SEC.

"Something can be in accordance with GAAP and yet not be a fair representation of the financial presentation of the company," said Alan Berkeley, a partner at the Washington law firm of Kirkpatrick & Lockhart.

"When Sarbanes-Oxley requires the CEO to make a certification, it requires that it be a fair presentation, not that it be a fair presentation in accordance with GAAP," Berkeley said.
Man I hate lawyers.

Of course, that's not quite right; it's the legislators who made this ambiguity. If the lawyers create clarity — even after the fact — that's a good thing; if they create more ambiguity to exploit, that's a bad thing. Making people guess whether there's a jail sentence behind door number two is a miserable way to run a legal system.

Monday, August 02, 2004
United Airlines
I was pounding the other blog about this a year and a half ago, and since United's problems have been in the news again recently — they're seeking to quit making contributions to the employees' pension fund — I thought I'd point out that they're still burning through creditors' money.

Medical Malpractice Insurance and Tort Reform
There's an interesting letter in today's Wall Street Journal suggesting that tort reform isn't necessary to keep health-care costs down. The author suggests, roughly, that a medical malpractice insurance company create a waiver which doctors insured by it require their patients to sign, saying they can only sue up to a cap. Patients who don't want to sign the waiver can go to a more expensive doctor.

I think it's an interesting idea. I'd like to know whether any insurance companies have tried this, and, if not, why they haven't. The paperwork involved would be something of a burden, but I would think the burden would be more than offset by the decrease in costs. Is there some reason a court would refuse to enforce the waiver?

Market Reaction to Terror Alert
The market is pretty flat today, including Citigroup. Apparently, investors are fairly trusting of the government's reaction to the latest intelligence.

Sunday, August 01, 2004
Advertising Beer
I've seen Miller Light ads, claiming that Bud Light drinkers think Miller Light has more flavor than Bud Light. I don't understand how that helps them, unless they want to add that they got some of these Bud Light drinkers to switch. The way I read it, though, is that Bud Light drinkers who try Miller Light think it has a strong flavor, which they are eager to wash out of their mouths by drinking Bud Light.

I don't claim to be an advertising guru.

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