Dollars and Jens
Friday, July 30, 2004
revised GDP data
With the 2Q advanced GDP numbers released this morning were also released revisions to previous data.
Republicans and Democrats have been fighting for months about who is to blame for the recession of 2001. Now it looks as if there might not even have been a recession, at least according to one definition.
With the revised data, there no longer exist two consecutive quarters of negative GDP growth in 2001. Two negative quarters of growth is one rule of thumb as to what makes a recession.

Professional economists have a different standard for recessions, one that is not affected by the revisions announced Friday. The professionals' definition relies on other indicators of economic health, especially employment, which fell sharply in 2001 and still has not reclaimed its pre-recession level.
Actually, the assertion that professional economists use "a ... standard" isn't strictly true. It's largely decided by the educated whim of the National Bureau of Economic Research. "At the moment, the NBER says the recession lasted eight months from March 2001 until November 2001."

There was a bit of "controversy" with the release of the 2004 Economic Report of the President because it contains a lot of charts and comparisons that use October 2000 as the beginning date of the recession. This date was based on revisions made to data after the NBER had announced March 2001 as the peak; the revised data are used in the charts and comparisons, and frankly they would look goofy if the administration had tried to shoe-horn them into the NBER date. If the NBER were going to issue a correction, though, I would expect it to have come by now; I expect the March date to hold, basically out of a combination of initial ignorance and later inertia.

I might as well note that the figure for second quarter 2004 growth came in at (annualized) 3.0%, well under the expected 3.7%. This is subject to two revisions, and while we saw a revision last fall as large as from 7.2% to 8.2%, I don't expect we'll see any changes that big to this number.

Update: That quarter that was revised from 7.2% to 8.2% has now been revised to 7.4%.

Monday, July 26, 2004
Google IPO
From Reuters:
Google Inc. said on Monday its highly anticipated initial public offer could value the company at more than $36 billion, prompting some investors to question whether growth prospects for the world's top Web search provider justified that rich valuation.

In a filing with the Securities and Exchange Commission, Google estimated it would sell its shares for between $108 and $135 through an online auction expected next month.

That price range would mean that the IPO could raise as much as $3.3 billion. It would also value the Mountain View, California-based company more richly than its closest rival, Yahoo Inc. and mark its emergence as a public company larger than old-economy stalwarts like Ford Motor Co. and McDonald's Corp.
skipping a little, and inserting per-post-offering-share amounts into the penultimate paragraph:

About 24.6 million shares would be sold in the IPO. Google plans to sell 14.1 million shares, while another 10.5 million would be sold by shareholders.

The company plans to use net proceeds from the sale of its 14.1 million shares, estimated to be $1.66 billion, for general corporate purposes. It will not receive any proceeds from the 10.5 million shares being sold by shareholders.

Google also filed second-quarter results on Monday. Earnings rose to $79 million ($.29/sh) from $64 million ($.24/sh) in the first quarter on revenue that jumped 7.5 percent to $700 million ($2.61/sh) from $652 million ($2.43/sh).

At $135 per share, Google would have a valuation, on a ratio of its price to 2003 earnings, of 329, more than twice that of its closest competitor, Yahoo Inc. The S&P 500 had a 2003 price-to-earnings ratio, in comparison, of more than 20.

Neither of us intends to place a bid.

Friday, July 23, 2004
Stupid Option Tricks
What's the dumbest thing you've ever heard? I'll bet I can top it.

As you know, there has been a debate in recent years over whether to count stock options issued by companies as an expense. Under current accounting rules, companies are allowed but not required to treat options as an expense on their income statements, but they are required to disclose the value of any options issued in the footnotes to the income statements. FASB has recently proposed that companies be required to expense their options. This is sensible -- things of value given up in exchange for labor services are, logically, salary expenses. And any company which disputes that options are "things of value" should feel free to send me some.

According to the Wall Street Journal, the U.S. House of Representatives recently voted to overrule FASB. This is dumb enough, on both procedure and substance, but it gets dumber: the bill they recently passed would require only stock options paid to a company's top five executives to count as an expense. They want to cut the baby in half.

Frankly, the status quo ante is tolerable to me -- as long as I can figure out a company's actual expenses (by looking through the footnotes), it's not important to me how wrong the financial statements themselves are. The current method that most companies use to calculate their expenses is obviously wrong, but it's not a problem. And the bill working its way through Congress wouldn't actually make things any worse, unless it weakens the footnote requirement. But it sure is dumb.

Tuesday, July 20, 2004
Iraqi Stock Market
The Iraqi stock market has opened.

Saturday, July 10, 2004
British Accounts Have Names Like Lenny, While American Accounts Have Names Like Carl
(or, "I Can't Believe I'm So Low on Interesting Blog Ideas That I'm Writing About Accounting")

I've been looking at the financial statements of a British company over the last week, and some of the accounting is a little different. The terminology is different, for one thing -- "stock" rather than "inventory", "turnover" rather than "revenue" (I don't know what they call turnover ratios), etc. Most of them are easy to figure out, though if I had to translate the different equity accounts to American, I'd have some trouble.

There are a few other differences -- for example, liabilities are listed on the asset side of the balance sheet. Their balancing equation, then, is assets-liabilities=equity, vs. our vastly different assets=liabilities+equity.

The most important difference I found was industry-specific. Oil & Gas exploration and production (E&P) companies in the U.S. always provide neat little tables of their production quantities and prices. This company doesn't do that. It does have most of this information in paragraph form -- their North Sea gas production volume is in units of billions of cubic feet, and the price is given in pence per therm. Therms are not trivially converted into cubic feet. West African oil is given in units of barrels per day, and the price is given in dollars per barrel -- no exchange rate is given, but West African revenue is specified, so one can be inferred. Pakistani gas volumes are given, but no other info -- I inferred a price of about 90 pence per thousand cubic feet by working backward from total production revenue, and that seems plausible. But it would have been nice if they had made it easier.

Friday, July 09, 2004
interest rate policy
I read today that Greenspan and Ferguson have been arguing that businesses "can absorb price increases with their profit margins", as it was put where I saw this; this makes me happier about having said it myself. At the same time, I wish I had a more clear sense of why I think they won't be able to pass those costs along.

One idea that's been slowly assembling itself in my head is based on something I emailed to my brother a few weeks ago, that it is precisely those companies that are in competitive industries that should be able to pass along cost increases, because their competitors will all be increasing prices as well, whereas the price a more protected company has been charging has been less connected to price in the first place and more connected to demand, which presumably is unaffected by the cost hikes. High profit margins suggest that competition hasn't yet been drawn in to a great extent. The way I say this — about competition being drawn in — is the classic reason that unsustainable profits are unsustainable: they draw competitors who will undersell you. This, too, would hold down prices.

So, there are my theories. Current prices are largely decoupled from costs by insufficient competition, and there will be more competition, holding down prices as costs rise. I'm still not convinced, but I'm talking myself into it; there will necessarily be an element of concern that I'm constructing models the way a drunk uses a lamppost: more for support than illumination.

latest numbers
Nobody filed for unemployment last week. Well, almost nobody; initial claims came in at 310,000, which is what I refer to as a "kick-the-machine" number, because that's what I would do if I got that measurement in a physics lab. Which is only one reason I'm not an experimental physicist. Anyway, bonds rose this morning in spite of the number; I understand that the usually-volatile initial claims number tends to be unusually volatile in the summer, in surprising part because car manufacturers are retooling for the new model year.

The treasury had a nondescript 10 year TIPS auction early this afternoon. I have recently read that the treasury recently announced that it would issue 5 year and 20 year TIPS; I remember when they suspended the 30 year, but I thought they had been auctioning 5 year TIPS all along. When did that stop? Its starting up again would presumably hurt I-bond investors, as it creates a more liquid market for TIPS maturing in 5 years, increasing their appeal and lowering their yield. It's this yield on which I-bond rates are based; until a week or two ago, the I-bond was headed to yield more if purchased in November than if purchased now, but intermediate- to long-term interest rates in general have weakened recently.

Incidentally, much as I keep writing about inflation being some time off, I do have a substantial amount of money in I-bonds.

It was noted today that the market didn't much respond to reports of "a steady stream of intelligence indicating al-Qaida may seek to mount an attack aimed at disrupting elections". This, of course, is because everybody already knew that. The market price at 11:00 was set based on this concern; when the announcement came out shortly after that, the new market price also reflected it, in exactly the same way.

Tuesday, July 06, 2004
Interest rate policy — where I see the economy going
I've recently — particularly the past week and a half — been indicating here that, while I think the fed should raise rates, I'm in no hurry to see them rise too quickly. While current rates are not neutral, and probably distort the economy in ways that aren't good in the long term, the labor market is still weak enough (and the economy over-adapted enough to low rates) that we should wait for stronger evidence of incipient inflation before braking too enthusiastically.

Apparently Bruce Bartlett thinks we should brake harder yesterday.

His arguments about higher commodity prices have been made throughout the ages by Kudlow, and they seem vaguely plausible to me; on the other hand, they've been predicting inflation for a while now, and I'm starting to wonder how long the lag is supposed to be. (If high commodity prices are supposed to cause inflation, it seems notable that labor is a much bigger part of most producer costs than are commodities.) It is my understanding that The Chairman does monitor the gap between the rate on the inflation-protected bond and the traditional, unprotected bond; that has indicated inflation in the neighborhood of 2% for quite a while. (TIPS yields have been going up over the past few months, just as nominal rates have.)

His comment about housing prices was, in fact, addressed here last week; his heart doesn't seem to be in it, and for approximately the reasons I gave. And I'm willing to spot him his reservations about more purely Keynesian arguments that inflation can't be happening because the economy has "unused capacity"; indeed, I've heard indications that much of the measured unused capacity is, in fact, obsolete capacity, and probably won't be used.

What really jumps out as a flashing red beacon, though, is this off-the-wall comment:
Just between Tuesday and Wednesday of last week, the yield on this bond fell from 4.69 percent to 4.59 percent because the Fed reduced inflationary expectations by tightening monetary policy.
This is exactly wrong. Everyone who wasn't working for Washington Mutual knew the fed would raise rates; the few people who thought there would not be a 25bp hike were expecting a 50bp hike. What surprised people was the statement, which tamed market projections of future fed hikes. Long-term rates came down because the fed statement was dovish, not because it was hawkish. (The rates have, in fact, dipped below 4.5% since the unemployment report came out.)

I have to admit that this may be an "anchoring" bias, but I just don't see record corporate profits as sustainable. The scenario I'm still carrying around with me is that the job market continues to improve, eventually it accelerates to the point where income growth exceeds GDP growth (which it still hasn't over any few months), companies start bidding against each other for workers, and most of the cost eats into corporate profits for several months before the companies have any general success passing cost hikes on to consumers.

Sustained core CPI increases would, of course, have to change my mind. If we don't see that, increased unit labor costs that aren't accompanied by falling earnings would concern me; even as if corporate earnings do fall as a result of wage pressures, that becomes the time to worry about inflation coming further out. Until then, a move toward a more neutral rate can be done very gradually, allowing fallout to occur at a rate where it won't threaten the ongoing recovery.

The Iowa Electronic Markets seem to approve of the choice of Edwards; the Democrats' winner-takes-all contract bumped up about 3 points.

Friday, July 02, 2004
latest numbers and interest rate policy
The jobs report was below consensus (though the household survey was slightly more sanguine), with the latest employment estimate only about 100,000 higher than last month; hourly wages were weak and hours per week dropped, implying a reduction of .4% in the total amount of money going to labor. This is Not Inflationary, and the end-of-year futures moved another 10 bp toward something closer to what I'm thinking lately.

I wish to digress in two directions, so I leave the political direction to its more appropriate forum, and prattle on here about my vision of interest rate policy. One of my arguments for a 25bp hike in May was that, by starting sooner, one could proceed more gradually; over the last few weeks I've come to think, increasingly, that we can proceed pretty gradually even starting June 30. While the economy is certainly looking up, there really aren't strong, credible threats of inflation; the only reason I'd raise rates at all is that I think the economy needs to start restructuring now to be better prepared for more robust inflation prevention in the future. That rates have been so low for so long is one of the big contributors to the low savings rate and asset orientation of the economy that I posted about last night; gradual moves now toward a more neutral rate allow for some adjustment so that any higher rates in the future don't cause quite as much dislocation.

Barring, of course, the unforeseen, I'd give the economy a full three months to digest this first hike, and maybe move another 25bp at the end of September. I don't know that the fed shares quite this view, but you can watch what they say; or, perhaps better yet, watch the futures market watch what they say. Greenspan is known to attempt to correct divergences between market expectations and his own intentions, and as we get closer to the next meeting and he knows what his intentions are, the futures market will probably align with them, by jawboning if necessary.

Asset-driven economy
Over the 1952 to 1985 time span, the ratio of household sector assets to GDP fluctuated in a fairly tight range centered around 3.75. But then, as the all-powerful secular bull markets in stocks and bonds took hold, that ratio started to drift upward. ... the ratio of US household sector assets to GDP pierced the 5.25 threshold in 1999.
An lot of reading material at Morgan Stanley about the fact that the wealth effect seems to be playing a bigger role in economic growth than it used to, and some concern that large fluctuations that take place in asset prices may reduce the stability of the economy.

Thursday, July 01, 2004
Krispy Kreme
I just looked at the price of Krispy Kreme for the first time in a while. It's down to 22 times earnings. I haven't done a detailed analysis, but it looks like a pretty reasonable price to me.

Incidentally, they claim to have been hit by the low-carb diet craze. I can see that as an excuse for pasta sales being hurt, but how many people who were concerned about their weight were eating doughnuts before low-carb took off? I guess I'm presuming that low-carb has been a substitute for other diets, i.e., that the number of dieters hasn't grown. And I realize this isn't entirely true -- a lot of people are just thinking more about health than they once did. But it still amuses me.

Again, I haven't looked at it closely. Do as you will.

Powered by Blogger