The Osborne Effect

Apple goes to extreme measures to keep their product announcements a secret. They even have people go through the garbage cans near the campus to make sure no one throws anything out. One reason for the secrecy is obviously competitors copy them... Another reason, according to the book, is the Osborne Effect, where the announcement of a new product kills the sales of the existing product. I worked at a company that announced a new product, then it ran behind schedule, and sales were so bad it resulted in layoffs.

Jim Cramer on the Daily Show

Everyone is talking about Jim Cramer's recent appearance on the daily show. Here is my take:

Jon Stewart seemed to have 3 main criticisms:

1) They give bad investing advice on CNBC.

2) Journalists on CNBC have a responsibility to dig deeper and be ahead of these scandals and meltdowns.

3) Jim Cramer and hedge fund managers in general are corrupt and unethical.

1) I think cramer was ready to defend himself on making bad calls, which he admitted to. Everyone makes bad calls, Warren Buffet just got his credit rating cut.  I should have sold goog at 750.  Anyone that invests will loose money at some point. Also CNBC often interviews people with conflicting views and most people take people comments at face value within the context of their usually disclosed self interests... whether they are analysts promoting their firm or stocks they own, CEOs promoting their companies.... economists promoting their profile or books, etc.  Even Cramer has to be taken in context.  He is a guy that used to run a hedge fund, and is used to changing direction on a dime, and turning a profit every day.  His experience doesn't fit well in a format after the market closes. Plus he is shilling his books and his web site and Action Alerts Plus, a service where he trades and notifies you before he makes the trade. Most people that invest are aware of these interests.  However, I think there is some value in what these people have to say.

2) The 24 hour news channels, fox, cnn, cnbc, etc. will never be a platform for serious investigative journalism. There are outlets for serious investigative journalism, 60 minutes, npr, the economist, the New York Times (largely the people that are guests on the daily show). Fortune famously ran the article "Is Enron Overpriced?" that began the unraveling of their fraud.  However, in depth journalism doesn't seem practical for stations with a 24 hour news cycle.

3) However, the death blow was that Stewart called him out for unethical behavior when he ran a hedge fund. That was awkward. Zing.

Bad Bank

This episode of American Life, Bad Bank, has some sobering statistics and explanations of the current banking crisis. Bank of America and Citigroup have 25% of US deposits. Top 20 banks have 90% of US deposits. Citigroup has balance sheet with 150 billion in assets, yet market cap is only 10 billion. Household debt to gdp chart has been 30-40% through 1940s and 1950s. It hit 50% in 1980s. It skyrocketed to 100%. The last time it was at 100%.... 1929 :-/ They also say that part of the reason the FDIC can't seize Citi or Bank of America is because they don't have a large enough staff.

John Thain and micro expressions

I have been interested in micro-expressions, facial expressions that last only a fraction of a second that indicate emotion, since I read blink, and more recently after watching the show Lie to me (which is based largely on the work of Paul Ekman). Today I was watching WSJ report and John Thaine, the recently ousted CEO of Merryl Lynch, was interviewed and he really gave himself away. On this clip watch as he says "I would first say I was surprised", then a quick grin flashes across his face. I'm not exactly sure what it means, but I suspect he was not surprised at all and that he's quite pleased with himself for pulling a fast one on Bank of America.

There is another point in the interview where Maria Bartiroma asks him about about them loosing 15 billion dollars in the 4th quarter, and he says "Well Maria as you know over the course of the year" he then pauses and does a half smile that indicates contempt.

I had been skeptical, but this is the first time I have actually spotted a micro expression.







contempt

House of Saud

This is a documentary about Saudi Arabia. How the kingdom was united, how they found oil in 1931 drilling for water, how Aramco was formed, how Roosevelt made pact to provide protection in exchange for cheap oil, and Dhahran military base to fight Japanese. It covers their struggle with modernity and westernization against their Islamic traditions, their objections over Israel being created, their role in the cold war, their citizens involvement in 9/11, and the Gulf Wars (They paid the US 50 billion dollars for protection from Iraq). Here is a good summary.

Yesterday's Market 1/29

The market and bank stocks were down today after a gun run after harsh language from barrack obama and chris dodd about irresponsibility of banks and getting back bonuses. Also there was some profit taking after a multi-day run up.

Gold is up because of inflation worries over stimulus package.

Amazon beat earnings, as did netflix a few days ago.

Pfizer continues to tank due to wyeth buyout. Wyeth has a big alzheimer's drug in the pipeline.

Sequenom has a blood test for pregnant women to detect down syndrome that replaces amniosyntesis, which carries risk of miscarriage. Also it may encourage all pregnant women (not just older women) to start taking the test.

Amylin got Icahn lift after he tried to appoint board members. They have a diabetes drug in the pipeline.

Crystal Castles: history repeats itself

In the 80s, technology progressed to the point of making low resolution electronic keyboards financially practical. The sound has made a huge comeback for some time now... from Intergalatic by the Beasty Boys to more recently Crystal Castles.

Truthfully, the keyboards sucked... eventually they were replaced by keyboards with higher resolution and sampling frequencies... Today I think we are seeing the same thing in finance... Long Term Capital Management imploded  in 98, was bailed out by the government, and probably set a bad precedent. Complex mortgage backed securities and quantitative hedge funds wouldn't be possible in their current form without the advances in computers. I'm saying Long Term Capital Management is the Herbie Hancock of finance.  

I have worked on programs that are used to do analysis for mutual and hedge funds. At this point, computers can only do what they are programmed to do.  Many expert systems fail because they don't take into account the real factors experts use like intuition, of which the experts aren't fully cognizant. 

CRYSTAL CASTLES - Crimewave (new official video)
Uploaded by Differentrecordings

The Great Crash 1929, and current financial crisis

I read "The Great Crash 1929" and I have compiled my thoughts on the book as it relates to the .com bust and the current financial crisis.

What caused the Crash in 1929?

1) Low Interest Rates. One conventional explanation is that the US Federal reserve cut interest rates too low and it enabled speculators. Winston Churchhill was largely blamed because he returned to the gold standard. Eventually, this caused Britian to beg the US to cut interest rates. When the US obliged credit was cheap. Cheap credit alone doesn't explain the crash. There have been other periods of cheap credit without a stock market crash. Although I think it is considered a factor in the 1929 crash as well as the 2008 crash.

2) Speculation. Another cause of the 1929 bubble was too much leverage. Individual investors did large buying on margin. Furthermore, holding companies and investment trusts indirectly added leverage to the markets.

3) Optimism. One of the biggest causes of any bubble is optimism. In 1929 there were several emerging technologies that brought great optimism about the future, namely the auto, radio, and airline industries. Lindenbergh had accomplished the first solo, transatlantic flight. People had trust in leaders due to hearing them over radio. Irving fisher even argued that prohibition of alcohol would increase worker productivity. Similarly, the optimism about the potential of the internet fueled the .com bust. The idea that everyone should own a house and that house prices never go down helped fuel the 2008 crash.  In 28 and 29 there was the term "new era", a term nearly directly reflected in the .com bubble with the "new economy."

In 1929 Irving Fisher was the poster boy for optimism. He famously said "Stock prices have reached what looks like a permanently high plateau." only a few days before the crash. On the flip side, shortly before the crash, Roger Babson said "Sooner or later a crash is coming, and it may be terrific."

Irving Fisher shortly after the crash

Another similarity after the 1929 crash and the 2008 crash is the assertion by Presidents and economic luminaries that the "fundamentals are sound."  In 1929, it was Irving Fisher and President Hoover, among others. In 2008 President Bush, John McCain and Hank Paulson have repeatedly stated that the fundamentals are sound when in fact, it's obvious they don't know.

During the .com bubble Alan Greenspan famously warned of irrational exuberance on December 5th, 1996. It would be over four years before the stock market crashed. The genius of the book the great crash is that it explains the psychology and paradox of investing during a bubble. "Temporary breaks were serious trials for those who declined fantasy. People who knew there was a bubble were fooled by small dips and eventually began to give up."

Timing

The 20s are characterized as the run up to the crash, but 28 and 29 were the years where it really went off the charts. I had always heard the stock market lost 90% of it's value during the crash, what I didn't realize was it took nearly three years.

September 3, 1929, the times industrials hits a peak 452

October 24, 1929 - black thursday - the market crashed and largely rebounded the same day.

October 29, 1929 - black tuesday - worst day in market. times industrial down 43 to 275

July 8, 1932 - the times industrials bottomed at 58. It took nearly 3 years to find a bottom.

Just as the computers get backlogged currently on days of high volume, the tickers couldn't keep up with falling prices. This induces panic because people don't know how much they have lost until later or after the fact when they may not be able to sell because the markets are closed.

In some cases stocks gapped huge. Often mondays saw huge losses because people reflected over the weekend. (Similar to Monday March 10, 2000 during the .com bubble)

Aftermath

John D. Rockafeller, the richest man in America at the time, wrote letter assuring the public the fundamentals were sound and he was buying common stock on October 30, 1929. Similarly, Warren Buffet, the current richest man in America, wrote an op-ed piece in the New York Times on October 17, 2008. Bill Gates, the richest man in America at the end of the .com bubble was probably relieved because the bubble was causing high rates of attrition at Microsoft.

"The Great Crash" asserts that the common belief in large increases in suicide is largely a myth. There was the high profile suicide of Ivar Kreuger. In the 2008 crash there have been 2 high profile suicides, namely English financier Ross Stephenson, and De La Villehuchet due to Bernie Madoff scandal.

Scandals are often uncovered during crashes and depressions because people become concerned and suspicious, whereas they are more lax in times of prosperity. This was true of the crash in 1929, there were numerous embezellments, the worst of which was the union industrial bank of flint michigan. The executives embezzled about 4 million (which is a lot inflation adjusted). The .com bust saw a slew of embezzlements: Enron, WorldCom, Adelphia, HealthSouth, Cendant, Global Crossings, Tyco, and the demise of Arthur Anderson. The 2008 crash has exposed Bernie Madoff.

Taxes

Hoover enacted tax cuts after the crash, but enacted large tax increases in 1932. There was a strong perception that the budget had to be balanced to restore confidence, but that seemed to only worsen the crisis.

Depression

The depression from 1873 till 1896 was known as "the great depression" before the great depression of 1929 - around 1940. There is an article about how that depression is more similar to the 2008 crisis.

The book claims the crash of 1929 started as a simple recession due to high inventory. The book is largely about the crash, not the depression. The long term depression is harder to explain, but there are four contributing factors.

1) Unequal distribution of wealth. The top 5% of the population received 1/3 of the personal income

2) bad corporate structures, namely holding companies and investment trusts. these companies depended on dividend, so there was pressure to maintain the dividends rather than invest in capital expenditures.

3) bad banking structure. In the first six months of 1929 346 banks failed with deposits of $115 million.

4) the dubious state of foreign trade. At the time the US was mainly an exporter and Hoover raised tarrifs to protect that status.

The big question is can or will it happen again. Or is it happening again? There were a lot of government regulations passed that have helped preventing the problems. The Glass Steagal Act created the FDIC, which was crucial to restoring confidence and stability to the banking system. It also separated commercial banks from other financial institutions, most notably brokerage firms. The Fed was given control of how much speculators could buy on margin. The SEC was created. Insider trading was outlawed. Also outlawed was mass coordination to manipulate the markets (I was surprised to learn they were at one point legal). There were numerous pump and dump scams preceding the crash, just as there were during the .com bubble largely thanks to email providing an easy way to pump up small stocks.

2008 Crisis and Deregulation

Many of these safeguards have been removed, namely, the repeal of Glass Steagal (Gramm-Biley-Leach Act) which enable the merger of banks and brokerages. In addition, the uptick rule was eliminated in 2007, that was designed to prevent bear raids. Deregulation of banking is a peculiar position in light of the fact that the goverment is an insurer of the banks through the FDIC and an ad hoc insurer to other financial institutions that are "too big to fail" through TARP. No reasonable insurer would encourage their clients to take on more risk. The irony is that senators like Phil Gramm that espoused free market capitalism have forced the fed to the verge of nationalizing the financial system.

The current financial crisis can be traced back to deregulation of even older laws. Credit default swaps, which are side bets and unregulated insurance on securities, were made illegal after the Panic of 1907, as is discussed in these two 60 minutes segments, but were legalized in 2000 by the Commodities Future Modernization Act. Sub-prime mortgages, CDOs, mortgage backed securities, and most importantly credit default swaps are what brought down the likes of Bear Stearns, Leahman Brothers, and AIG. As Warren Buffet said "Wall Street drank their own Kool-Aid." There is the cliche that those who don't remember the past are doomed to repeat it... I suspect people knew their history, but were too idealogical or greedy to act on it.

Visual Guide to Housing Crisis

Nice chart porn...
"Housing prices never fall"

"Everything our parents told us was good for us turned out to be bad. The sun. Milk. Read meat. College" - Woody Allen