Wednesday morning's appearance by Laszlo Birinyi on CNBC caused quite a stir. He made a stunning prediction that we are currently in a new secular bull equity market. He forecast a 2100 S&P500 Index in "2 to 3 years." By my calculations, that's a roughly 60% rise, working out to almost twice the long run Index annual average performance of around 11%.
I don't personally keep track of his record on this sort of call, but I assume it's pretty good. My sense is he is very well regarded in his field.
However, Birinyi said something that fit with my own observations. He talked about equity analysts and noted that there really are no 'stock market analysts,' but, rather, 'stock analysts.'
His own firm specializes in technical analyses of equity markets generally. For example, on the subject of the North African uprisings, Birinyi cited work that his firm has done on German equity markets after the Berlin Wall fell. Maybe it's relevant, maybe it's not. But that's the sort of thing his firm does.
I can identify with that, since my own quantitative work keeps a careful eye on basic equity market trends and behaviors. Like Birinyi, I don't presently see a market in which one wants to be solidly short. There may be increased volatility compared to a few months ago, but, despite many apparent headwinds, signals still indicate solid long positions.
Birinyi came right out and said that most investors simply have no sense of market history. Therefore, they are incapable of seeing trends or understanding how markets are likely to behave.
In light of current US federal and state government spending and debt challenges, and Fed policies, it seems heroic for Birinyi to have made his unequivocal call. However, given his focus, I am inclined to assign him more credibility than most pundits on this sort of prediction.
Friday, March 25, 2011
Thursday, March 24, 2011
Lee Cooperman Talks His Book On CNBC
This earlier post described the feisty discussion between Ken Langone and one of CNBC's favorite guests, Steve Rattner.
Rattner seems to be one of those favored cronies, like Bill Ackman and Lee Cooperman, who are given air time to basically push their views in order to publicize positions and, hopefully, enhance their portfolios' values. In the second linked post, I noted,
"Cooperman clearly believes, as a result of his fund's analytical team's meetings with HD's management, that the company's stock will eventually be appreciated, even though, now, it's "undervalued." His reeling off of the many operating statistics, mostly rather abstruse numbers, sounded like he was reading from a list his analysts had prepared for him."
I hadn't reread this post in quite some time, so I was pleasantly surprised that I had noted how Cooperman seemed to be reading quickly from a script prepared by his staff.
On Wednesday, Legg Mason fund manager Bill Miller, once famous for an unbroken string of years beating the S&P500 Index return, was a co-host for a portion of CNBC's afternoon programming. He, in turn, invited Omega Advisers' Lee Cooperman to appear, via video link, as his guest.
What followed was one of the most transparent, blatant examples of self-serving, legal investment book-talking that I've seen on CNBC in quite some time. After exchanging mutually-congratulatory greetings and such with Miller, Cooperman answered some questions about market conditions and the like. He stepped through some points which were conveniently reprised on overlay text, suggesting the thing was well-prepared and coordinated long before air time. It was so pre-programmed that Cooperman evidently forgot he was on video, and began to do something annoying with his finger and his ear. I honestly don't recall what he said, as it was so fascinating, in this video age, to see him attempt to push a finger all the way through his head on camera.
Someone asked Cooperman a question about his 'single measure' or some similar term that he watches, and he gave a forgettable answer. Then, in a sudden burst of verbiage, he hurriedly said that his firm had just acquired a new client and/or several hundred million dollars to manage. He said he'd contacted all of his very excellent analysts for ideas, and then, in a blur of words that were nearly incomprehensible, Lee rattled off a list of investments they were making for the client.
I don't know quite why he was in such a rush, but he was, again, as some years ago with the Home Depot figures, reading from a script. The CNBC co-anchor made some joke about there being too many stocks named to do appropriate disclaimers on all of them. Cooperman didn't even grin- he was obviously pleased that he'd done the job he really wanted to do that afternoon, i.e., enunciate a list of equities, into which he'd already put client money, in hopes that viewers would rush to their terminals and follow Lee's lead.
When a floor specialist who can see trades coming does this sort of thing, it's called front-running, and is illegal. That's because the specialist knows which way orders are going, and takes additional positions in order to then sell them to fill the orders. When a portfolio manager goes on air to name his current positions, the effect is the same, though the act is not illegal. By publicizing his current positions, he reasonably expects some viewers to follow his lead. But, instead of selling anything to those subsequent investors, he enjoys a rise in his portfolio's value as new buyers push the prices of his current holdings higher.
Later in the afternoon, Jim Cramer, who, according to his own statements, engaged in his own brand of market-affecting tactics as a hedge fund manager, made the obligatory statements of adulation about Cooperman, thus adding more focus to the list.
The shame of it is that none of this is illegal. It may be unethical. It may, and, I believe, does constitute a sort of media-based crony financial capitalism. But it's all perfectly legal. Why else do you think so many lesser-known portfolio managers seem so thankful to get 3 minutes of air time? They just want a few of the names they hold in portfolios to be publicized, hoping some viewers, either retail or institutional, will take the bait and buy, pushing the price up further, enhancing the guest's portfolio values.
Much is still made of Cooperman's investing skills. I haven't seen one of Omega's performance reports in years, so I am not personally aware of his recent performance record. I guess we'll all know, shortly, with the new fund managers' reporting requirements arriving via Dodd-Frank.
Until then, however, few will actually know how well Omega's portfolios have been performing. But you can bet they did a little better by the close of Wednesday afternoon.
Rattner seems to be one of those favored cronies, like Bill Ackman and Lee Cooperman, who are given air time to basically push their views in order to publicize positions and, hopefully, enhance their portfolios' values. In the second linked post, I noted,
"Cooperman clearly believes, as a result of his fund's analytical team's meetings with HD's management, that the company's stock will eventually be appreciated, even though, now, it's "undervalued." His reeling off of the many operating statistics, mostly rather abstruse numbers, sounded like he was reading from a list his analysts had prepared for him."
I hadn't reread this post in quite some time, so I was pleasantly surprised that I had noted how Cooperman seemed to be reading quickly from a script prepared by his staff.
On Wednesday, Legg Mason fund manager Bill Miller, once famous for an unbroken string of years beating the S&P500 Index return, was a co-host for a portion of CNBC's afternoon programming. He, in turn, invited Omega Advisers' Lee Cooperman to appear, via video link, as his guest.
What followed was one of the most transparent, blatant examples of self-serving, legal investment book-talking that I've seen on CNBC in quite some time. After exchanging mutually-congratulatory greetings and such with Miller, Cooperman answered some questions about market conditions and the like. He stepped through some points which were conveniently reprised on overlay text, suggesting the thing was well-prepared and coordinated long before air time. It was so pre-programmed that Cooperman evidently forgot he was on video, and began to do something annoying with his finger and his ear. I honestly don't recall what he said, as it was so fascinating, in this video age, to see him attempt to push a finger all the way through his head on camera.
Someone asked Cooperman a question about his 'single measure' or some similar term that he watches, and he gave a forgettable answer. Then, in a sudden burst of verbiage, he hurriedly said that his firm had just acquired a new client and/or several hundred million dollars to manage. He said he'd contacted all of his very excellent analysts for ideas, and then, in a blur of words that were nearly incomprehensible, Lee rattled off a list of investments they were making for the client.
I don't know quite why he was in such a rush, but he was, again, as some years ago with the Home Depot figures, reading from a script. The CNBC co-anchor made some joke about there being too many stocks named to do appropriate disclaimers on all of them. Cooperman didn't even grin- he was obviously pleased that he'd done the job he really wanted to do that afternoon, i.e., enunciate a list of equities, into which he'd already put client money, in hopes that viewers would rush to their terminals and follow Lee's lead.
When a floor specialist who can see trades coming does this sort of thing, it's called front-running, and is illegal. That's because the specialist knows which way orders are going, and takes additional positions in order to then sell them to fill the orders. When a portfolio manager goes on air to name his current positions, the effect is the same, though the act is not illegal. By publicizing his current positions, he reasonably expects some viewers to follow his lead. But, instead of selling anything to those subsequent investors, he enjoys a rise in his portfolio's value as new buyers push the prices of his current holdings higher.
Later in the afternoon, Jim Cramer, who, according to his own statements, engaged in his own brand of market-affecting tactics as a hedge fund manager, made the obligatory statements of adulation about Cooperman, thus adding more focus to the list.
The shame of it is that none of this is illegal. It may be unethical. It may, and, I believe, does constitute a sort of media-based crony financial capitalism. But it's all perfectly legal. Why else do you think so many lesser-known portfolio managers seem so thankful to get 3 minutes of air time? They just want a few of the names they hold in portfolios to be publicized, hoping some viewers, either retail or institutional, will take the bait and buy, pushing the price up further, enhancing the guest's portfolio values.
Much is still made of Cooperman's investing skills. I haven't seen one of Omega's performance reports in years, so I am not personally aware of his recent performance record. I guess we'll all know, shortly, with the new fund managers' reporting requirements arriving via Dodd-Frank.
Until then, however, few will actually know how well Omega's portfolios have been performing. But you can bet they did a little better by the close of Wednesday afternoon.
Ken Langone v. Steve Rattner, George Miller On CNBC This Morning
Home Depot chain co-founder Ken Langone spent two hours as a guest host on CNBC's morning program today. As usual, it was an immensely intriguing episode marked my Langone's candor bursting the fictions being spun by other guests on the program.
The first act was Langone debunking several of the self-serving, misleading statements made by Steve Rattner. I've written about Rattner in a recent post, so I'm not pretending to be neutral about him. But the wonderful thing about this morning's discussion was that Rattner, when finally forced to spin his truth-challenged story to a smart, objective, capable opponent, clearly came off badly.
The reason for Rattner's appearance was apparently some article he wrote in a European publication claiming that his government-run bankruptcy action of GM could provide a template for European nations to follow. Langone began the debate by taking issue with the utility of comparing GM before and after the bankruptcy. Rattner had crowed about various comparative measures, and Langone called attention to the peculiar nature of the bankruptcy. In essence, Langone correctly stated that the process removed senior creditors' rights, removed health care obligations in an unusual fashion, and, generally, was run to the benefit of unions while trampling the rights of legitimate creditors.
Rattner then told his fairy tale of hypotheticals, mixed with lies. For example, he repeated the usual line that 'millions of jobs would have been lost' had the government allowed GM to be liquidated. That was the predominant line used at the time, but, of course, nobody can ever prove it to be true.
Then Rattner told a baldface lie when he claimed that, to paraphrase,
'the only choices were government-assisted restructuring of GM or liquidation.'
That's simply not true. In fact, a conventional bankruptcy would have protected GM while it considered options, such as closing some units, selling others, and, generally, reviewing alternatives prior to total liquidation. Rattner simply denies this, because it's inconvenient for him to admit there was a third, available, conventional, legal option.
Rattner also disingenuously claimed that bondholders had the right to take the company, but refused. That, too, isn't true. What really happened, as news stories of the day will inform, and about which I wrote in some of my GM-labeled posts of the time, was that the government coerced bondholders to take a lower recovery than the unions received. Rattner pretends that bondholders received a fair bankruptcy court hearing, but that's not true. The entire procedure was taken out of the usual bankruptcy channels, and federal power was used to quietly bludgeon bondholders, as they were told the government would arrange a resolution leaving them nothing, or they could take what was on offer. Period.
Because of various fiduciary laws, the various funds holding GM paper had no choice, because the third option, legitimate bankruptcy process according to established law, in an independent court, was not available.
Langone and Rattner then began to elaborate on their points, with Langone repeatedly criticizing the GM bankruptcy as abnormal and wrong, while Rattner continued to claim it saved the US economy and was nothing unusual.
From there, after a few rounds of those statements, the combatants agreed they would not change each others' opinions. Then Rattner, ever the self-interested party, chimed in that he wanted viewers to believe him. No surprise there.
Since Langone is objective, and Rattner is not, it's pretty easy to see who was telling the truth.
Next, George Miller (D-CA) appeared to beat his chest over how great a Congressman he was when his party was in the majority. Specifically, he claimed total responsibility and authorship of the dreaded 'paygo' House rule, lauded every costly piece of liberal legislation passed by the recently-ended Congressional session, and, regarding health care, said he just wanted 'change.'
His exchange with Langone, and others, was less a direct debate than a clear example of big government (Miller) vs. small government (Langone). Miller made it very clear that he had no use for market-based evolution of the health care system. Missing from his self-glorifying patter were some facts. For example, that his vaunted paygo approach was just an excuse to force every new Democratic program to trigger more taxes to pay for it. On health care, rather than mention that his party stiff-armed every Republican amendment and suggestion, he instead claimed that they 'listened to academics' and various other theoreticians, mostly of a liberal stripe. True enough, the bill that passed has already proven to be engendering dozens of unintended, unworkable and undesirable consequences. Exemptions to major coverage requirements already number over a thousand.
Toward the end of the second hour, the networks resident economic moron, Steve Liesman, showed up to spew some more bad thinking and ill-informed verbiage.He drew justifiably heavy fire from Langone, Kernen and Rick Santelli for ignoring the front-line burdens of the recent health care legislation, then moved on to exhibit his complete misunderstanding of a recent Wall Street Journal editorial which ingeniously put the lie to Treasury Secretary Geithner's claim that TARP had 'made money' for taxpayers. The Journal piece provided the broader context of various Fed asset purchases, GSE takeovers, etc., which allowed bank-held structured finance assets to be valued at higher levels than they would have otherwise been, thus allowing them to repay TARP funds. In short, the editorial correctly noted that TARP was simply the named tip of a very large federal iceberg of self-dealing and non-market-based asset valuations calculated to let banks appear solvent and, thus, capable of repaying government funds. Liesman apparently failed to understand the article, gasping and sputtering that the authors, and anyone who believed them, were just ungrateful for the federal government's profitable rescue of the banking system.
It's refreshing to see a principled, reasoned, intelligent host like Langone take on some of the dissembling guests who so routinely appear on CNBC's Squawkbox. Too bad they can't fire Carlos whathisname and replace him with Langone. But I'm sure Langone would decline the offer.
The first act was Langone debunking several of the self-serving, misleading statements made by Steve Rattner. I've written about Rattner in a recent post, so I'm not pretending to be neutral about him. But the wonderful thing about this morning's discussion was that Rattner, when finally forced to spin his truth-challenged story to a smart, objective, capable opponent, clearly came off badly.
The reason for Rattner's appearance was apparently some article he wrote in a European publication claiming that his government-run bankruptcy action of GM could provide a template for European nations to follow. Langone began the debate by taking issue with the utility of comparing GM before and after the bankruptcy. Rattner had crowed about various comparative measures, and Langone called attention to the peculiar nature of the bankruptcy. In essence, Langone correctly stated that the process removed senior creditors' rights, removed health care obligations in an unusual fashion, and, generally, was run to the benefit of unions while trampling the rights of legitimate creditors.
Rattner then told his fairy tale of hypotheticals, mixed with lies. For example, he repeated the usual line that 'millions of jobs would have been lost' had the government allowed GM to be liquidated. That was the predominant line used at the time, but, of course, nobody can ever prove it to be true.
Then Rattner told a baldface lie when he claimed that, to paraphrase,
'the only choices were government-assisted restructuring of GM or liquidation.'
That's simply not true. In fact, a conventional bankruptcy would have protected GM while it considered options, such as closing some units, selling others, and, generally, reviewing alternatives prior to total liquidation. Rattner simply denies this, because it's inconvenient for him to admit there was a third, available, conventional, legal option.
Rattner also disingenuously claimed that bondholders had the right to take the company, but refused. That, too, isn't true. What really happened, as news stories of the day will inform, and about which I wrote in some of my GM-labeled posts of the time, was that the government coerced bondholders to take a lower recovery than the unions received. Rattner pretends that bondholders received a fair bankruptcy court hearing, but that's not true. The entire procedure was taken out of the usual bankruptcy channels, and federal power was used to quietly bludgeon bondholders, as they were told the government would arrange a resolution leaving them nothing, or they could take what was on offer. Period.
Because of various fiduciary laws, the various funds holding GM paper had no choice, because the third option, legitimate bankruptcy process according to established law, in an independent court, was not available.
Langone and Rattner then began to elaborate on their points, with Langone repeatedly criticizing the GM bankruptcy as abnormal and wrong, while Rattner continued to claim it saved the US economy and was nothing unusual.
From there, after a few rounds of those statements, the combatants agreed they would not change each others' opinions. Then Rattner, ever the self-interested party, chimed in that he wanted viewers to believe him. No surprise there.
Since Langone is objective, and Rattner is not, it's pretty easy to see who was telling the truth.
Next, George Miller (D-CA) appeared to beat his chest over how great a Congressman he was when his party was in the majority. Specifically, he claimed total responsibility and authorship of the dreaded 'paygo' House rule, lauded every costly piece of liberal legislation passed by the recently-ended Congressional session, and, regarding health care, said he just wanted 'change.'
His exchange with Langone, and others, was less a direct debate than a clear example of big government (Miller) vs. small government (Langone). Miller made it very clear that he had no use for market-based evolution of the health care system. Missing from his self-glorifying patter were some facts. For example, that his vaunted paygo approach was just an excuse to force every new Democratic program to trigger more taxes to pay for it. On health care, rather than mention that his party stiff-armed every Republican amendment and suggestion, he instead claimed that they 'listened to academics' and various other theoreticians, mostly of a liberal stripe. True enough, the bill that passed has already proven to be engendering dozens of unintended, unworkable and undesirable consequences. Exemptions to major coverage requirements already number over a thousand.
Toward the end of the second hour, the networks resident economic moron, Steve Liesman, showed up to spew some more bad thinking and ill-informed verbiage.He drew justifiably heavy fire from Langone, Kernen and Rick Santelli for ignoring the front-line burdens of the recent health care legislation, then moved on to exhibit his complete misunderstanding of a recent Wall Street Journal editorial which ingeniously put the lie to Treasury Secretary Geithner's claim that TARP had 'made money' for taxpayers. The Journal piece provided the broader context of various Fed asset purchases, GSE takeovers, etc., which allowed bank-held structured finance assets to be valued at higher levels than they would have otherwise been, thus allowing them to repay TARP funds. In short, the editorial correctly noted that TARP was simply the named tip of a very large federal iceberg of self-dealing and non-market-based asset valuations calculated to let banks appear solvent and, thus, capable of repaying government funds. Liesman apparently failed to understand the article, gasping and sputtering that the authors, and anyone who believed them, were just ungrateful for the federal government's profitable rescue of the banking system.
It's refreshing to see a principled, reasoned, intelligent host like Langone take on some of the dissembling guests who so routinely appear on CNBC's Squawkbox. Too bad they can't fire Carlos whathisname and replace him with Langone. But I'm sure Langone would decline the offer.
Mort Zuckerman On The Anemic Recovery
Mort Zuckerman wrote a provocative editorial in last Thursday's Wall Street Journal concerning the anemic recovery in the US. He echoed some of my concerns, but provided interesting metrics to substantiate them.
For example, consider this passage,
"Quite simply, it is because households are still carrying far too much debt on their balance sheets. Relative to income, debt today is approximately twice as high for families as it was in the 1980s. Total borrowing in relation to disposable, personal after-tax income leaped to approximately 136% in the first quarter of 2008 from 60% in the early 1980s before it began to recede. It has now declined to 117% of income compared to the pre- bubble norm of 70%. To return to that level, debt would have to be reduced by another $6 trillion. Similarly, the debt-to-asset ratio in relation to household assets is currently 20%, but the pre-bubble norm was 12.5%. The deleveraging process still has a long ways to go.
As more U.S. households pay down their debt, the slowdown in consumer spending will continue. The savings rate, which had averaged 8.6% during the 1980s and 5.5% in the 1990s, dropped to an alarming 2.8% in the 2000s. No longer are households engaging in mortgage equity cash-outs to the tune of over $80 billion per quarter, as they did in 2006. Cash-out refinancing today has dropped by 90%, contracting the available funds that helped power the pre-2007 spending binge."
In short, Zuckerman cites the data which explain why even the very slow job growth that seems to be fretfully emerging is not going to be sufficient to cure our ills. We're experiencing and witnessing continuing consumer de-leveraging after a decade of financial decline.
If you look closely at these comparative statistics, it describes how much different the decades of the 1990s and 2000s were from the 1980s. That earliest decade was, at the time, considered one of prosperity. Yet, in terms of personal financial balance sheets, it was relatively restrained.
From the perspective Zuckerman provides, the last twenty years have truly been an aberration.
Zuckerman continues by observing,
"Not surprisingly, middle-class Americans are growing increasingly leery of debt. This trend will continue as more families realize their retirement nest egg is going to be a whole lot smaller than they expected. Credit cards provide a marker. In a survey taken towards the end of last year by Javelin Strategy & Research, only 45% of households used credit cards in 2010, compared to 56% in 2009, and 87% in 2007.
Virtually every index of consumer sentiment supports this sense of consumer restraint. In a recent poll taken by the Pew Research Center, 71% of American consumers say they are buying less expensive brands, 57% say they have trimmed or eliminated vacations, 11% have postponed marriage or children, and 9% have moved in with their families, reducing spending on alcoholic beverages, clothing and restaurants. In other words, roughly 25 million unemployed or partially unemployed Americans are focusing on basic necessities. They make up a part of the 42 million Americans on food stamps.
Quite simply, American households are seeking to become net savers, not net borrowers. This is hardly surprising when real median household incomes are down over 4% from the 2000-2009 decade, according to recent research conducted by Mr. Rosenberg at Gluskin Sheff. Net worth has declined by more than $100,000 for the average household compared to just three years ago, and total household net worth is $12 trillion lower today than at the pre-recession peak—an unprecedented decline of 18.5% over three years. The bulk of this loss comes from diminished home equity, and with more than six million homes in inventory or in foreclosure, prices have been declining again for the past six months."
Here, Zuckerman has provided some of the income and spending details to identify why and how the consumer balance sheet changes he noted in the previous passage are occurring. It's stunning stuff, is it not? These are the sorts of behaviors probably last experienced forty years ago, during the Carter-era stagflation. That is, American families making sizable lifestyle changes in order to survive,
"In short, the triple whammy of weak consumer sales, a weak housing market, and a deeply anemic job market is still very much with us. There are no quick fixes to the post-bubble credit collapse. The painful process of deleveraging is far from over. Current debt loads are not sustainable either by incomes or asset values, which are falling.
That's why our economic pulse is so weak. Real GDP growth is less than half of what one would ordinarily expect to see coming out of such a deep downturn. And there has been virtually no recovery at all with respect to housing, income levels and employment."
So there you have it in a nutshell. Consumer deleveraging, by the numbers. The related income and expense consequences. I think the data are convincing and compelling. We have a signficant shift in consumer economic and financial behaviors.
In conclusion, Zuckerman wrote,
"The government's February jobs report reaped a slew of cheerful headlines. But much of the bounce came in construction, where workers were kept idle by January's snowfalls. Job gains for the past three months averaged just 135,000—we need 150,000 a month just to keep pace with population. And government figures don't take into account the two million plus discouraged workers who've dropped out of the labor force over the past year and a half and are still unemployed. If counted, the jobless rate would have been 11.5% in February."
I don't particularly agree with his final comments suggesting another federal stimulus, whether monetary or fiscal. But his analysis of the current US economic situation is, I believe, correct. The trouble is, many want government to do something. Nobody seems to be capable anymore of simply accepting the pain and consequences of prior economic mistakes.
But now, that's probably what is necessary for the US economy to fully recover to its potential.
For example, consider this passage,
"Quite simply, it is because households are still carrying far too much debt on their balance sheets. Relative to income, debt today is approximately twice as high for families as it was in the 1980s. Total borrowing in relation to disposable, personal after-tax income leaped to approximately 136% in the first quarter of 2008 from 60% in the early 1980s before it began to recede. It has now declined to 117% of income compared to the pre- bubble norm of 70%. To return to that level, debt would have to be reduced by another $6 trillion. Similarly, the debt-to-asset ratio in relation to household assets is currently 20%, but the pre-bubble norm was 12.5%. The deleveraging process still has a long ways to go.
As more U.S. households pay down their debt, the slowdown in consumer spending will continue. The savings rate, which had averaged 8.6% during the 1980s and 5.5% in the 1990s, dropped to an alarming 2.8% in the 2000s. No longer are households engaging in mortgage equity cash-outs to the tune of over $80 billion per quarter, as they did in 2006. Cash-out refinancing today has dropped by 90%, contracting the available funds that helped power the pre-2007 spending binge."
In short, Zuckerman cites the data which explain why even the very slow job growth that seems to be fretfully emerging is not going to be sufficient to cure our ills. We're experiencing and witnessing continuing consumer de-leveraging after a decade of financial decline.
If you look closely at these comparative statistics, it describes how much different the decades of the 1990s and 2000s were from the 1980s. That earliest decade was, at the time, considered one of prosperity. Yet, in terms of personal financial balance sheets, it was relatively restrained.
From the perspective Zuckerman provides, the last twenty years have truly been an aberration.
Zuckerman continues by observing,
"Not surprisingly, middle-class Americans are growing increasingly leery of debt. This trend will continue as more families realize their retirement nest egg is going to be a whole lot smaller than they expected. Credit cards provide a marker. In a survey taken towards the end of last year by Javelin Strategy & Research, only 45% of households used credit cards in 2010, compared to 56% in 2009, and 87% in 2007.
Virtually every index of consumer sentiment supports this sense of consumer restraint. In a recent poll taken by the Pew Research Center, 71% of American consumers say they are buying less expensive brands, 57% say they have trimmed or eliminated vacations, 11% have postponed marriage or children, and 9% have moved in with their families, reducing spending on alcoholic beverages, clothing and restaurants. In other words, roughly 25 million unemployed or partially unemployed Americans are focusing on basic necessities. They make up a part of the 42 million Americans on food stamps.
Quite simply, American households are seeking to become net savers, not net borrowers. This is hardly surprising when real median household incomes are down over 4% from the 2000-2009 decade, according to recent research conducted by Mr. Rosenberg at Gluskin Sheff. Net worth has declined by more than $100,000 for the average household compared to just three years ago, and total household net worth is $12 trillion lower today than at the pre-recession peak—an unprecedented decline of 18.5% over three years. The bulk of this loss comes from diminished home equity, and with more than six million homes in inventory or in foreclosure, prices have been declining again for the past six months."
Here, Zuckerman has provided some of the income and spending details to identify why and how the consumer balance sheet changes he noted in the previous passage are occurring. It's stunning stuff, is it not? These are the sorts of behaviors probably last experienced forty years ago, during the Carter-era stagflation. That is, American families making sizable lifestyle changes in order to survive,
"In short, the triple whammy of weak consumer sales, a weak housing market, and a deeply anemic job market is still very much with us. There are no quick fixes to the post-bubble credit collapse. The painful process of deleveraging is far from over. Current debt loads are not sustainable either by incomes or asset values, which are falling.
That's why our economic pulse is so weak. Real GDP growth is less than half of what one would ordinarily expect to see coming out of such a deep downturn. And there has been virtually no recovery at all with respect to housing, income levels and employment."
So there you have it in a nutshell. Consumer deleveraging, by the numbers. The related income and expense consequences. I think the data are convincing and compelling. We have a signficant shift in consumer economic and financial behaviors.
In conclusion, Zuckerman wrote,
"The government's February jobs report reaped a slew of cheerful headlines. But much of the bounce came in construction, where workers were kept idle by January's snowfalls. Job gains for the past three months averaged just 135,000—we need 150,000 a month just to keep pace with population. And government figures don't take into account the two million plus discouraged workers who've dropped out of the labor force over the past year and a half and are still unemployed. If counted, the jobless rate would have been 11.5% in February."
I don't particularly agree with his final comments suggesting another federal stimulus, whether monetary or fiscal. But his analysis of the current US economic situation is, I believe, correct. The trouble is, many want government to do something. Nobody seems to be capable anymore of simply accepting the pain and consequences of prior economic mistakes.
But now, that's probably what is necessary for the US economy to fully recover to its potential.
Wednesday, March 23, 2011
Paul Singer On Inflation, Dodd-Frank Regulation, & The Next Financial Meltdown
This past weekend's Wall Street Journal main interview was with hedge fund manager Paul Singer. I can't say I was acquainted with his work prior to reading the interview, but I was heartened, in a way, that so much of what he espoused was similar to some of my own previously-written views.
For example, Singer was unequivocal regarding coming inflation. When a guy like this begins citing 1930s era European treatises on the Germany currency debasement, you should be worried. I already am, but, of course, Helicopter Ben keeps telling people like me to have faith and quit being concerned.
Let me put it this way. Singer has built a multi-billion hedge fund by relying on his own analyses, conclusions and instincts. Ben The Bernanke is a high-level civil servant who will probably be offered another high-level, lucrative position after being Fed Chairman, no matter how badly he messes up in that role.
Of the two, Singer or Bernanke, whom do you think has the greater risk in being wrong, and, therefore, is more likely to get the current economic situation correct? And, by the way, Bernanke, as a sitting Fed Chairman, pretty much has to cheer lead on topics like saying economic growth is coming or here, inflation won't be a problem, and the world's investors won't be concerned about continued US monetary debasement.
For once, in Singer, I've found someone who echoes my own views of large US commercial banks as totally unattractive investments. James Freeman's interview quotes him as saying,
"You don't know the financial condition of [Citigroup], JP Morgan, Bank of America, any of them. Mr. Singer believes the big banks still carry too much leverage, and he doesn't trust regulators to monitor them effectively.
The largest financial institutions, he says, are "a random collection of survivors. Almost none of the survivors exist because of their perspicacity, risk controls and sound management- even the ones that are vaunted along those lines...How and why do they exist? Mostly on accident, meaning who got bailed out first and who was saved next and how did people feel and what did people say the weekend Merrill was under pressure [in September 2008]." "
Singer goes further in the next paragraphs, citing one of my own favorite risks- counterparty. He says that his fund complex has removed itself as much as possible from having any of the large US commercial banks and "the Street" as counterparties.
Singer sees Dodd-Frank as I, and many others, do, as described in the interview thus,
"The authors of Dodd-Frank claim that the law prevents the government from bailing out any particular firm, but the Fed can still provide emergency loans to a failing giant as long as it offers similar financing to other firms.
"It's a very important part of this equation that a few survivors exist in this peculiar relationship with government, having to kowtow to government, make relationships with regulators," says Mr. Singer. "Are they puppets of the government? Are they cronies of the government? Will their lending be affected by the perceived whims or beliefs of the particular government regulators existing at a particular time? Yes."
If the government deems a firm not "systemically important," Mr. Singer forecasts, it could spell its doom. "Small and medium-sized financial institutions may be disadvantaged, may be sacrificed in the next crisis to protect these behemoths," he says.
It gets even worse, Mr. Singer says, if the government ever deems a financial giant "in danger of default"—a judgment that can be made without the consent of the firm or its investors. The business is then taken over by the Federal Deposit Insurance Corporation, with its Orderly Liquidation Authority.
Once in charge of the firm, the government can discriminate among similarly situated creditors and transfer assets out of the business at will. Because of this, says Mr. Singer, creditors and trading counterparties might flee even faster than they would from a firm headed toward bankruptcy, where at least there is established law instead of regulator discretion.
"You don't know how you will be treated," he says of financial institutions under the new FDIC regime. "If there are companies that are also counterparties alongside you but they've been designated systemically important, that's a clue. It's like a game of treasure hunt. It's a clue that you're going to get disadvantaged compared to them."
So maybe FDIC chairman Sheila Bair and the authors of Dodd-Frank were right about one thing: Perhaps their new process for resolving failing giants really will discourage some people from lending to the biggest banks—but only at the worst possible moment.
The problem, in Mr. Singer's view, will be the jarring shift from one day being an investor in a member of the "systemically important" club, to the next day being a creditor whose claim is determined by bureaucratic whim. This may be welcome news to government pension funds that will want to be bailed out, but certainly not for private investors.
The speed at which a firm will collapse as word gets around that it might be headed to FDIC resolution could be "amazing," says Mr. Singer. And that "speed will drive the size of the losses."
This "atmosphere of unpredictability" is harmful to America's place in the financial world, he says, and "it doesn't make the system any safer. . . . This is nuts to be identifying systemically important institutions." He views it as a poor "substitute for creating soundness and reasonable levels of leverage throughout the system."
Phrases like "bureaucratic whim" ought to make you cringe. Don't you think they have that effect on investors in, lenders and counterparties to such institutions? I do. Singer's comments confirm what many others, including me, have contended, i.e., that the comparatively predictable existing bankruptcy laws have been replaced by liquidation-by-whim and cronyism. Singer is correct to predict that funds will leave a troubled firm much faster than anyone can imagine. And, ironically, that being in a group of selectively preferred, "systematically important" designated firms lending to or investing in a large bank is actually dangerous, because you will be the least-advantaged party. The one most likely to be at the very end of any line to collect on funds due.
Thus, in Singer's view, you have government-backed large institutions continuing with risky behaviors, and counterparties like them doing the same. This, he worries, is the seed bed for the next financial meltdown. Dodd-Frank and the FDIC have replaced uncertainty with respect to government backing for large firms in the event of another financial crisis with absolute certainty that select "systematically important" banking firms will be rescued. Moral hazard is now legislatively and regulatorily banished, leading to another round of excessive risk-taking.
The final passage of Freeman's interview says a lot about Singer,
"One reason his firm has survived for 34 years, he says, is that "we try to be very respectful of the unpredictability of markets. We try to at all times at least assume that the world is not being properly run." A safe assumption. "
Sad but, in this case, so true.
For example, Singer was unequivocal regarding coming inflation. When a guy like this begins citing 1930s era European treatises on the Germany currency debasement, you should be worried. I already am, but, of course, Helicopter Ben keeps telling people like me to have faith and quit being concerned.
Let me put it this way. Singer has built a multi-billion hedge fund by relying on his own analyses, conclusions and instincts. Ben The Bernanke is a high-level civil servant who will probably be offered another high-level, lucrative position after being Fed Chairman, no matter how badly he messes up in that role.
Of the two, Singer or Bernanke, whom do you think has the greater risk in being wrong, and, therefore, is more likely to get the current economic situation correct? And, by the way, Bernanke, as a sitting Fed Chairman, pretty much has to cheer lead on topics like saying economic growth is coming or here, inflation won't be a problem, and the world's investors won't be concerned about continued US monetary debasement.
For once, in Singer, I've found someone who echoes my own views of large US commercial banks as totally unattractive investments. James Freeman's interview quotes him as saying,
"You don't know the financial condition of [Citigroup], JP Morgan, Bank of America, any of them. Mr. Singer believes the big banks still carry too much leverage, and he doesn't trust regulators to monitor them effectively.
The largest financial institutions, he says, are "a random collection of survivors. Almost none of the survivors exist because of their perspicacity, risk controls and sound management- even the ones that are vaunted along those lines...How and why do they exist? Mostly on accident, meaning who got bailed out first and who was saved next and how did people feel and what did people say the weekend Merrill was under pressure [in September 2008]." "
Singer goes further in the next paragraphs, citing one of my own favorite risks- counterparty. He says that his fund complex has removed itself as much as possible from having any of the large US commercial banks and "the Street" as counterparties.
Singer sees Dodd-Frank as I, and many others, do, as described in the interview thus,
"The authors of Dodd-Frank claim that the law prevents the government from bailing out any particular firm, but the Fed can still provide emergency loans to a failing giant as long as it offers similar financing to other firms.
"It's a very important part of this equation that a few survivors exist in this peculiar relationship with government, having to kowtow to government, make relationships with regulators," says Mr. Singer. "Are they puppets of the government? Are they cronies of the government? Will their lending be affected by the perceived whims or beliefs of the particular government regulators existing at a particular time? Yes."
If the government deems a firm not "systemically important," Mr. Singer forecasts, it could spell its doom. "Small and medium-sized financial institutions may be disadvantaged, may be sacrificed in the next crisis to protect these behemoths," he says.
It gets even worse, Mr. Singer says, if the government ever deems a financial giant "in danger of default"—a judgment that can be made without the consent of the firm or its investors. The business is then taken over by the Federal Deposit Insurance Corporation, with its Orderly Liquidation Authority.
Once in charge of the firm, the government can discriminate among similarly situated creditors and transfer assets out of the business at will. Because of this, says Mr. Singer, creditors and trading counterparties might flee even faster than they would from a firm headed toward bankruptcy, where at least there is established law instead of regulator discretion.
"You don't know how you will be treated," he says of financial institutions under the new FDIC regime. "If there are companies that are also counterparties alongside you but they've been designated systemically important, that's a clue. It's like a game of treasure hunt. It's a clue that you're going to get disadvantaged compared to them."
So maybe FDIC chairman Sheila Bair and the authors of Dodd-Frank were right about one thing: Perhaps their new process for resolving failing giants really will discourage some people from lending to the biggest banks—but only at the worst possible moment.
The problem, in Mr. Singer's view, will be the jarring shift from one day being an investor in a member of the "systemically important" club, to the next day being a creditor whose claim is determined by bureaucratic whim. This may be welcome news to government pension funds that will want to be bailed out, but certainly not for private investors.
The speed at which a firm will collapse as word gets around that it might be headed to FDIC resolution could be "amazing," says Mr. Singer. And that "speed will drive the size of the losses."
This "atmosphere of unpredictability" is harmful to America's place in the financial world, he says, and "it doesn't make the system any safer. . . . This is nuts to be identifying systemically important institutions." He views it as a poor "substitute for creating soundness and reasonable levels of leverage throughout the system."
Phrases like "bureaucratic whim" ought to make you cringe. Don't you think they have that effect on investors in, lenders and counterparties to such institutions? I do. Singer's comments confirm what many others, including me, have contended, i.e., that the comparatively predictable existing bankruptcy laws have been replaced by liquidation-by-whim and cronyism. Singer is correct to predict that funds will leave a troubled firm much faster than anyone can imagine. And, ironically, that being in a group of selectively preferred, "systematically important" designated firms lending to or investing in a large bank is actually dangerous, because you will be the least-advantaged party. The one most likely to be at the very end of any line to collect on funds due.
Thus, in Singer's view, you have government-backed large institutions continuing with risky behaviors, and counterparties like them doing the same. This, he worries, is the seed bed for the next financial meltdown. Dodd-Frank and the FDIC have replaced uncertainty with respect to government backing for large firms in the event of another financial crisis with absolute certainty that select "systematically important" banking firms will be rescued. Moral hazard is now legislatively and regulatorily banished, leading to another round of excessive risk-taking.
The final passage of Freeman's interview says a lot about Singer,
"One reason his firm has survived for 34 years, he says, is that "we try to be very respectful of the unpredictability of markets. We try to at all times at least assume that the world is not being properly run." A safe assumption. "
Sad but, in this case, so true.
Tuesday, March 22, 2011
ATT & T Mobile
My first inclination, to be blunt, was to check on the equity price moves of the major US telecoms for the past five years, and more.
It isn't pretty.
The first chart displays ATT, Verizon, Sprint and the S&P500 Index for the past five years. Sprint is clearly the big loser, but the other two could only manage to match the Index.
Think about that. In such a capital intensive, advanced technological business, Verizon and ATT can, at best, only manage to give you the equity market index return, with no premium for the risk of lack of diversification.
The next chart displays the long term price moves of the same series. Sprint, again, is the big loser. But the other two haven't even matched the S&P over the longer timeframe.
Conclusion?Before you get all amped up over this proposed deal, notice that the whole sector is an investment graveyard.
My hunch, born of my experiences with predecessor AT&T from 1979-82, was right. I can still recall, upon joining AT&T right out of graduate business school, seeing the single most riveting chart describing the company's situation. It was a Yankee Group chart showing the monotonically plunging free cash flow for AT&T. A trend that had begun a few years earlier, and was proceeding at breakneck speed. Everything about the business screamed 'value destruction,' in the classic Schumpeterian sense.
Existing prices and equipment were under attack. New products would provide incredible productivity increases for customers, while transitioning AT&T from the clunky, labor-intensive world of analog to the much more competitive, less-profitable digital world.
Everywhere I looked, I saw revenue forecasts failing to displace business lost to either competition or technology. People my age received a brutally quick introduction to deregulatory dynamics in telecommunications, airlines, and banking. It hasn't ceased yet.
Now, as to the strategies and tactics of the proposed deal.
T Mobile has the valued asset, with Sprint needing it to remain relevant. So ATT promised a $3B breakup fee just to keep Sprint's hands off of T Mobile while the proposed merger is vetted by DOJ and God knows who else.
If ATT gets its prize, albeit at a P/E exceeding its own, it immediately increases its physical network assets and, perhaps most importantly, gets its target's valuable spectrum slots, while denying Sprint a viable means to remain competitive. If not, it's at least tied up T Mobile for a while, thus starving Sprint a little longer.
Why the putative architect of this deal, some investment banker from Chase, is so lauded is beyond me. I mean, with so few players, was this really something for which ATT and T Mobile needed a banker? Maybe for the basic funding mechanics, but nothing else.
As for the hoopla involving Chase underwriting the proposed deal with $20B of credit, so what? They're underwriting the purchase of infrastructure and spectrum, more than anything else. Not so risky. Given consumer behavior, even if the oligopolistic aspects of the deal allow some price increases, people are still going to continue to use their smart phones for data- and video-heavy apps, which will ensure the debt being paid off.
Meanwhile, according to CNBC's pundits and the Wall Street Journal, the regulatory issues are hardly trivial. For precisely that oligopoly effect of taking out one of four providers in the sector.
But, to me, win or lose, ATT's CEO, in an interview on CNBC Monday morning, said something that really gave me pause. Something right in line with this recent post.
Jenkins wrote about cloud computing, and smart phones certainly are a major contributor to the phenomenon. Stephens, ATT's CEO, noted that the firm needs more network capacity muy pronto, as even cars are now bringing apps traffic to cell phones. He mentioned some growth figure which, while I forget what it was, stunned me. After all, I, like many people, have already seen the commercial wherein a guy remotely accesses his car for his teen-aged daughter and her friend, then starts it via his cell phone app.
Far more than the old land-line engineers at the old Bell Labs and Long Lines, today's ATT network engineers must be terrified at the expected smart-phone and related device-based traffic coming their way on wireless networks. Meanwhile, nobody wants to pay much more for these conveniences.
Regardless of whether this deal is approved, or not, I doubt it will really make ATT a more attractive equity investment. Take another look at that second chart. None of the three telecom companies has a higher price today than ten years ago. It's just a lousy sector for investment, no matter how much more concentrated it gets. At least barring radical changes in regulatory-driven economics which allow a telco to become a reasonably pure play on market-based pricing for wireless bandwidth. Even then, however, the infrastructure requirements may dampen investor enthusiasm.
But, for now, I'd be surprised if this deal, if consummated, really does a whole lot for ATT's ability to earn consistently superior total returns in the years just ahead.
Monday, March 21, 2011
I Join Groupon- Initial Impressions
I wrote this recent post concerning Groupon. In it, I mused,
"What struck me about this was just how low the barriers to entry may well be in this product/market. I hadn't really given the business a whole lot of thought until I read this piece. Frankly, it just seems to be a tactic- couponing- that no business can afford to do too much of, without suffering serious pricing policy challenges for the long term. There's something about teaching customers to expect discounts that becomes corrosive over time."
In order to learn more about the company and its activities, and hopefully score half-price tickets to the recently-released movie The Lincoln Lawyer, I joined Groupon last week.
Overall, I've been very underwhelmed and unimpressed. I honestly can't quite figure out what all the fuss is about- for me, at least.
First, I never saw an offer for the movie. Despite being featured in the Wall Street Journal's March 16th edition, the offer never made it to my Groupon account. That's annoying to start with. Perhaps it was sold out instantly. But customer experiences like that only serve to leave a negative impression with potential buyers.
What I have seen isn't particularly earthshaking. The initial coupon was for half off on a dinner at a localish upscale French restaurant. It's disappeared, so it likely either expired or sold out. Upon closely reading the offer, the fine print was less than entirely clear. There were some weird blackout dates, a host of restrictions on how many of the coupons could be used per table, per person, etc. The term to fulfill the offer was, I believe, throughout the summer. However, it called to mind an old marketing aphorism that goes something like this,
'A coupon for something you weren't already planning to buy is no deal and saves you no money.'
In the case of the restaurant in question, while I'm aware of it, I haven't ever actually dined there. Given the circumstances under which I would use the coupon, it's not clear I know anyone who would actually prefer to dine there. So a coupon for a half-price dinner- or maybe two, it wasn't really clear- was of limited value to me.
As I scan the available deals on this Sunday afternoon, while composing this post, I see offers for Persian rugs, Lasik eye surgery, Yoga sessions, and facials. There's another restaurant deal, window treatments, door locks and bar glassware.
Frankly, none of it is compelling to me. And I've provided Groupon with more personal details in order for them to presumably target more appropriate offers to me.
It reminds me a lot of when I used to shop on eBay. If you find what you're looking for, great. If not, you're out of luck. The sort of shopping Groupon, like eBay, provides, is a sort of stream of offers which move past you. Online impulse shopping.
I could see people finding, on reflection and analysis, that they'd spent way more than they realized on unnecessary goods and services because they got caught up in the timed, networked nature of the deal excitement.
For the businesses, it seems to me to be either too small a reach to be very effective or, if it's sufficiently large to be so, then it's really expensive. And it does things like teaches people to refuse to pay full price at a restaurant, waiting, instead, for a Groupon deal.
Is Groupon more exciting than getting a Val-Pak in the mail bulging with coupons? Sure.
Is Groupon actually a significantly better, more efficient way for consumers to use coupons? I'm not sure yet. So far, I'd say no.
"What struck me about this was just how low the barriers to entry may well be in this product/market. I hadn't really given the business a whole lot of thought until I read this piece. Frankly, it just seems to be a tactic- couponing- that no business can afford to do too much of, without suffering serious pricing policy challenges for the long term. There's something about teaching customers to expect discounts that becomes corrosive over time."
In order to learn more about the company and its activities, and hopefully score half-price tickets to the recently-released movie The Lincoln Lawyer, I joined Groupon last week.
Overall, I've been very underwhelmed and unimpressed. I honestly can't quite figure out what all the fuss is about- for me, at least.
First, I never saw an offer for the movie. Despite being featured in the Wall Street Journal's March 16th edition, the offer never made it to my Groupon account. That's annoying to start with. Perhaps it was sold out instantly. But customer experiences like that only serve to leave a negative impression with potential buyers.
What I have seen isn't particularly earthshaking. The initial coupon was for half off on a dinner at a localish upscale French restaurant. It's disappeared, so it likely either expired or sold out. Upon closely reading the offer, the fine print was less than entirely clear. There were some weird blackout dates, a host of restrictions on how many of the coupons could be used per table, per person, etc. The term to fulfill the offer was, I believe, throughout the summer. However, it called to mind an old marketing aphorism that goes something like this,
'A coupon for something you weren't already planning to buy is no deal and saves you no money.'
In the case of the restaurant in question, while I'm aware of it, I haven't ever actually dined there. Given the circumstances under which I would use the coupon, it's not clear I know anyone who would actually prefer to dine there. So a coupon for a half-price dinner- or maybe two, it wasn't really clear- was of limited value to me.
As I scan the available deals on this Sunday afternoon, while composing this post, I see offers for Persian rugs, Lasik eye surgery, Yoga sessions, and facials. There's another restaurant deal, window treatments, door locks and bar glassware.
Frankly, none of it is compelling to me. And I've provided Groupon with more personal details in order for them to presumably target more appropriate offers to me.
It reminds me a lot of when I used to shop on eBay. If you find what you're looking for, great. If not, you're out of luck. The sort of shopping Groupon, like eBay, provides, is a sort of stream of offers which move past you. Online impulse shopping.
I could see people finding, on reflection and analysis, that they'd spent way more than they realized on unnecessary goods and services because they got caught up in the timed, networked nature of the deal excitement.
For the businesses, it seems to me to be either too small a reach to be very effective or, if it's sufficiently large to be so, then it's really expensive. And it does things like teaches people to refuse to pay full price at a restaurant, waiting, instead, for a Groupon deal.
Is Groupon more exciting than getting a Val-Pak in the mail bulging with coupons? Sure.
Is Groupon actually a significantly better, more efficient way for consumers to use coupons? I'm not sure yet. So far, I'd say no.
Sunday, March 20, 2011
CNBC Celebrates A Non-Event
Two weeks ago, I wrote this post critiquing various on-air staff at CNBC. It was a toss up to categorize Bob Pisani as one of "The Bad,", rather than "Ugly." I wrote,
"Pisani spends too much of each weekday looking astonished or surprised by some move in equities. That's when he isn't anthropomorphizing the market and cheering it onward to new heights, rather than simply reporting the facts.
Anchors and reporters who can't add value beyond restating the obvious or bringing some level of knowledge to a topic, so that they can at least ask questions you would, or hadn't considered, are just a waste."
The problem is, Pisani veers dangerously close to dispensing falsehoods, which would have clearly put him in The Ugly category. The salient falsehood that Pisani peddles is that anything happening on the floor where he is stationed actually matters anymore.
Last Tuesday, I happened to see the network hold a little celebratory, self-congratulatory moment at around 3:30 for the 15th anniversary of Pisani's debut reporting from the floor of the NYSE.
In 1996, the floor saw a lot more activity. Technology for crossing trades off of the floor was much less pronounced, and the floor was actually crowded. In those days, reporters from the floor had to fight for space, often getting hip-checked and jostled during their live reports.
Not anymore. Now you see a few people in the distance, and nobody usually comes within camera-range.
The funny thing about CNBC making a big deal out of Pisani's tenure is that the guy is a no-value-added chump. That is, he adds no value to viewers, but has been known to allow himself to be manipulated by institutional fund managers to great effect, and for tremendous value.
I recall seeing an interview with Jim Cramer, in which he admitted blatantly manipulating a stock by pumping Pisani with rumors, sending the issue's price up during the day. Cramer than sold before the close, making nice profits, so he said.
How is it that CNBC, upon learning this, even considered leaving the hapless Pisani down on the floor? Doing so was tantamount to explicitly allowing fund managers a wide-open door through which to manipulate markets in favored equities.
Just incredible. Rather than celebrating the guy's tenure reporting from the floor of the NYSE, they should have pulled him years ago, out of a sense of propriety and concern for retail investors, if nothing else.
As for Pisani, you wonder whether he is too dense to understand what Cramer's interview did to his role and crediblity, or is just so arrogant as to ignore the obvious import of it.
"Pisani spends too much of each weekday looking astonished or surprised by some move in equities. That's when he isn't anthropomorphizing the market and cheering it onward to new heights, rather than simply reporting the facts.
Anchors and reporters who can't add value beyond restating the obvious or bringing some level of knowledge to a topic, so that they can at least ask questions you would, or hadn't considered, are just a waste."
The problem is, Pisani veers dangerously close to dispensing falsehoods, which would have clearly put him in The Ugly category. The salient falsehood that Pisani peddles is that anything happening on the floor where he is stationed actually matters anymore.
Last Tuesday, I happened to see the network hold a little celebratory, self-congratulatory moment at around 3:30 for the 15th anniversary of Pisani's debut reporting from the floor of the NYSE.
In 1996, the floor saw a lot more activity. Technology for crossing trades off of the floor was much less pronounced, and the floor was actually crowded. In those days, reporters from the floor had to fight for space, often getting hip-checked and jostled during their live reports.
Not anymore. Now you see a few people in the distance, and nobody usually comes within camera-range.
The funny thing about CNBC making a big deal out of Pisani's tenure is that the guy is a no-value-added chump. That is, he adds no value to viewers, but has been known to allow himself to be manipulated by institutional fund managers to great effect, and for tremendous value.
I recall seeing an interview with Jim Cramer, in which he admitted blatantly manipulating a stock by pumping Pisani with rumors, sending the issue's price up during the day. Cramer than sold before the close, making nice profits, so he said.
How is it that CNBC, upon learning this, even considered leaving the hapless Pisani down on the floor? Doing so was tantamount to explicitly allowing fund managers a wide-open door through which to manipulate markets in favored equities.
Just incredible. Rather than celebrating the guy's tenure reporting from the floor of the NYSE, they should have pulled him years ago, out of a sense of propriety and concern for retail investors, if nothing else.
As for Pisani, you wonder whether he is too dense to understand what Cramer's interview did to his role and crediblity, or is just so arrogant as to ignore the obvious import of it.
Saturday, March 19, 2011
FX Coverage on CNBC
Sad to say, I was spot-on in this recent post regarding CNBC's plans for covering foreign exchange trading. In it, I wrote,
"Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.
You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss."
Sure enough, for the past few weeks, CNBC has been advertising it's new program, Money in Motion, which debuted yesterday in the 5:30PM time slot.
So, once again, we see the network bow to its entertainment nature, and tout trading behavior that few, if any, retail viewers should ever venture near.
It would be fitting if Vanguard founder John Bogle boycotted appearances on the network in protest of this latest move that is diametrically opposed to his message to retail investors.
I haven't seen the details of the program's staffing, and I didn't watch its inaugural appearance, though I may have elected to record it. However, at half an hour one day a week, it's reasonable to assume that the network, to start, is borrowing resources to staff it. At least until it knows whether it can expand it sufficiently to merit its own staff and budget.
That won't change my feelings about the program, which I wrote in that prior linked post,
"I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse."
"Within the past week, I was asked to complete a CNBC survey on the topic. The network's surveys are typically pretty obvious in their focus. This one probed my unaided recall of advertising by various FX trading vendors, then segued into how I felt about the companies and the concept of CNBC airing an FX trading program.
You can see what's coming here. One or more retail FX platform vendors approach CNBC about sponsoring a program focusing on their instruments. With all the cross-currency plays available, plus various forces- interest rates, trade, intervention, etc.- driving FX valuations and expectations, there would be a lot to discuss."
Sure enough, for the past few weeks, CNBC has been advertising it's new program, Money in Motion, which debuted yesterday in the 5:30PM time slot.
So, once again, we see the network bow to its entertainment nature, and tout trading behavior that few, if any, retail viewers should ever venture near.
It would be fitting if Vanguard founder John Bogle boycotted appearances on the network in protest of this latest move that is diametrically opposed to his message to retail investors.
I haven't seen the details of the program's staffing, and I didn't watch its inaugural appearance, though I may have elected to record it. However, at half an hour one day a week, it's reasonable to assume that the network, to start, is borrowing resources to staff it. At least until it knows whether it can expand it sufficiently to merit its own staff and budget.
That won't change my feelings about the program, which I wrote in that prior linked post,
"I continue to feel that CNBC knowingly entices retail investors to believe they can and should engage in investing activities for which they are unsuited. Most retail investors should stick to managed equity and fixed income funds. Few really have the time, knowledge and skill to add unique value by selecting individual equities or bonds, let alone derivatives thereon. For CNBC to devote so much air time- as much as 2 1/2 hours now, including two Fast Money programs and Cramer's Mad Money- is, in my opinion, irresponsible. To add FX to this brew is even worse."
Friday, March 18, 2011
Cloud Computing, Net Neutrality, Regulation & Economics
The Wall Street Journal columnist Holman Jenkins, Jr., wrote an interesting piece last week entitled What Price the Cloud?
In it, he reviewed the evolving situation regarding heavy internet capacity usage by firms like Netflix and Google, who, of course, want no pricing actions taken against them.
Jenkins wrote, in reference to "once-great firms like Digital Equipment and Wang Labs,"
"The scariest part: Even leaders who grasp what's happening to them often can't change cost structures and business models fast enough to survive."
That's actually a misunderstanding. DEC and Wang really never had a chance once the PC began to spread. No change in cost structure for producing a Wang system could save the company, because the product was just archaic in the face of a multi-functional PC of the late 1980s.
I'm rather surprised Jenkins made this mistake. Schumpeterian dynamics don't typically allow for accommodation by older firms to the newer trends which supplant them. There is little or no effective response. Rather, the older approaches simply disappear.
Still, the core of Jenkins' piece involves whether repricing of bandwidth will hurt companies like Netflix. Everyone's nightmare, of course, is that the cable companies begin to meter individual usage and charge for such usage volumes over a certain level. Jenkins notes how the introduction of ever lower-priced smart phones is driving up bandwidth demand from mobile sources.
He refers to an A.T. Kearney report which finds current economics of the internet unsustainable without some transfer of bandwidth costs to those that generate traffic. But for me, the key passage is this one,
"...but who's to say consumers can't judge for themselves if the restrictions are worth the price?"
Just the other day, I went online and selected three Netflix movies to view on my television. Into the instant queue they went, and I watched them, with no particular interruption, that afternoon (Although, I should note that Netflix has had some recent problems, disappearing from my Tivo unit for a day or so, and freezing up the system on occasion. I suspect usage overload).
What's that worth? For a flat monthly fee, I could watch 30 movies/month. I think that comes out to about 50 cents/film, and considerably less on a per/hour basis for entertainment.
If my cable bill rose by $10 for this level of service, will I really care? Is $10 so much that I'd revert to mailing discs back and forth to Netflix? Unlikely.
I saw the excellent movie Barney's Version in an art house theatre last weekend with a friend. It cost about $25 all in. The price differential between first-run movie experiences and arm-chair selection and viewing off of Netflix remains enormous. Temporarily raising the price of using bandwidth, until the traffic generators respond with more efficient delivery to economize on bandwidth usage, probably won't be crippling for most consumers.
What's really at issue here is this. Having learned the ability to buy, perhaps at artificially low prices, cloud-based experiences involving high-speed transfers of video and other high-volume communications applications, will consumers just return to old, pre-cloud habits, or will they willingly pay something for the ability to maintain their new levels of cloud-based information consumption?
But, in the short term, Jenkins is entirely correct when he writes of Apple, Netflix, Amazon and Google,
"All are betting heavily on the cloud. All need to start dealing realistically with the question of how the necessary bandwidth will be paid for."
Current enjoyment of on-demand, large swatches of bandwidth for free can't last much longer. The electronic highway is getting crowded, and sooner or later, tolls will have to be charged to allocate usage, or we'll all experience an inability to view full motion video in a manner that's appealing or worthwhile.
In it, he reviewed the evolving situation regarding heavy internet capacity usage by firms like Netflix and Google, who, of course, want no pricing actions taken against them.
Jenkins wrote, in reference to "once-great firms like Digital Equipment and Wang Labs,"
"The scariest part: Even leaders who grasp what's happening to them often can't change cost structures and business models fast enough to survive."
That's actually a misunderstanding. DEC and Wang really never had a chance once the PC began to spread. No change in cost structure for producing a Wang system could save the company, because the product was just archaic in the face of a multi-functional PC of the late 1980s.
I'm rather surprised Jenkins made this mistake. Schumpeterian dynamics don't typically allow for accommodation by older firms to the newer trends which supplant them. There is little or no effective response. Rather, the older approaches simply disappear.
Still, the core of Jenkins' piece involves whether repricing of bandwidth will hurt companies like Netflix. Everyone's nightmare, of course, is that the cable companies begin to meter individual usage and charge for such usage volumes over a certain level. Jenkins notes how the introduction of ever lower-priced smart phones is driving up bandwidth demand from mobile sources.
He refers to an A.T. Kearney report which finds current economics of the internet unsustainable without some transfer of bandwidth costs to those that generate traffic. But for me, the key passage is this one,
"...but who's to say consumers can't judge for themselves if the restrictions are worth the price?"
Just the other day, I went online and selected three Netflix movies to view on my television. Into the instant queue they went, and I watched them, with no particular interruption, that afternoon (Although, I should note that Netflix has had some recent problems, disappearing from my Tivo unit for a day or so, and freezing up the system on occasion. I suspect usage overload).
What's that worth? For a flat monthly fee, I could watch 30 movies/month. I think that comes out to about 50 cents/film, and considerably less on a per/hour basis for entertainment.
If my cable bill rose by $10 for this level of service, will I really care? Is $10 so much that I'd revert to mailing discs back and forth to Netflix? Unlikely.
I saw the excellent movie Barney's Version in an art house theatre last weekend with a friend. It cost about $25 all in. The price differential between first-run movie experiences and arm-chair selection and viewing off of Netflix remains enormous. Temporarily raising the price of using bandwidth, until the traffic generators respond with more efficient delivery to economize on bandwidth usage, probably won't be crippling for most consumers.
What's really at issue here is this. Having learned the ability to buy, perhaps at artificially low prices, cloud-based experiences involving high-speed transfers of video and other high-volume communications applications, will consumers just return to old, pre-cloud habits, or will they willingly pay something for the ability to maintain their new levels of cloud-based information consumption?
But, in the short term, Jenkins is entirely correct when he writes of Apple, Netflix, Amazon and Google,
"All are betting heavily on the cloud. All need to start dealing realistically with the question of how the necessary bandwidth will be paid for."
Current enjoyment of on-demand, large swatches of bandwidth for free can't last much longer. The electronic highway is getting crowded, and sooner or later, tolls will have to be charged to allocate usage, or we'll all experience an inability to view full motion video in a manner that's appealing or worthwhile.
Thursday, March 17, 2011
Bill Dudley's iPads
Tuesday's Wall Street Journal carried an editorial describing audience reactions to New York Fed President Bill Dudley, a Goldman Sachs veteran, as he tried to explain that the cost of living isn't rising.
Apparently, Dudley said,
"Today you can buy an iPad2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things."
Well, all things except food and energy, if you're the Fed.
According to the Journal, amidst laughter over Dudley's remarks, someone in the audience replied,
"I can't eat an iPad."
While another shouted,
"When was the last time, sir, that you went grocery shopping?"
In yesterday's post regarding inflation, I noted that not everyone ascribes all price movements to inflation or, for that matter, deflation. Those terms are reserved for monetary creation in excess of, or less than, the growth of an economy.
Just because prices rise, or fall, doesn't mean they are due to (monetary) inflation.
It's pretty distressing that the New York Fed's President can't distinguish between prices which fall due to improved productivity or value-added, prices which rise due to demand, and price moves resulting from reactions to excessive money creation.
Apparently, Dudley said,
"Today you can buy an iPad2 that costs the same as an iPad 1 that is twice as powerful. You have to look at the prices of all things."
Well, all things except food and energy, if you're the Fed.
According to the Journal, amidst laughter over Dudley's remarks, someone in the audience replied,
"I can't eat an iPad."
While another shouted,
"When was the last time, sir, that you went grocery shopping?"
In yesterday's post regarding inflation, I noted that not everyone ascribes all price movements to inflation or, for that matter, deflation. Those terms are reserved for monetary creation in excess of, or less than, the growth of an economy.
Just because prices rise, or fall, doesn't mean they are due to (monetary) inflation.
It's pretty distressing that the New York Fed's President can't distinguish between prices which fall due to improved productivity or value-added, prices which rise due to demand, and price moves resulting from reactions to excessive money creation.
Wednesday, March 16, 2011
More Shameful Behavior by CNBC
Only a few months ago, I wrote this post concerning CNBC prominently showcasing the ethically-troubled Steve Rattner.
It simply stuns- and sickens- me that CNBC continues to kowtow to and butter this guy up. He was introduced as if he's God's gift to finance. As if we all know that Rattner 'saved the economy' by allowing GM to wriggle out of a proper bankruptcy, and, in the process, pay off the administration's labor cronies.
Then they proceed to ask the guy's opinions on things which, according to even his swollen bio, seem out of his normal sphere of interest.
Is this really the best guy they can get for this program? What's next- a guest spot for Bernie Madoff, live from jail? Or an hour guest-host spot on SquawkBox?
Disgusting. Just disgusting.
When a major business network so arrogantly panders to someone who violated ethics rules, you know how hypocritical that network is regarding business ethics.
It simply stuns- and sickens- me that CNBC continues to kowtow to and butter this guy up. He was introduced as if he's God's gift to finance. As if we all know that Rattner 'saved the economy' by allowing GM to wriggle out of a proper bankruptcy, and, in the process, pay off the administration's labor cronies.
Then they proceed to ask the guy's opinions on things which, according to even his swollen bio, seem out of his normal sphere of interest.
Is this really the best guy they can get for this program? What's next- a guest spot for Bernie Madoff, live from jail? Or an hour guest-host spot on SquawkBox?
Disgusting. Just disgusting.
When a major business network so arrogantly panders to someone who violated ethics rules, you know how hypocritical that network is regarding business ethics.
Kelly Evans On The Fed & Oil Prices
Monday's Wall Street Journal had an Ahead of the Tape column by Kelly Evans entitled The Federal Reserve Faces an Oil Dilemma.
In her piece, Evans offered the pros and cons of the Fed's prospective sterilization of oil's price increases. She dutifully trotted out the usual arguments involving effective taxation, consumer spending consequences, QE2, monetary easing and how all of these effects might relate to US economic growth.
What I found odd was that Evans, who is typically very well-versed in both economics and business, completely missed the obvious point.
That is, the Fed's primary job remains dollar price stability. In reality, it really shouldn't be so overly-concerned with adjusting for oil's price, or the various follow-on effects on the US economy. Rather, by maintaining stable prices, in dollars, given supply and demand forces, and money supply growth in concert with some variant of the Taylor Rule, the Fed can provide at least one fairly consistent, if not constant, in an otherwise rapidly-changing economic landscape.
In truth, the Fed isn't going to 'get it right' if it really tries to solve all the simultaneous equations which are theoretically required to arrive at the correct, perfect economic policy prescription for the US economy.
The fact is, despite the Fed or Congress, the US economy, like all economies, must suffer through cycles. And that includes slowdowns and recessions.
The Fed can mitigate (monetary) inflation, and the US economy may still experience rises in the prices of some goods due to demand-supply imbalances. When I learned economics, we called that a price signal. If prices rise, some demand ebbs, while more supply is coaxed into the market, and others seek to replace the goods, the price rises of which have provided opportunities.
To suggest that the Fed can somehow, with just one monetary lever, sterilize the effects of so many disparate inputs to our economic system is laughable. And wrong.
I'm surprise Evans didn't go that route in her column. It would have been more helpful than writing in such a way as to suggest that the Fed has choices which include actually resolving these conflicting economic forces in some perfect or preferred manner beyond simply maintaining price stability.
In her piece, Evans offered the pros and cons of the Fed's prospective sterilization of oil's price increases. She dutifully trotted out the usual arguments involving effective taxation, consumer spending consequences, QE2, monetary easing and how all of these effects might relate to US economic growth.
What I found odd was that Evans, who is typically very well-versed in both economics and business, completely missed the obvious point.
That is, the Fed's primary job remains dollar price stability. In reality, it really shouldn't be so overly-concerned with adjusting for oil's price, or the various follow-on effects on the US economy. Rather, by maintaining stable prices, in dollars, given supply and demand forces, and money supply growth in concert with some variant of the Taylor Rule, the Fed can provide at least one fairly consistent, if not constant, in an otherwise rapidly-changing economic landscape.
In truth, the Fed isn't going to 'get it right' if it really tries to solve all the simultaneous equations which are theoretically required to arrive at the correct, perfect economic policy prescription for the US economy.
The fact is, despite the Fed or Congress, the US economy, like all economies, must suffer through cycles. And that includes slowdowns and recessions.
The Fed can mitigate (monetary) inflation, and the US economy may still experience rises in the prices of some goods due to demand-supply imbalances. When I learned economics, we called that a price signal. If prices rise, some demand ebbs, while more supply is coaxed into the market, and others seek to replace the goods, the price rises of which have provided opportunities.
To suggest that the Fed can somehow, with just one monetary lever, sterilize the effects of so many disparate inputs to our economic system is laughable. And wrong.
I'm surprise Evans didn't go that route in her column. It would have been more helpful than writing in such a way as to suggest that the Fed has choices which include actually resolving these conflicting economic forces in some perfect or preferred manner beyond simply maintaining price stability.
Tuesday, March 15, 2011
US Outsourcing: A Race To The Bottom?
About a week ago, a friend and I were at our fitness club when he ran into another guy as we were talking.
The third man began to converse, and, in time, mentioned he had been laid off from a New York-based insurance company. He then briefly recounted that, though an IT professional with an electrical engineering degree, he'd been laid off from Bell Labs, then a second firm, and, most recently, from the IT department of the insurance firm.
Understandably disappointed, he railed that there was no manufacturing left in the US, while companies are engaged in what he termed a "race to the bottom," hollowing out high-paying jobs from America and outsourcing them to India, China and Southeast Asia.
However, the laid-off engineer isn't entirely correct. As I wrote in this recent post concerning a recent Wall Street Journal editorial,
"A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.
In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.
Perry observes,
"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.
The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.
The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972."
It's not that the US doesn't produce things. It's that high value-added goods don't require as many workers per capital dollar to do so. The sorts of manufacturing jobs the engineer had in mind aren't competitive with those in other countries where such lower-value work is done for lower wages.
But this guy wasn't even in manufacturing. So let's consider his general concern- about outsourcing and a 'race to the bottom.'
I don't know where the guy earned his BS in EE, but it seems as if he was a fairly recent employee of Bell Labs. Probably within the last decade. Let's just say, as kindly as possible, that it's not the same Bell Labs of the pre-Lucent era. And it hasn't exactly been associated with lots of Nobel Prizes since ATT was broken up, as it was in the organization's salad days from the 1950s to 1970s.
Further, while the conversation was fairly brief, he typified himself as just a 'financial IT' guy. Working in such a capacity for a garden-variety general insurer is hardly a unique sort of job.
While he complained that it was no longer useful for Americans to earn EE degrees, as engineering jobs went overseas, I thought of Google, Facebook, Cisco, Apple and lots of other technology firms which still appear to be growing and using engineering talent.
Part of being an American is the freedom to educate yourself and then pursue a chosen field and skill set. If you make poor choices, you may find yourself challenged to maintain the career path you envisioned. For example, there are a lot fewer telecommunications engineers now than there were a decade or more ago, when so much more of the existing systems were analog. That's partly why communications are so much less expensive and more powerful.
It's the same with jobs in steel, autos, and even airlines.
In one respect, the laid-off engineer was correct. American companies, in order to remain competitive, for the good of their shareholders, do locate functions where they are most productive. For lower value-added functions, that can mean lower-wage countries outside the US.
Sometimes, companies have gone too far in this direction, as Boeing's CEO recently admitted, and reverse course,
"Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.
If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.
I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future."
It's the higher value-added functions and services that will remain onshore. American productivity is often superior in those areas, especially when requiring large and sophisticated amounts of capital to work so productively.
Sadly, the engineer's comments seemed to signal, more than anything else, that he'd perhaps made some sub-optimal educational and career choices in the past, which led to his having too few highly-valued skills, despite his degree.
The US does have a challenge to continue to create business growth which will employ highly-educated and -skilled Americans in highly-productive jobs which create high value-added. We can continue to expect lower value-added jobs to migrate to lower-wage locales, often offshore.
But that's not the same challenge as every worker to constantly evaluate whether her or his skills will remain competitive and highly-prized in our economy.
The third man began to converse, and, in time, mentioned he had been laid off from a New York-based insurance company. He then briefly recounted that, though an IT professional with an electrical engineering degree, he'd been laid off from Bell Labs, then a second firm, and, most recently, from the IT department of the insurance firm.
Understandably disappointed, he railed that there was no manufacturing left in the US, while companies are engaged in what he termed a "race to the bottom," hollowing out high-paying jobs from America and outsourcing them to India, China and Southeast Asia.
However, the laid-off engineer isn't entirely correct. As I wrote in this recent post concerning a recent Wall Street Journal editorial,
"A related common complaint by some pundits is the oft-proclaimed death of US manufacturing.
In a well-written editorial entitled The Truth About U.S. Manufacturing, in last Friday's Wall Street Journal, economics professor Mark Perry (University of Michigan at Flint) debunks that complaint.
Perry observes,
"In every year since 2004, manufacturing output has exceeded $2 trillion (in constant 2005 dollars), twice the output produced in America's factories in the early 1970s. Taken on its own, U.S. manufacturing would rank today as the sixth largest economy in the world, just behind France and head of the United Kingdom, Italy and Brazil. Despite recent gains in China and elsewhere, the U.S. still produced more than 20% of global manufacturing output in 2009.
The truth is that America still makes a lot of stuff, and we're making more of it than ever before. We're merely able to do it with a fraction of the workers needed in the past.
The average U.S. factory worker is responsible today for more than $180,000 of annual manufacturing output, triple the $60,000 in 1972."
It's not that the US doesn't produce things. It's that high value-added goods don't require as many workers per capital dollar to do so. The sorts of manufacturing jobs the engineer had in mind aren't competitive with those in other countries where such lower-value work is done for lower wages.
But this guy wasn't even in manufacturing. So let's consider his general concern- about outsourcing and a 'race to the bottom.'
I don't know where the guy earned his BS in EE, but it seems as if he was a fairly recent employee of Bell Labs. Probably within the last decade. Let's just say, as kindly as possible, that it's not the same Bell Labs of the pre-Lucent era. And it hasn't exactly been associated with lots of Nobel Prizes since ATT was broken up, as it was in the organization's salad days from the 1950s to 1970s.
Further, while the conversation was fairly brief, he typified himself as just a 'financial IT' guy. Working in such a capacity for a garden-variety general insurer is hardly a unique sort of job.
While he complained that it was no longer useful for Americans to earn EE degrees, as engineering jobs went overseas, I thought of Google, Facebook, Cisco, Apple and lots of other technology firms which still appear to be growing and using engineering talent.
Part of being an American is the freedom to educate yourself and then pursue a chosen field and skill set. If you make poor choices, you may find yourself challenged to maintain the career path you envisioned. For example, there are a lot fewer telecommunications engineers now than there were a decade or more ago, when so much more of the existing systems were analog. That's partly why communications are so much less expensive and more powerful.
It's the same with jobs in steel, autos, and even airlines.
In one respect, the laid-off engineer was correct. American companies, in order to remain competitive, for the good of their shareholders, do locate functions where they are most productive. For lower value-added functions, that can mean lower-wage countries outside the US.
Sometimes, companies have gone too far in this direction, as Boeing's CEO recently admitted, and reverse course,
"Then there's the recent comments of Boeing CEO Jim McNerney on CNBC. In answer to questions concerning the Dreamliner's continuing delays, McNerney confessed that the firm had overreached with its design outsourcing. He said that they won't be doing that again, focusing instead on more onshore engineering and design.
If one of the most sophisticated engineered systems we have, a modern jetliner, has failed to be reliably designed and produced globally on time, what are the prospects for equally-sophisticated systems? At least the Dreamliner results in a testable product on which quality control may be performed before it actually goes live in its initial commercial flights. And Boeing has been building such systems for decades.
I think it says a lot that they got the mix and management of global design of the various parts and subsystems of their newest jet fouled up, and are planning to move back to more centrally-sourced services in the future."
It's the higher value-added functions and services that will remain onshore. American productivity is often superior in those areas, especially when requiring large and sophisticated amounts of capital to work so productively.
Sadly, the engineer's comments seemed to signal, more than anything else, that he'd perhaps made some sub-optimal educational and career choices in the past, which led to his having too few highly-valued skills, despite his degree.
The US does have a challenge to continue to create business growth which will employ highly-educated and -skilled Americans in highly-productive jobs which create high value-added. We can continue to expect lower value-added jobs to migrate to lower-wage locales, often offshore.
But that's not the same challenge as every worker to constantly evaluate whether her or his skills will remain competitive and highly-prized in our economy.
Monday, March 14, 2011
My Hate/Love Relationship with Dunkin' Donuts
I've written in prior posts of how much I admire and respect companies or employees who provide an excellent service experience.
By contrast, I typically feel equally passionate, but negative, when a company or its employees or franchisees deliver poor service.
Unfortunately, one of my usually-favorite retail firms, Dunkin' Donuts, has earned a place in the second category. Twice in one week.
Last week, I visited the nearest DD franchise outlet, at the foot of Morris Avenue in Summit, New Jersey, one evening. I ordered several donuts and a small cup of coffee. Very simple. And there was nobody else in the shop. Not only did I have to coach the counter employee on finding the right items, but he didn't pay attention, resulting in my leaving with less than my full order of pastries.
But that was a minor gaffe compared to what I experienced on Saturday morning.
As background, it's worth noting that DD has begun having monthly themes to spur customer visits. For example, February was chocolate lovers' month. They baked and sold a few special varieties of chocolate-filled donuts and pastries which are no longer available.
Right on cue, beginning in March, the chain began promoting, via televised and radio spots, its Big N' Toasty Breakfast Sandwich (hereinafter BNT). Here's the prose describing it:
Start your big day with 2 fried eggs, 4 slices of Cherrywood smoked bacon and American cheese on thick Texas Toast.
With such an onslaught of expensive media, and no mention of a date on which the food item would be offered, it seemed reasonable to assume it is already available. Especially considering that, upon walking into any DD location in the past week, it is already prominently featured on POP display signs and on the permanent menu board located high on the back wall. It's even priced, so you know they are serious about selling it.
In short, all the advertising and marketing cues point to its widespread availability.
So on Saturday morning, I drove the short distance to the Morris Avenue DD to buy a few donuts and take home a BNT sandwich. With 2 eggs and four slices of bacon, plus cheese, it's not the sort of thing I want to consume all at once.
Imagine my dismay when, upon ordering it, I was told, in very broken English-well, actually, I'm not exactly sure what I was told. The first employee babbled incoherently, so I repeated my request. He babbled some more. I caught the word "Friday," and asked if he was saying it was only available on Friday?
Then his colleague babbled with a different accent, letting loose with a stream of words, the only ones of which I initially understood were 'don't have it,' and something about 'that's corporate.'
At this point, I turned to the man in line behind me, offering to let him go ahead of me, as it was becoming clear my order would be neither simple, nor fast. He declined, evidently wanting some free entertainment.
For the next minute or so, I was put through more pigeon English, while three of the store's employees, none of whom spoke clear English, apparently attempted to tell me that DD, the parent, had initiated a media campaign for a new breakfast sandwich which was not yet actually physically available in the stores.
It seemed, if I understood the extremely-poor communications of the employees, that the first items don't hit the retail outlets until this coming Friday.
Can you believe the ineptitude of DD's corporate management? It's owned by a private equity firm, so there's limited machinery to easily contact the firm. I tried once before, when another DD store refused to sell me a bag of espresso beans, although they admitted to having them to make espressos, cappuccinos and lattes. At that time, I emailed the parent on their website, giving them my contact information, but never heard back at all.
Now, the same management team is committing one of what is, to me, the most egregious mistakes a retailer can make- spending heavily on promotion of a new product which isn't yet available in its stores.
That's why I have such a hate/love relationship with DD. I find their atmosphere, usual service, and espresso-based coffee products to be better and less expensive than Starbuck's. But screwups like the BNT sandwich introduction are a real pain.
Just in case, however, the franchisee of that one outlet was at fault, I tried another DD store in a nearby town on Saturday evening. I walked in at 10PM to a mostly-empty shop. There was nobody in line, so I stepped up to the counter immediately. What happened next just cemented my recent sense of DD as having declining service levels.
In this case, at the store on Valley Road in Stirling, an employee looked directly at me, only a few feet away, then continued to talk on his cell phone and walked through a door into the back of the store, deliberately leaving me unserved, and no employees in sight.
Now I'm not sure when I'll return to one a DD store to try the new food item. Or anything else, for that matter. I guess you can characterize me as a formerly loyal DD customer whose patience with the firm's product introduction policy and store service has just about worn out.
By contrast, I typically feel equally passionate, but negative, when a company or its employees or franchisees deliver poor service.
Unfortunately, one of my usually-favorite retail firms, Dunkin' Donuts, has earned a place in the second category. Twice in one week.
Last week, I visited the nearest DD franchise outlet, at the foot of Morris Avenue in Summit, New Jersey, one evening. I ordered several donuts and a small cup of coffee. Very simple. And there was nobody else in the shop. Not only did I have to coach the counter employee on finding the right items, but he didn't pay attention, resulting in my leaving with less than my full order of pastries.
But that was a minor gaffe compared to what I experienced on Saturday morning.
As background, it's worth noting that DD has begun having monthly themes to spur customer visits. For example, February was chocolate lovers' month. They baked and sold a few special varieties of chocolate-filled donuts and pastries which are no longer available.
Right on cue, beginning in March, the chain began promoting, via televised and radio spots, its Big N' Toasty Breakfast Sandwich (hereinafter BNT). Here's the prose describing it:
Start your big day with 2 fried eggs, 4 slices of Cherrywood smoked bacon and American cheese on thick Texas Toast.
With such an onslaught of expensive media, and no mention of a date on which the food item would be offered, it seemed reasonable to assume it is already available. Especially considering that, upon walking into any DD location in the past week, it is already prominently featured on POP display signs and on the permanent menu board located high on the back wall. It's even priced, so you know they are serious about selling it.
In short, all the advertising and marketing cues point to its widespread availability.
So on Saturday morning, I drove the short distance to the Morris Avenue DD to buy a few donuts and take home a BNT sandwich. With 2 eggs and four slices of bacon, plus cheese, it's not the sort of thing I want to consume all at once.
Imagine my dismay when, upon ordering it, I was told, in very broken English-well, actually, I'm not exactly sure what I was told. The first employee babbled incoherently, so I repeated my request. He babbled some more. I caught the word "Friday," and asked if he was saying it was only available on Friday?
Then his colleague babbled with a different accent, letting loose with a stream of words, the only ones of which I initially understood were 'don't have it,' and something about 'that's corporate.'
At this point, I turned to the man in line behind me, offering to let him go ahead of me, as it was becoming clear my order would be neither simple, nor fast. He declined, evidently wanting some free entertainment.
For the next minute or so, I was put through more pigeon English, while three of the store's employees, none of whom spoke clear English, apparently attempted to tell me that DD, the parent, had initiated a media campaign for a new breakfast sandwich which was not yet actually physically available in the stores.
It seemed, if I understood the extremely-poor communications of the employees, that the first items don't hit the retail outlets until this coming Friday.
Can you believe the ineptitude of DD's corporate management? It's owned by a private equity firm, so there's limited machinery to easily contact the firm. I tried once before, when another DD store refused to sell me a bag of espresso beans, although they admitted to having them to make espressos, cappuccinos and lattes. At that time, I emailed the parent on their website, giving them my contact information, but never heard back at all.
Now, the same management team is committing one of what is, to me, the most egregious mistakes a retailer can make- spending heavily on promotion of a new product which isn't yet available in its stores.
That's why I have such a hate/love relationship with DD. I find their atmosphere, usual service, and espresso-based coffee products to be better and less expensive than Starbuck's. But screwups like the BNT sandwich introduction are a real pain.
Just in case, however, the franchisee of that one outlet was at fault, I tried another DD store in a nearby town on Saturday evening. I walked in at 10PM to a mostly-empty shop. There was nobody in line, so I stepped up to the counter immediately. What happened next just cemented my recent sense of DD as having declining service levels.
In this case, at the store on Valley Road in Stirling, an employee looked directly at me, only a few feet away, then continued to talk on his cell phone and walked through a door into the back of the store, deliberately leaving me unserved, and no employees in sight.
Now I'm not sure when I'll return to one a DD store to try the new food item. Or anything else, for that matter. I guess you can characterize me as a formerly loyal DD customer whose patience with the firm's product introduction policy and store service has just about worn out.
Saturday, March 12, 2011
KKR, TPG & The TXU Private Buyout Fiasco
Tuesday's Wall Street Journal featured an article on the mess that's become of KKR's and TPG's private buyout of TXU.
When you think of private equity, you often think of wealthy, savvy private capitalists buying underappreciated companies and assets, sprucing them up, then spinning them back out to the public, coining money in the process.
Sometimes, of course, we read about one of the leveraged buyouts which essentially just looted the firm of value by loading it up with debt, paying a 'special dividend' to the buyout firms, then letting it go under or stagger under the onerous debt service costs.
But one paragraph of the Journal story gave me pause. It contained this passage,
"The biggest leveraged buyout of all time has boiled down to an expensive bet on the price of a commodity. Natural gas has fallen 43% since TXU's buyout, and settled at $3.927 a million British themral units on Monday."
Makes you think twice about how smart some of these private equity guys are, doesn't it? Like Cerebrus' purchase of GMAC and Chrysler just before the mortgage-backed mess collapsed in 2008.
Somehow, one is left feeling that TXU should have been left alone, and these private equity guys could have just gone long natural gas futures, if that's really all they were effectively trying to do.
When you think of private equity, you often think of wealthy, savvy private capitalists buying underappreciated companies and assets, sprucing them up, then spinning them back out to the public, coining money in the process.
Sometimes, of course, we read about one of the leveraged buyouts which essentially just looted the firm of value by loading it up with debt, paying a 'special dividend' to the buyout firms, then letting it go under or stagger under the onerous debt service costs.
But one paragraph of the Journal story gave me pause. It contained this passage,
"The biggest leveraged buyout of all time has boiled down to an expensive bet on the price of a commodity. Natural gas has fallen 43% since TXU's buyout, and settled at $3.927 a million British themral units on Monday."
Makes you think twice about how smart some of these private equity guys are, doesn't it? Like Cerebrus' purchase of GMAC and Chrysler just before the mortgage-backed mess collapsed in 2008.
Somehow, one is left feeling that TXU should have been left alone, and these private equity guys could have just gone long natural gas futures, if that's really all they were effectively trying to do.
Friday, March 11, 2011
CNBC's On-Air Staff & Yesterday's Equity Market Sell-Off
US equity markets sold off yesterday. We got that.
But if you watched CNBC after 3PM that afternoon, you saw some priceless comedy featuring Maria Bartiromo's breathlessly asking a guest, to paraphrase,
'We've had a two-year bull market during which some have been calling for this pullback. Calling for it for years. Now we finally get it.'
Two years? Are you kidding me? Someone's been predicting an equity market drop for two years, and yesterday they were suddenly heroes? I'd like to see one of those anchors or reporters try to manage a live portfolio where you weren't allowed to just guess that sometime during the next few years the market may decline. You had to go long or short for real.
Around 3:45PM, the network shifted into high gear with a multi-camera'd navel-gazing session that looked, onscreen, like the old Brady Bunch intro. Among the cognoscenti were the network's own David Faber, Sue Herrera, ex-anchor Ron Insana, a few other staffers I can't recall, and one or two guests. The first few participants, of course, were CNBC talking heads.
Why do you suppose a crew of people whose job is to make every day in the markets seem like the most important day ever would have a clue as to what yesterday's equity market decline implied? Didn't occur to any of the CNBC production staff to arrange participation by some respected portfolio managers or equity strategists, rather than their own largely credential-less crew of reporters and talking heads?
Here's a test. Bartiromo wrung her hands over the day's losses. Others decried the rise in volatility.
Since the market's post-2008 crisis bottom on 9 March, 2009, how many days has the S&P500 Index experienced a loss greater than yesterday's?
The answer appears below, in a table of the 50 worst daily percentage declines since the market's bottom. I've highlighted yesterday in red. It's only the 32nd worst day in two years.
The champ? April 1, 2009, at -4.28%
At -1.89%, yesterday's Index decline didn't even make it into the -2% range, of which there 18 days of such magnitude.
Date Level Return
1 4/20/2009 832.39 -4.28%
2 5/20/2010 1071.59 -3.90%
3 3/30/2009 787.53 -3.48%
4 6/4/2010 1064.88 -3.44%
5 5/6/2010 1128.15 -3.24%
6 2/4/2010 1063.11 -3.11%
7 6/29/2010 1041.24 -3.10%
8 6/22/2009 893.04 -3.06%
9 7/2/2009 896.42 -2.91%
10 7/16/2010 1064.88 -2.88%
11 8/11/2010 1089.47 -2.82%
12 10/30/2009 1036.19 -2.81%
13 5/13/2009 883.92 -2.69%
14 10/1/2009 1029.85 -2.58%
15 8/17/2009 979.73 -2.43%
16 4/7/2009 815.55 -2.39%
17 5/4/2010 1173.6 -2.38%
18 6/15/2009 923.72 -2.38%
19 4/27/2010 1183.71 -2.34%
20 1/22/2010 1091.76 -2.21%
21 9/1/2009 998.04 -2.21%
22 5/11/2009 909.24 -2.15%
23 2/22/2011 1315.44 -2.05%
24 3/27/2009 815.94 -2.03%
25 3/24/2009 806.33 -2.02%
26 4/14/2009 841.5 -2.01%
27 3/20/2009 768.54 -1.98%
28 7/7/2009 881.03 -1.97%
29 10/28/2009 1042.63 -1.95%
30 5/27/2009 893.06 -1.90%
31 1/21/2010 1116.48 -1.89%
32 3/10/2011 1295.11 -1.89%
33 5/14/2010 1135.68 -1.88%
34 1/28/2011 1276.34 -1.79%
35 11/27/2009 1091.49 -1.72%
36 6/1/2010 1070.71 -1.72%
37 8/19/2010 1075.63 -1.69%
38 6/24/2010 1073.69 -1.68%
39 5/21/2009 888.33 -1.68%
40 4/30/2010 1186.68 -1.67%
41 11/16/2010 1178.34 -1.62%
42 4/16/2010 1192.13 -1.61%
43 6/22/2010 1095.31 -1.61%
44 10/19/2010 1165.9 -1.59%
45 3/1/2011 1306.33 -1.57%
46 5/7/2010 1110.88 -1.53%
47 8/30/2010 1048.92 -1.47%
48 8/24/2010 1051.87 -1.45%
49 11/23/2010 1180.73 -1.43%
50 5/18/2010 1120.8 -1.42%
What about volatility? Well, everyone has their favorite measure. By mine, yesterday's volatility value isn't even close to levels that should worry you about a significant, short-selling type of market sell-off. In fact, volatility was more than twice as great while the market rebounded in March of 2009. There were at least two more periods of higher volatility since then.
So before you get all shook up by Bartiromo's breathy rhetoric and anxious tone, never mind her typical loss for words and inability to get her sentences enunciated properly, check the facts.
As market hurricanes go, this isn't even a tropical storm yet.
But if you watched CNBC after 3PM that afternoon, you saw some priceless comedy featuring Maria Bartiromo's breathlessly asking a guest, to paraphrase,
'We've had a two-year bull market during which some have been calling for this pullback. Calling for it for years. Now we finally get it.'
Two years? Are you kidding me? Someone's been predicting an equity market drop for two years, and yesterday they were suddenly heroes? I'd like to see one of those anchors or reporters try to manage a live portfolio where you weren't allowed to just guess that sometime during the next few years the market may decline. You had to go long or short for real.
Around 3:45PM, the network shifted into high gear with a multi-camera'd navel-gazing session that looked, onscreen, like the old Brady Bunch intro. Among the cognoscenti were the network's own David Faber, Sue Herrera, ex-anchor Ron Insana, a few other staffers I can't recall, and one or two guests. The first few participants, of course, were CNBC talking heads.
Why do you suppose a crew of people whose job is to make every day in the markets seem like the most important day ever would have a clue as to what yesterday's equity market decline implied? Didn't occur to any of the CNBC production staff to arrange participation by some respected portfolio managers or equity strategists, rather than their own largely credential-less crew of reporters and talking heads?
Here's a test. Bartiromo wrung her hands over the day's losses. Others decried the rise in volatility.
Since the market's post-2008 crisis bottom on 9 March, 2009, how many days has the S&P500 Index experienced a loss greater than yesterday's?
The answer appears below, in a table of the 50 worst daily percentage declines since the market's bottom. I've highlighted yesterday in red. It's only the 32nd worst day in two years.
The champ? April 1, 2009, at -4.28%
At -1.89%, yesterday's Index decline didn't even make it into the -2% range, of which there 18 days of such magnitude.
Date Level Return
1 4/20/2009 832.39 -4.28%
2 5/20/2010 1071.59 -3.90%
3 3/30/2009 787.53 -3.48%
4 6/4/2010 1064.88 -3.44%
5 5/6/2010 1128.15 -3.24%
6 2/4/2010 1063.11 -3.11%
7 6/29/2010 1041.24 -3.10%
8 6/22/2009 893.04 -3.06%
9 7/2/2009 896.42 -2.91%
10 7/16/2010 1064.88 -2.88%
11 8/11/2010 1089.47 -2.82%
12 10/30/2009 1036.19 -2.81%
13 5/13/2009 883.92 -2.69%
14 10/1/2009 1029.85 -2.58%
15 8/17/2009 979.73 -2.43%
16 4/7/2009 815.55 -2.39%
17 5/4/2010 1173.6 -2.38%
18 6/15/2009 923.72 -2.38%
19 4/27/2010 1183.71 -2.34%
20 1/22/2010 1091.76 -2.21%
21 9/1/2009 998.04 -2.21%
22 5/11/2009 909.24 -2.15%
23 2/22/2011 1315.44 -2.05%
24 3/27/2009 815.94 -2.03%
25 3/24/2009 806.33 -2.02%
26 4/14/2009 841.5 -2.01%
27 3/20/2009 768.54 -1.98%
28 7/7/2009 881.03 -1.97%
29 10/28/2009 1042.63 -1.95%
30 5/27/2009 893.06 -1.90%
31 1/21/2010 1116.48 -1.89%
32 3/10/2011 1295.11 -1.89%
33 5/14/2010 1135.68 -1.88%
34 1/28/2011 1276.34 -1.79%
35 11/27/2009 1091.49 -1.72%
36 6/1/2010 1070.71 -1.72%
37 8/19/2010 1075.63 -1.69%
38 6/24/2010 1073.69 -1.68%
39 5/21/2009 888.33 -1.68%
40 4/30/2010 1186.68 -1.67%
41 11/16/2010 1178.34 -1.62%
42 4/16/2010 1192.13 -1.61%
43 6/22/2010 1095.31 -1.61%
44 10/19/2010 1165.9 -1.59%
45 3/1/2011 1306.33 -1.57%
46 5/7/2010 1110.88 -1.53%
47 8/30/2010 1048.92 -1.47%
48 8/24/2010 1051.87 -1.45%
49 11/23/2010 1180.73 -1.43%
50 5/18/2010 1120.8 -1.42%
What about volatility? Well, everyone has their favorite measure. By mine, yesterday's volatility value isn't even close to levels that should worry you about a significant, short-selling type of market sell-off. In fact, volatility was more than twice as great while the market rebounded in March of 2009. There were at least two more periods of higher volatility since then.
So before you get all shook up by Bartiromo's breathy rhetoric and anxious tone, never mind her typical loss for words and inability to get her sentences enunciated properly, check the facts.
As market hurricanes go, this isn't even a tropical storm yet.
A Twitter-Based Hedge Fund
I saw one of the most unusual segments on CNBC a few days ago involving a hedge fund announcing it will use Twitter-based inputs for trading.
If I recall correctly, a psychology professor and his grad student played with data and found an alleged leading indicator of Tweets, classified by sentiment, to the Dow's performance 3-4 days later.
Then a British guy with money from some other, distinctly non-financial venture, the exact nature of which I've forgotten, but think it had something to do with hair care, together with his colleague or brother, is investing some millions of pounds in a hedge fund- and promptly arranged to use the Twitter-based approach. The investor was presented in a brief clip extolling the importance of jumping on such a hot, 'leading edge' concept as Tweet-based trading.
This is almost too funny for words, isn't it? If it were three weeks from now, I'd think it was an April Fool's Day joke.
There are so many things about this story that don't make sense that it makes you wonder how it even made it onto CNBC a few afternoons ago.
First, it's clearly a high-frequency trading strategy. That means it's expensive. We learned nothing about how much and how rigorous was the backtesting the creators did on the strategy.
Of course, being psychologists, selling or licensing their technique to novice hedge fund owners, one wonders if any of them- concept originators or hedge fund owners- actually have any idea how professionals actually test these things?
Then there's the rather non-trivial question of just how it works. Believe it or not, most sophisticated investors don't want to invest with novice fund managers who operate a total black box investing strategy. Think, well, Bernie Madoff.
Especially one which relies, we are told, on the daily attitudes of the tweets of samples of several million users. Which are then, we're told, classified into one or more of six sentiment buckets, the disposition of which apparently creates a signal to buy or sell the Dow in anticipation of its level 3-4 days hence.
The actual example given in the interview on CNBC was a Tweet by a person stating that they were going to their gym to work off some excess weight. The psychologist sagely intoned that this was a negative market indicator.
Then there's the ease with which this could probably be cloned, with the market inefficiencies beaten out of it within a year- or less.
Or perhaps a competitor will clone it, then go one step further and poison the general Twitter feeds, while retaining their own pristine stream, the better to confuse others trying to trade on such sentiment.
Having been introduced to adapting what a novice equity strategist thinks is an investment-ready approach to actual operational status by experienced fund managers, I speak from experience when I say that I am sceptical of the Twitter-based fund concept. There just don't seem to be any experienced adults in sight to vet the idea.
But I guess time will tell whether we'll hear more about this one.
If I recall correctly, a psychology professor and his grad student played with data and found an alleged leading indicator of Tweets, classified by sentiment, to the Dow's performance 3-4 days later.
Then a British guy with money from some other, distinctly non-financial venture, the exact nature of which I've forgotten, but think it had something to do with hair care, together with his colleague or brother, is investing some millions of pounds in a hedge fund- and promptly arranged to use the Twitter-based approach. The investor was presented in a brief clip extolling the importance of jumping on such a hot, 'leading edge' concept as Tweet-based trading.
This is almost too funny for words, isn't it? If it were three weeks from now, I'd think it was an April Fool's Day joke.
There are so many things about this story that don't make sense that it makes you wonder how it even made it onto CNBC a few afternoons ago.
First, it's clearly a high-frequency trading strategy. That means it's expensive. We learned nothing about how much and how rigorous was the backtesting the creators did on the strategy.
Of course, being psychologists, selling or licensing their technique to novice hedge fund owners, one wonders if any of them- concept originators or hedge fund owners- actually have any idea how professionals actually test these things?
Then there's the rather non-trivial question of just how it works. Believe it or not, most sophisticated investors don't want to invest with novice fund managers who operate a total black box investing strategy. Think, well, Bernie Madoff.
Especially one which relies, we are told, on the daily attitudes of the tweets of samples of several million users. Which are then, we're told, classified into one or more of six sentiment buckets, the disposition of which apparently creates a signal to buy or sell the Dow in anticipation of its level 3-4 days hence.
The actual example given in the interview on CNBC was a Tweet by a person stating that they were going to their gym to work off some excess weight. The psychologist sagely intoned that this was a negative market indicator.
Then there's the ease with which this could probably be cloned, with the market inefficiencies beaten out of it within a year- or less.
Or perhaps a competitor will clone it, then go one step further and poison the general Twitter feeds, while retaining their own pristine stream, the better to confuse others trying to trade on such sentiment.
Having been introduced to adapting what a novice equity strategist thinks is an investment-ready approach to actual operational status by experienced fund managers, I speak from experience when I say that I am sceptical of the Twitter-based fund concept. There just don't seem to be any experienced adults in sight to vet the idea.
But I guess time will tell whether we'll hear more about this one.
Subscribe to:
Posts (Atom)
