Dollars and Jens
Tuesday, July 31, 2007
I imagine those who care are likely to know, but I feel like commenting on the release of the government's first estimate on Q2 GDP growth at a 3.4% annual rate. Last quarter it was 0.6%.

3.4% is bigger.

Interestingly, the consumer spending that has been dragging GDP kicking and screaming higher for the last few years lost a great deal of its momentum; on the other hand, imports were lower and exports higher. The two effects almost exactly offset; the total of the two contributed to 2.1% of GDP growth in each quarter. Let's set that part of the story aside as consumers contributing the same amount each quarter, but foreign consumers this quarter rather than domestic ones. (That's not quite right, but it's maybe close enough.)

The other items I notice are a 0.8% in national defense consumption, 0.8% in inventory build-up, and 1.0% in "fixed non-residential investment", viz. what laymen tend to think of as investment. Inventory build-up is fairly mean-reverting, and backing that out gives about 1 1/4% growth for Q1 and 3 1/4% for Q2.

Sunday, July 29, 2007
Re: sum of the parts
I mostly agree with my brother; the Post probably could have created as much shareholder value by raising its dividend, possibly beyond its earnings, or buying back its own shares. But Dean is right that Fortune would not have been impressed, and I suspect the more likely alternative to buying non-synergistic companies would have been to waste money on investments in their core business.

Using that money to buy other companies for less than they're worth, as a certain textiles company started doing 40 years ago is much better. Though it should influence how you think about the company's management, and it might well be worthwhile for them eventually to spin off the subsidiary.

Friday, July 27, 2007
the corporate tax code
Well, this is heartening:
When Paulson asked panelists whether they'd like to see the corporate tax rate lowered from 35 percent - the top rate today - to 27 percent along with the elimination of preferences such as the research and development credit, Safra Catz, president and CFO of Oracle Corporation, said without hesitation. "I'd trade it in a minute for a simpler, lower rate."
This is one of those ways in which I expect corporate types — for want of a better label — to oppose economic efficiency. Tax-code inefficiencies tend to create their own constituencies, and tend to have a mind-share in excess of their size relative to the basic rate. They do, though, create a lot of waste on rent-seeking, not to mention increasing investment on lower-value projects at the expense of higher-value but less visible or politically connected ones. I'd love to see a move toward their elimination.

sum of the parts
An article on the Washington Post in particular and the newspaper business in particular.
The company bought cable systems in the mid-1990s, when prices were low. But Graham's best move has been to invest in the sprawling array of education businesses - a test-prep firm, colleges, an online university and professional training businesses - that make up the Kaplan unit. It contributed 43 percent of the Post Co.'s $3.9 billion in revenues in 2006.

While the Post Co. diversified, the New York Times Co., the Tribune Co., Knight Ridder, Gannett and McClatchy invested heavily in print during the 1990s. They have paid dearly for it. One example will suffice: In 1998, McClatchy bought the Minneapolis Star-Tribune for about $1.2 billion. The Post Co. then owned about 28 percent of the Minneapolis paper, and it chose to sell. Smart move. McClatchy sold it last year for $530 million.

This dependence on print is the big reason why, over the past five years, newspaper stocks as a group are down by nearly 30 percent. The Times Co. is off by 45 percent. During that same period, Post Co. shares are up by more than 40 percent.
What's not clear here is whether this is, say, a $1 billion business bolted onto a $3 billion business to make a $4 billion business, a $5 billion business, or a $3.5 billion business.

When the newspaper business is bad, the CEO of a newspaper company is lionized for taking his company out of the newspaper business, as though there's some value to having the institutional continuity. From a macroeconomic standpoint, if there's no particular fit between the existing business and whatever it's expanding into, there's no reason to think it's good for that company to be doing this new thing rather than some new company doing it while the newspaper business maximizes its value, however much that might be, as a newspaper business; from a shareholder perspective, it's not clear why the shareholder can't choose to buy stock in the hypothetical new business if that's what he wants. Financial journalism doesn't celebrate the competent management of a company's senescence; the manager of a business that isn't growing is expected to become an investment manager for his shareholders instead, deploying cash toward building a portfolio that the shareholders are perhaps too dumb to do themselves.

There is an obvious fit between the print newspaper business and the web media that he's been quick to get into as well; that seems like something that is likely to make good use of the intangible value the company started with. It's not obvious to me that the company wouldn't be better off as two different companies, though; if it were, and Graham were to stay with the newspaper company, he would probably get fewer encomia in Fortune magazine.

Friday, July 20, 2007
some follow-up on yesterday's posts
I thought I'd mention, in re housing, that the first thing I'm waiting for is for the inventory-to-sales ratio to come down from its peak. (It's in the six to seven months range right now, depending on exactly what you're looking at and which month.) I don't see a reason for prices to firm up on a widespread basis until the backlog is behind us, and I don't see a reason for much increase in investment until the prices firm up. So if you're wondering whether we're past the bottom yet, keep your eye on how many months' sales are outstanding. If it's within noise of its peak, the answer is no. We might see that in this calendar year, but I wouldn't bet any of my favorite body parts on it.

In re the Bill Miller piece, I was certainly expecting you to follow links from that first page, but thought I'd deep-link the full interview just in case. And I'll call attention, just because it's interesting to hear from a mutual fund manager, to
Well, first of all let me say that I think index funds ought to constitute, just from the broad standpoint of prudence, a significant portion of one's assets in equities.
If you just want to jump through it, "behavioral advantages" is a good thing to search for, and I guess I'll go ahead and pull out
My view, instead, is that the evidence is overwhelming that most people are too risk averse. And that therefore they should be taking a lot more risk than they feel like is right.

The problem is that real risk and perceived risk are two different things. And that's where people get into trouble, because they perceive risk to be high when prices are low, and they perceive risk to be low when prices are high. That's the psychological problem that most people have.
As highly as I think of Miller, I do think Jason Zweig — the interviewer — is a bit too agreeable; somewhere along the line I would have liked to ask Bill Miller whether he's ever fallen into a value trap, or how he would characterize and recognize such a thing, and — not unrelatedly — when he mentioned a recency bias, I might have asked about countervailing "pinning" biases that might keep stocks from responding to news as much as they should (where "recency" may cause them to overrespond). Going back to the beginning of the interview, one of the things he suggests you look for in a mutual fund manager is
Three, I would look for a value orientation. Doesn't mean that they would be necessarily a so-called value manager. I would look for somebody who actually thinks about the price that they're paying in relation to what this thing is worth, even if they're growth-oriented.
I agree absolutely with the statement as qualified, and think that, even where some psychological factors will pull in opposite directions, I'm going to place more faith in someone who keeps them in mind as a way of thinking about things, even where they seem to be sending mixed messages.

Bill Miller
Really, "Bill Miller speaks" is the sort of thing that should just make you follow the link and leave whatever I have to say redundant, but it's customary at this blog to steal at least one choice bit regardless.
If you have a valuation discipline, then you know that stock prices change more rapidly than business value.
I hadn't heard of the Kelly criterion before, but it looks like something I derived a few years ago. This is one of those things I should surely research more at some point.

housing market
"David Berson, vice president and chief economist at Fannie Mae, said 2006 and 2007 combined will show the biggest drop in sales since the housing downturn of 1989-91."
Berson said the housing market should bottom out close to the end of this year and there may be a small increase in demand in 2008, centered in the second half of the year.

Housing starts, however, will continue to fall through 2007 and perhaps into early 2008, he said.

"Unsold inventories remain excessively high," Berson said. "We need a period of time in which sales growth is stronger than starts."
This is basically what the people I believe seem to have been thinking.

Wednesday, July 18, 2007
subprime mortgages
About $140 billion in 2-year ARM subprime mortgages are resetting this quarter.

Have a nice day.

Monday, July 16, 2007
Foreign thoughts on SarbOx
I don't read foreign news sources as often as maybe I should, but I saw the European edition of the Financial Times a couple weeks ago. They had an interview with the new British Chancellor of the Exchequer, which is British for "Treasury Secretary". He thinks that Sarbanes-Oxley has been fantastic for the London financial sector.

I just thought I'd mention that.

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