Dollars and Jens
Thursday, May 31, 2007
American Stock Market
Just to note a milestone, the S&P 500 hit a record close today, up 2.5 basis points over yesterday's record close. The previous record close was in March of 2000.

Chinese stock market
Let's engage in some rumor spreading; I haven't checked the following statistics from a reliable source, but heard them from someone I largely trust.

The Chinese stock market is up somewhere between 50% and 100%, and the P/E ratio is about 50. The denominator there — earnings — are up nearly 100%, though, which makes it sound sustainable — except that the same phenomenon is at play here as was in Japan twenty years ago, in that a lot of the companies on the Chinese stock exchange own each others' stocks, and a lot of the reported "earnings" are capital gains. Operating earnings — the amount that, if you owned a basket of stocks, wouldn't amount to pulling money out of one pocket and putting it into the other — are up about 10 or 15%. Still, that's positive; twenty years ago in Japan, that figure went negative a good year or two before the top of the market. I'm also told of a lot of other indicia of mania: people mortgaging their houses to buy stocks, jokes about it being easier to make money in stocks than in crime, etc. China may well have a prosperous future — in fact, that's the way I'd bet — but there's every reason to expect a bump or two in the next couple years.

Thursday, May 24, 2007
Lacker on inflation
Lacker is less optimistic than consensus that weak growth will lead to a moderation in inflation without further action by the fed. Which we kind of already knew, but here he explains his thoughts a bit more explicitly.

Wednesday, May 23, 2007
Rare Gems
I'm going through some of my old stuff, and I found a copy of Timberline Software's annual report for 2000. Timberline was subsequently purchased by a private company, so this report is not only old, it's for a company that is no longer publicly traded. I should probably get rid of it. But I don't think I will.

The thing is, 2000 was a bad year for Timberline. The report opens by quoting the closing words of the 1999 report: "Two Thousand. It looks to be a most exciting year for Timberline." Later, they quote Groucho Marx: "I've had a wonderful time, but this wasn't it." That might suggest that the report is unserious, and it isn't - there's no sense of "we have your money, stupid investor, and you can't do anything about it; neener, neener." But it's not humorless, and definitely not weaselly. To be fair, it might have been even more fun to watch them try to spin their way out of it, but I enjoyed the forthrightness of the report. I think I'll keep it a bit longer.

Thursday, May 17, 2007
Earnings Guidance
According to BusinessWeek, fewer companies these days are giving earnings guidance. I think earnings guidance may well encourage management to play games, as the article suggests, but the more important question is whether it constitutes information. It usually doesn't; generally, a company should be able to provide enough information that a competent analyst can not only generate his or her own earnings estimates, but error bars and an understanding of what might cause the numbers to miss the estimates.

Tuesday, May 15, 2007
ce qu'on ne voit pas
During bubbles, the competition created by excess capacity — too many e-retailers, too many railroads competing for too few customers — inevitably leads to vicious price competition. (Score one for consumers). Post-pop, the infrastructure - housing and telegraph wire, fiber-optic cable and railroads - doesn't get plowed under. It gets reused, and quickly, by entrepreneurs with new business plans, lower cost bases and better capital structures.
Is the whole book premised on the broken window fallacy?

All that cheap infrastructure being used after the pop cost a lot of money — more, in fact, than it was worth; the resources that were put into building it could otherwise have been put into building something more valuable. That it's not all lost doesn't make it a net positive; I'd file it under "the world is imperfect, and this sort of thing is probably less bad than what happens if we try a coordinated market structure change to protect against it".

Sunday, May 13, 2007
Charlie Rose interviews Warren Buffett
The hour-long video is at Google Video.

Friday, May 11, 2007
Cynicism Rising
Allstate Corp., the state's third-biggest home insurer, will stop selling new residential policies in California.

The Northbrook, Ill., company announced the July 1 cutoff Thursday afternoon, saying it needs to better manage the risk of potential losses from wildfires and earthquakes that might strike the Golden State.

"Allstate is taking responsible action now so that the company will continue to be in a strong position to help protect customers in California and across the country," said Robert Barge, the insurer's field vice president for California.

Spokesman Rich Halberg stressed, however, that the insurer will continue to renew coverage for the 1 in 7 California homeowners that it already insurers.
Sounds reasonable, no? Risks within one state are going to be highly correlated. This is good for their shareholders, good for policyholders in other states, and good for existing policyholders in California, none of whom should want Allstate to take on potential liabilities they aren't good for.

Here's the reaction from some self-appointed consumer group:
Advocates for policyholders say they want California Insurance Commissioner Steve Poizner to take a tough stance on Allstate if the company insists on limiting its California exposure. They want the commissioner to prohibit the company from returning to the market for at least 10 years.

"It would be completely unfair to California customers if Allstate tries to treat the California market like an accordion, coming in when business is good and then walking out," said Douglas Heller, president of the Foundation for Taxpayer & Consumer Rights in Santa Monica.

Monday, May 07, 2007
New Century Financial
At the same time the common stock of New Century Financial was delisted from the NYSE, so were two issues of preferred stock. They continue to trade on the pink sheets, and, while I don't know what the relevant par values are, the subprime market in general didn't really do anything interesting until the past six months, so the 52-week high may be a reasonable proxy, and they're both still trading — a few trades took place today — around 35% of that level. Barring the ever-present possibility that the market's just being dumb, this suggests at the very least a 35% chance that lenders and bond holders are going to come out of this thing whole, and really suggests odds rather better than that.

It's looking more and more like a chapter 11 liquidation at this point, and they just sold some mortgages at 30 cents on the dollar, but it may be that a nonnegligible part of their assets are unimpaired loans that could sell around their book value, though I should emphasize that I don't actually know that and am wildly speculating here. In any case, someone in the market thinks assets could work out to exceed liabilities. (I don't have data on where their bonds are trading. If anyone who reads this does, see whether the comments section works.)

causation, correlation, and statistics
Until 2004, the Washington Redskins appeared to have a tremendous ability to predict the future. Prior to that year's election, since 1936, the Redskins' performance in their last home game before the election accurately predicted the party that would gain control of the White House. That's a pretty interesting piece of data mining, but as the 2004 election showed, it had no real influence on the outcome.


People who believed that the game could predict the outcome of the election were committing a common logical error. They believed that correlation was causation.
Correlation isn't causation; as this incident shows, it's not even correlation.

More often, the confusion between correlation and causation is a direct one; A is correlated with B, so A causes B. Often someone will realize that, if A is correlated with B, then B is equally correlated with A, so B may well cause A; in fact, in light of le Chatlier's principle, I've developed a tendency, when I see a correlation with a sign opposite to what I'm expecting, to look at whether the causal relationship might primarily run the direction opposite what I was first thinking. More often, though, it's noted that both could be effects of some third cause. What often gets dropped is the notion that perhaps it's coincidence.

Warren Buffett, some nearly integer number of years back, noted that in insurance you don't care about causal relationships, only about the ensuing correlations. If X and Y are positively correlated, and someone with a lot of X wants to insure against Y, you'd better charge more than you would someone without a lot of X; it doesn't matter whether some risk factor for Y causes X or whether X causes Y. He was, however, referring to situations in which there is reason to believe in a future correlation between X and Y, which may be different from whether a small sample of past events has itself exhibited such a correlation. Having an understanding of the causal relationship underlying a correlation can help one to believe that it is likely to be sustained, and is not simply coincidence. Of course, if you have oodles of statistics for a comparatively uncontrived relationship, it can make sense not to assume there isn't a correlation just because you can't figure out why there should be.

Indeed, it's the case that you may, with insufficient statistics, not see a pattern where there is one. For example, if you follow that link, you can witness an attempt to refute a broadly plausible model of modern finance with seven data points which the model itself would expect to have far more noise than signal. There may be a (nonzero) correlation, or there may not be; with this kind of information set, it's probably safest simply to acknowledge ignorance.

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