The Big Picture | September 2003

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Day Trading Makes a Comeback (whoopee!)

Tuesday, September 30, 2003 | 08:46 AM

They're back.

The Wall Street Journal notes that the day traders have returned. Not in the same size and scope as during the bubble heyday, but in sufficient force to prompt Fidelity to cut trading prices to just $8 per trade for its most active clients (240 trades per year or more).

Not quite a contrary indicator, but certainly a warning sign.

I do not believe this has much value as a specific market timing signal; However, it an ominous dark cloud on the distant horizon. For those who consider the Macro environment, this is yet another important sign that all of the speculative excesses has yet to be wrung out of the markets.

Here's an excerpt:

Fidelity -- one of the nation's biggest discount brokers as well as the largest mutual-fund company -- reported 59,976 average daily trades in August, up 16% from the same month the year before. Two big rivals, Ameritrade Holding Corp . and E*Trade Group Inc., have both announced recently that trading activity in September is up 30% or more from August.
Fidelity said Monday it would cut the commissions on stock and options trades almost in half for those who trade at least 120 times a year. Those customers will pay only $8 a trade. Fidelity's best commission rate was previously $14 and available only to customers that traded 240 times a year or more . . .

Analysts say that day trading correlates strongly with the technology-focused Nasdaq Composite Index, which is up 64% since hitting bottom last October. Charles Biderman, chief executive officer at TrimTabs.com Investment Research, says much of the quick buying and selling is focusing on the same sorts of technology and Internet stocks that populated accounts during the late 1990s. Starting in 2000, many of those investors lost fortunes, and many of the firms that egged them on have now shut their doors.

Day Trading Makes a Comeback And Brokers Vie for the Business
http://online.wsj.com/article/0,,SB106487814397200100,00.html
by John Hechinger and Jeff D. Opdyke
Staff Reporters, The Wall Street Journal

Oligopoly

Monday, September 29, 2003 | 10:56 PM

in Current Affairs | Music

Kevin Laws (by way of Tim Oren's Due Diligence) raises some very interesting issues regarding the music industry, and questions of monopoly and profitability.

I disagree with Kevin's take on the matter; Here's my counter argument:

The music industry is not a Monopoly -- but it is an Oligopoly. The five major labels control the vast majority of musical acts and capture over 90% of the consumers money spent on recorded music.
Nor are artists monopolists: Consider the 90% number mentioned above: How far down the artist roster will you have to go to reach that 90% of consumer dollars spent on recorded music, or concert appearances or both? We know the Rolling Stones do big touring and bring in a lot of dough; So does Paul McCartney. But if you go down the list of total dollars spent on the musical entertainment, you wont reach the 90% level until you have included 100s of artists. Hence, no monopoly.

Kevin also wonders why music companies aren't wildly profitable? There are several reasons:

First, as mentioned above, they are not monopolies; They are a loose cabal of price fixing companies who recently came to learn a very basic law of economics: Increased prices = decreased demand. Shockingly, its taken them about 5 years to figure this out.

Secondly, broaden the sector where the industry competes from the narrow music to the broader category of entertainment. Suddenly, music has a serious fight on its hands for each and every discretionary consumer dollar. Music is battling against cable and satellite and film and tv, against internet and print, against video games -- both local playstations, and massive multiplayer games over the net. Sports are another form of live entertainment taking a hefty chunk of consumers time and money. The gambling industry takes their piece also.

Demand is quite elastic for their product; Their products are not like cigarettes or gasoline or heroin; Raise the price or lower the quality or both, and Voila! Sales tank.

All these reasons help explain why Music aint all that profitable -- and thats before we even begin to analyze how effective management is at the 5 big labels; I suspect we would find that most of the companies in the industry are not particularly well run or efficiently managed. They lack innovative ideas or creative responses to challenges. They have been slow to adapt to new technologies. They do not respect their clients. They have not shown they understand artists.

Lastly, the music industry is married to a film industry model. Film production involves a large budget, limited output of production; Studios release a relatively small number of films and hope for a few big movies each year. The big labels base their marketing on long-term stars who release multimillion-copy blockbusters. One album that sells 10 million copies is more lucrative than 10 that sell 1 million. They certainly arent prepared for a 500 bands selling 20,000 copies each, yet thats where the music itself wants to go . . .

Here's a rundown of 2002's Top 10 live acts, according to Pollstar:

1. Paul McCartney, $103.3 million
2. The Rolling Stones, $87.9 million
3. Cher, $73.6 million
4. Billy Joel/Elton John, $65.5 million
5. Dave Matthews Band, $60.1 million
6. Bruce Springsteen & the E Street Band, $42.6 million
7. Aerosmith, $41.4 million
8. Creed, $39.2 million
9. Neil Diamond, $36.5 million
10. The Eagles, $35.4 million

Sources:
Music Industry Structure: Why Madonna Never Complains
Due Diligence, Guest blogger Kevin Laws

Concert Cash: Forget CD Sales the Real Money for Hot Acts Is in Concert Tours
By Peter Kafka, Forbes.com

Hit Charade: The Music Industry's Self-Inflicted Wounds
by Mark Jenkins, Slate.

Seasonal Weakness Arrives at Last

Monday, September 29, 2003 | 02:37 PM

in Finance

After a nearly uninterrupted six month run, the markets’ momentum finally faded last week. The combination of the dollar weakening, crude strengthening, and a smattering of pre-announcements, or just the September/October blues were a handy excuse for a bout of profit taking; As observed last week, any ole’ excuse would have sufficed – the markets simply became tired and needed to digest a bit before their next directional move.

Seasonality is a double-edged sword that cuts both ways. The good seasonal news is that 3Q window dressing is here, and many institutions will be protecting bids to defend their gains before the quarter ends on September 30th. The bad news is that most funds operate on a fiscal year ending October 31st. The repositioning of portfolios prior to fiscal year’s end would not surprise us. After two nearly straight up quarters, choppiness should be expected during October.

Given how far the highest beta, speculative issues have run – notably, the internets, biotech, and semiconductors – the next big move might involve rotation away from those red hot names. Holders of stocks gorged with beefy gains in spicy sectors should consider burping up some partial profits as we enter the rally’s next phase.

Indeed, the focus on the highest beta, most speculative names (some of which are up tenfold during the past 3 Qs) leads us to wonder whether the worst of the Bear market has been fully worked out of the capital markets systems.

Perhaps we’re early, but for risk averse investors looking to participate in the rally, the more defensive sectors look appealing: industrials, energy, chemicals, financials, and other dividend paying stocks could see their moment in the sun. We expect the benefits of the mostly-ignored dividend tax cuts to receive more attention from the public; As the early stage speculative excesses of the rally get wrung out, expect investors to seek safety in value and dividend plays.

The weakest link to this thesis are the two assumptions upon which its predicated: First, that the present rally is based upon more than mere excessive stimulus from government market intervention; Second, corporate CapEx spending and hiring will pick up noticeably by Q3 2003, and Q1 2004.

Lacking those two corporate contributions to the overall economy, we fear signs that the economy’s momentum was fading will appear by the end of first quarter next year.

Chart of the Day

Monday, September 29, 2003 | 02:21 PM

in Finance

Intermediate trend still intact; A pullback to support (1760-1780) would not be a problem.

Nasdaq 6 Month Chart

Source: Gary B. Smith, Real Money.com

A breach of the Nasdaq uptrend, however, would lead to things getting real ugly real fast.

Random Items

Monday, September 29, 2003 | 02:17 PM

in Finance | Media

Seasonality kicking in

Building Intelligence to Fight Terrorism

Is the Big Board a small clique?

The Dollar Meltdown

Study Finds Net Gain From Pollution Rules

Al-Qaida Asks Pakistanis to Oust Musharraf

Quote of the day: "The generally accepted view is that markets are always right -- that is, market prices tend to discount future developments accurately even when it is unclear what those developments are. I start with the opposite point of view. I believe that market prices are always wrong in the sense that they present a biased view of the future.” -George Soros

Kodak: when they're out, who's in?

Saturday, September 27, 2003 | 10:02 AM

in Finance

"Attention ladies and gentleman: In tonight's production of The Dow Man Cometh, the role of Eastman Kodak will be played by . . . "

A follow up to yesterday's Kodak discussion: If and when that fateful day arrives (in 2004?), who will replace Kodak in the DJIA?

a) Cisco Systems;

b) AOL Time Warner;

c) Amgen;

d) A player to be named later.

Discuss

WeedShare Music Model

Friday, September 26, 2003 | 01:46 PM

in Music

Good Morning Silicon Valley posted a terrific response to the Great Recording Industry Business Model Contest from Weedshare:

"Our new music sharing service, which went "live" less than 3 weeks ago, doesn't sue people who share files. It pays them. Rather than try to punish people who don't respect copyrights, we reward people who do.
We have developed a proprietary variation on the Windows Media file format which allows us to track the distribution and redistribution of files. We call our format "Weed" (as in "spreads like a...").

We encode files for content owners and send them back to the owner. The owner may then distribute these Weed files in any way they see fit: download site, peer-to-peer network, email, CD, we don't care.

Anybody who receives a Weed file from anywhere can listen to it 3 times for free (using Windows Media Player). After that, a message pops up encouraging them to buy it, which they do by clicking the "Buy" button. The song's price, which is set by the owner, is deducted from the listener's Weed account. Once you buy the song, you can play it on up to 3 computers, burn it to CD, and download it to a portable player.

Here's the twist: once you've bought the song, you're encouraged to share it. Say you send it to your friend Al. If Al buys it, you get 20% of the sale (and the content owner, as always, gets 50%). If Al sends it to Becky and she buys it, you get 10% and Al gets 20%. If Becky sends it to Chuck and he buys it, you get 5%, Al gets 10%, and Becky gets 20%. After that, you're out of the loop, but the content owner is happy because their material has been exposed to a lot of people, and they get 50% of every sale. The money they would have spent on promoters and payola goes instead to the fans, who provide the best kind of promotion there is: word of mouth.

If you do the math, you'll see that if every recipient finds 2 more buyers, he or she winds up earning 120% of whatever the file cost. With 3 new buyers at each level, sharers earn almost 3 times the file's cost.

Casual users can reduce or eliminate their cost of purchasing music. More active users can develop a hobby business that's fun and modestly profitable (typically by creating a personal web page offering downloads of their favorite music to friends, classmates, etc.). Record labels can realize significant revenue from their catalogs, and the sharing incentives provide a fantastic way to spread the word about new artists, new CD releases, etc.

Our service is especially attractive to unsigned artists who have no practical way to distribute their material and get paid. We offer them do-it-yourself, pay-as-you-go distribution and promotion, with zero up-front cost.

That's a really creative and interesting idea -- wrapping a multi-level marketing model around a DRM issue. I like it -- but have a few very minor quibbles:

1) Windows Media Player? It sucks. I'd rather see a cross platform, open architecture. But hey, that's DRM for ya. (They say they'll have other platform versions soon).

2) Hack-arounds. Can the Weed/WMP DRM system be broken? If so, than it kinda defeats the purpose. (although those looking to download for free will download MP3s, not Weeds)

3) RIAA: Will the goons be able to distinguish between the sharers of these products? Will I be inviting a lawsuit from the Music Police if I share weed products?

All told, its a way cool idea that has some promise . . .

Stocks vs Gold

Friday, September 26, 2003 | 11:31 AM

in Finance | Media

Jim Picerno of The Capital Spectator addresses the relationship between the Dollar and Gold, in THE COMFORTING AURA OF GOLD.

Note that the quote he pulled from yesterday's comment's Currency and Pre-announcements and Oil – Oh My! appears somewhat Bearish, that's more of a short term concern. I'm more Bullish intermediate term; longer term, I fear we may be rangebound for a few years.

Kodak? Buh-Bye!

Friday, September 26, 2003 | 07:28 AM

in Current Affairs | Finance

Eastman Kodak's long slide to oblivion continues.

Yesterday, they announced their Maginot Line in the sand: Hey, this digital thingie looks pretty cool!

More than a day late and a few dollars short, the stock got whacked yesterday to the tune of 13% (ouch). Unless the company can pull off a miraculous transformation, there's probably more to go.

Their very belated shift into digital has allowed both nascent competitors and established names to create a marketplace where no one company dominates. Thus, despite their 100 year history of owning the film market, Kodak is simply another entrant in a crowded field.

This may become a classic B school case. (Moral: Cannibalize yourself before someone else does)

I believe the inexorable decline of the once great company will accelerate over the next decade. Somewhere between now and then, Kodak will ignomiously get booted from the Dow, joining a growing list of previous stars on the road to irrelevancy.

They had their opportunities: Aggressive moves into digital hardware or, cobranding with camera manufacturers; creating a software solutions (See Apple's iPhoto for an example); On line photo sites like Shutterbug.com, Snapfish.com, snap-shot.com, etc. could have been snatched up on the cheap after the dotcom crash. EK doesn't even own EastmanKodak.com, for crying out loud.

Kodak is not one but two paradigm shifts behind the times, as they make their foray into digital cameras. Two days before Kodak's announcement, camera phones reach a milestone: For the first time, global sales of camera-enabled mobile handsets surpassed sales of conventional digital cameras (in 1H 2003). (Thanks to
Due Diligence for the pointer).

They have seen the coming digital challenge, and dithered for quite a few years. Hey, I hear PCs are gonna be big also.

UPDATE: 02/06/04 3:04PM

Interesting trashing of Kodak's accounting from BusinessWeek:

Kodak's Fuzzy Numbers
The company has taken "one-time" charges every year for the past 12
Faith Arner
Business Week, FEBRUARY 9, 2004
http://www.businessweek.com/magazine/content/04_06/b3869096_mz020.htm

Where them Dems Stand on Tax Cuts

Thursday, September 25, 2003 | 11:15 PM

in Current Affairs | Politics

Source: CNN/Money

Currency and Pre-announcements and Oil – Oh My!

Thursday, September 25, 2003 | 03:19 PM

in Current Affairs | Finance

An unholy trinity of negatives is weighing on equities: From the G7 meeting, we got weak dollar to start off the week; Pre-announcements from firms across varied sectors – Level 3 Communications (LVLT), Verizon (VZ), Viacom (VIA.B), Dupont (DD), Kroger Co. (KR), and the New York Times Company (NYT) – added to the worries; Lastly, the surprise cut in oil output by OPECsent crude prices higher.

On top of all this, signs are now appearing that the consumer is starting to fatigue. That’s a very large potential danger to the broader recovery. The spendthrift consumer has been the backbone of the economy, while business spending has been AWOL during the past three years.

But why are these issues having resonance, and why now? These factors arise at the point in this rally where the markets have become ripe for consolidation. The pundits and gurus will pick whichever excuse they find to be most convenient to their models, and use them as justification for the recent sell off.

How the markets’ internals respond to these pressures will be more telling than these underlying issues actually are.

Technically, Monday was the first heavy volume breakdown in Price since this rally began. The bounce back on Tuesday was on light volume, setting up Wednesday’s heavy volume sell off. This suggests that we may be entering a distributive phase of the rally. While the longer term trend remains upwards (we have not violated that red trend line), internals are weakening somewhat as the Bulls tire.

There are other signs that the market needs to take a breather. The advance/decline ratio has weakened, as has the up/down volume. For the first time since March, Price is diverging from Momentum.

The bottom line is that corrective action is necessary for healthy market anyway. As the nearby chart reveals, what’s at risk presently is not the six month old rally, but rather, the more recent, fast-rising and frothy channel. In our opinion, this suggests a mild (5-10%) pullback from the peak towards recent breakout levels. On the Nasdaq, that’s 1760 or so; The psychologically important SPX 1000–1010 is the 1st level to watch; the next is 965 or so. On the Dow, 9310 is the zone to watch.

Chart of the Day
Intermediate term trend (red line) still very much intact; The breach of the recent move (green line) suggests a pullback to support in the 1760-1780 levels.

Nasdaq 6 Month Chart
trend break.gif

Source: RedWoodTechnimentals

Support levels are not far below present levels; Corrective activity should be limited to a 5-10%. Internal trends (and near level supports) suggest corrective activity should be shallow.

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Quote: "Life is like a great big grinding wheel. Whether it wears you down or polishes you up depends on what you’re made of." -Author Unknown

Minimum Wage, Inflation and Job Loss

Wednesday, September 24, 2003 | 05:19 PM

in Finance | Web/Tech

Marc Brazeau over at the Blogonaut asks the question:

"Two common arguments against raising the minimum wage are possible inflationary effects and job loss. Why aren't these issues raised in relation to executive compensation? "

Lets parse this complex question into thirds: 1) Political; 2) Economic; and 3) Corporate Governance. Each may provide insight via varied perspectives:

Political
The most obvious distinction is Political. Raising the minimum wage requires Congressional legislation; Raising executive compensation does not -- hence, very different rhetoric accompanies the exec comp debate.

Broad economic arguments which paint the issue in terms of nationwide job losses is an effective rhetorical political strategy. That method has far less resonance with the issue of CEO pay, which is set by the board of Directors.

That contrast goes the furthest in explaining the rhetoric used to defend or support raising the minimum wage. Until the recent brouhaha over Dick Grasso’s outsized pay package, one hardly ever heard much chatter about exec comp, unless outright fraud (i.e., WorldCom, Enron, Tyco) was involved. (Kudos to Blogonaut for initiating this discussion).

It doesn't take much bombast to frighten Congress into fearing less job creation; On the other hand, it takes several 100 million dollars in CEO pay to get investors worked up into a lather.

Economically speaking, the inflationary effects and job loss arguments are fairly parallel between execs and min wage workers. The caveat is that the latter is true, while the former isn’t always so.

Job loss is simply based upon the math of how much firms have to spend. If the minimum wage is bumped to $10, and a firm has $1200/week budgeted for a new hire, they’ll hire 3 full time employees ($1,200 = 40 hours x $10 x 3 workers). If the minimum wage is $6, they’ll hire 5 full time employees ($1,200= 40 hours x $6 x 5 workers). The $4 difference in minimum wage just cost 2 jobs. Companies cannot pay someone with money they don’t have.

Similarly, if a company replaces a $1 million/year CEO with an exec who gets $11 million a year, then there’s $10 million less for other items. That’s 200 less $50,000 per year employees.

So the job loss arguments does apply, buy its rarely mentioned in “polite” company. The recent Verizon union negotiations provides a good example of how those data points can be used; The union ran ads in newspapers comparing how many workers health care coverage (a key issue in negotiations) was equivalent to outsized executive’s pay package. (“The $69 million in executive bonuses could cover the healthcare costs of 13,800 workers”). It was a very effective technique.

Economic argument “Part B” -- is it inflationary? My short answer is “depends upon the macro environment.” Longer answer: Consider the present. We have massive fiscal and monetary stimulus: tax cuts, increased money supply, 2 wars, lower interest rates, deficit spending, more tax cuts, and a weak dollar. All of these items might have been considered inflationary at a different time. Now, the hope is that its reflationary -- stimulating (but not too stimulating) to the economy.

Yet if you took any one of these factors, and dropped them into the 1970s, it would be horrifically inflationary. Whether a given factor is inflationary is relative to the complex and chaotic machinations of the world’s largest economy.

Does the fine line between stimulus and inflation still exist in 2003? Has inflation has been vanquished once and for all? (I doubt it). Quite possibly, this kitchen sink economic plan (throw everything possible at the economy but the kitchen sink) may lead to inflation again one day -- though I kinda doubt that. There are simply too many deflationary forces at work -- China’s exports, surging productivity, lack of corporate pricing power, economies of scale lowering tech prices, etc. -- for there to be much in the way of deflation any time soon.

Corporate Governance: Parallels exist between elected representatives and corporate board members. Compare Tammany Hall patronage jobs with crony capitalism, as it applies to exec comp.

The framing issue is the expertise and resources required to evaluate any theft from shareholders via pay packages; To evaluate these exec comps approved by lackey board members is time consuming, expensive and difficult.

For the individual investor, it’s a matter of transaction costs. Does it make any financial sense for each and every shareholder to invest the time, energy and money into researching the relative merits of all the potential board members voting for these giveaways for each of all their 100 share odd lot stock holdings? No.

Large institutional holders, on the other hand, have the resources, expertise and incentives to do so. There is a fiduciary obligation to do so. They represent pools of millions of investors, and they certainly know (or should know) what's in a shareholders best interest financially.

Aside from Calpers, why other Pension and Mutual Funds haven’t done so yet is one of the great mysteries of the recent round of corporate scandals . . . Perhaps it's a glass house / stone throwing thing . . .

Minimum Wage versus CEO compensation

Wednesday, September 24, 2003 | 03:17 PM

in Finance

Marc Brazeau of Blogonaut asks the following question:

The minimum wage expressed in 2000 dollars had a value of $7.80 in 1968, $6.80 in 1979 and $4.75 today.

During the period 1990-1999, corporate profits rose 117.4 percent, the S&P 500 rose 297 percent, and CEO pay rose 535 percent. During the same period, average worker pay rose 32 percent;

According to Fortune magazine, median compensation for chief executives at 100 of the largest companies rose 14 percent -- to $13.2 million -- in 2002. The average chief executive is now paid 282 times what the average worker is paid, up from a 42 to 1 ratio in 1982. Still, that multiple is down from the peak of 531 to 1 in 2000.

"If the minimum wage, which stood at $3.80 an hour in 1990, had grown at the same rate as CEO pay, it would have been $21.41 an hour in 2001, rather than the current $5.15 an hour,'' the (Merill Lynch) report said.

Two common arguments against raising the minimum wage are possible inflationary effects and job loss. Why aren't these issues raised in relation to executive compensation? "

Discuss.

G7 placating US public opinion?

Tuesday, September 23, 2003 | 01:55 PM

in Finance | Media | Politics

Quote of the Day

"Other G7 officials said privately that the communiqué was more a bid to placate domestic US public opinion than a genuine attempt to engage with the Chinese authorities. A senior G7 official said there was resistance to treating China as the "root of all evil" and the country was very unlikely to succumb to public international pressure to revalue its currency."

"US and UK undermine exchange rate consensus," by Alan Beattie and Christopher Swann in Dubai, Published: September 21 2003, The Financial Times Ltd

Insider Selling

Tuesday, September 23, 2003 | 11:35 AM

in Finance

Jonathan Moreland has an interesting perspective on insider selling over at RealMoney.com:

Records may be made to be broken, but the fact that the Insider Insights' four-week rolling average market indicator continues to collapse shouldn't help momentum investors sleep well at night. This is uncharted territory for these indicators, and I've once again had to reformat the scale of this chart to accommodate the plunge.

Insider Selling (click for larger pop up image)

Moreland says this is "untested territory," and at negative 270%, insider selling is "twice as bad as the worst level I'd seen since 1995."

We've discussed this in the past, and its a tough indicator to use with much precision as a timing factor.

DVD recorders

Tuesday, September 23, 2003 | 12:07 AM

in Film | Finance | Media | Web/Tech

Shopping this past weekend, I came across 3 DVD recorders -- all under $500:

- Phillips for $499;

- Panasonic for $449;

- an "off brand" for $399.

That leads me to make two predictions:

1st, by Christmas 2003, DVD recorders will be $250-300. Its more than 90 days from now, and the upper range of that target is totally do-able.

2nd prediction: Christmas 2004, $150-250. At that price, this becomes a very popular home and consumer device; Especially if we see name brands ike Panasonic under $250.

Now think about the possibilities of combining a DVR/TiVo device with a DVD recorder . . .

Turning Japanese?

Monday, September 22, 2003 | 04:50 PM

in Finance

Does the U.S. want a weak or strong dollar? That’s the $64,000 question for currency traders. Earlier this year, a weakening dollar was touted as a salve for U.S. industrial exports. Yet at the weekend meeting in Dubai, the G7 industrial countries issued a statement calling for "more flexibility in exchange rates" – meaning a weaker U.S. dollar. All the while, Treasury Secretary Snow affirmed the U.S. commitment to a strong dollar policy.

Which is it?

The G7 comments were consistent with recent White House statements. The U.S. has been pressing Japan and China to stop intervening in their currencies. By artificially keeping the Yen and the Yuan cheap, these nations can export goods attractively priced to U.S. consumer markets.

The combination of a new Japanese cabinet (which might be willing to let the Yen float) and the G7 statement worked to embolden traders, who bought the Yen versus the Dollar. Asian currency prices surged and stocks tumbled on fears of reduced exports to the world’s largest economy. The Nikkei 225’s drop of 463 points – over 4.2% – was its biggest sell off in over two years.

The good news is that U.S. officials did not do anything to exacerbate the situation. There are some odd parallels to 1987 – a sharp summer spike in interest rates, changes in tax policies, a big rally in stocks, and a threat to back away from a strong dollar policy all contributed to the 1987 crash. Those factors and events sound disturbingly familiar.

Fortunately, the differences between today and 1987 argue against a new crash: The ‘87 spike in rates was from 9% to 10.5%, while the recent move was from 4.2% to 5.5%; while that’s a greater percentage, its not a rise to peculiarly high levels. The changes in tax policies were benign this time versus the threatened “Merger Tax.” And while the current rally has been substantial, it was from levels “down so long it looks like up to me.”

Lest anyone forget, Nasdaq 1,900 is still more than 3,000 points below its former highs.

The silver lining in the currency debacle is that we now know that Treasury Secretary John Snow is a student of market history: He’s been insisting there’s no change in the U.S.’s strong dollar policy (that’s his story and he’s sticking to it). Traders – at least those older than 30 – may recall that then Treasury Secretary James Baker precipitated, in large part, the ‘87 crash. In a statement over the over weekend, Baker threatened to encourage a further drop in the dollar. The next trading day was Black Monday.

It’s an old but true cliché: Be careful what you wish for, you just might get it.

Chart of the Day
Superimposing the Nikkei index onto the current Nasdaq index suggests that history might be repeating itself. The chart shows the massive bear market of 2000-2003 and subsequent rally since late 2002 (moved forward 14 years or so) has followed a strikingly similar pattern to that of the Nikkei (circa 1989).

Nasdaq vs. Nikkei
Nasdaq v Nikkei.gif
Source: Chartoftheday

What might this mean? If history continues to repeat itself, the Nasdaq will soon be entering a larger broad trading range.

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Quote of the Day
"Given how expectations had been building up in recent weeks, markets will be unimpressed by this. The statement does little more than reflect the views already there and highlights that this remains the key issue."

-Gerard Lyons, chief economist at Standard Chartered Bank.

Lyons may have been aware that G7 officials had privately said that the communiqué was "more a bid to placate domestic US public opinion than a genuine attempt to engage with the Chinese authorities. A senior G7 official said there was resistance to treating China as the "root of all evil" and the country was very unlikely to succumb to public international pressure to revalue its currency."

E-Mail: Enemy of Productivity?

Monday, September 22, 2003 | 10:53 AM

in Finance | Web/Tech

Has E-Mail turned into the enemy of Productivity?

That's the argument put forth by Matthew Lynn of Bloomberg. His article this morning: E-Mail Has Turned Into the Enemy of Productivity identifies four ways email is sapping productivity gains:

"One, and most obviously, spam. So much has been written on the menace of unsolicited e-mail, it is not worth dwelling on here -- except to say that spam is close to making e-mail boxes unworkable.

Two, security and privacy. Most viruses spread by e-mail, imposing huge costs as companies try to clear them out. Worse, e- mail leaves a permanent record of office gossip. None of New York Attorney General Eliot Spitzer's investigations of Wall Street banks would have been possible without e-mail records.

Three, time-wasting. E-mail makes it very easy for people to spend their days in the office goofing around as they stare at a computer screen. But it also encourages bureaucracy. Managers send out long e-mails, hitting the ``cc'' button 100 times, when they could have solved the problem with a quick conversation. And the ``forward'' button is a tool of office politics. People are rarely productive when they are plotting against one another.

Four, e-mail encourages nastiness. Pornographic or racist material is passed around the office. Bosses bully and fire their staff electronically -- in Britain, the insurance company Accident Group caused an outcry earlier this year by firing more than 2,000 workers by text message. One survey by the software company SurfControl Plc found a third of British workers preferred to deal with sensitive situations by e-mail rather than face-to-face or on the telephone."

I can't say I agree with that; The idea of banning intra-office email will do nothing to stop Spam or Viruses (Virii?); Time wasting via email probably consumes much less time than time wasting via web-surfing. Nastiness via email can be dealt with the same way nastiness on the phone or at the copy machine.

Several firms have taken different approaches to reduce wasted hours and email-foolery:

- The British retail chain Phones4U Chief Executive John Caudwell banned his staff from using internal e-mail, according to the Financial Times; His rules say you can't send e-mails to co-workers,but customers and suppliers can still be contacted electronically. All internal communication by e-mail is now banned, whether it's work-related or not. Instead, staff will have to pick up the phone or wander down the corridor and say what they want to say in person.

- The U.K. unit of the Swiss food giant Nestle SA has introduced an "e-mail- free Friday,'' according to ComputerWeekly.com.

- Other companies are firing workers for sending inappropriate e-mail. What started as one of the great innovations of the last decade is fast becoming a monster.

E-mail is like any other office tool: it can be use to enhance productivity or to harm it. Excessive personal phone calls, printing horoscopes, xeroxing your butt at the office Christmas party -- all non productive ways to use technology.

Technology and Productivity are inter-related. Their application towards specific uses or misuses is a function of corporate culture -- and the establishment of the right environment -- than it is inherently in the tool itself.

Nader critiques on sister blog

Monday, September 22, 2003 | 07:20 AM

in Politics

I try to keep this blog as a strict economics/market commentary site, and bring in geopolitics only as it impacts those venues.

The overtly political stuff is on essays & effluvia. Two new posts over the weekend are of interest to the political junkies out there:

The RED Pill or the BLUE pill?

3rd Party Candidates

The Casino Greeter

Sunday, September 21, 2003 | 09:01 PM

in Finance | Media

Quote of the day:

Never mind the $140 million paid to Richard A. Grasso for his work as a casino greeter. Never mind the hypocrisy of the New York Stock Exchange directors giving Mr. Grasso his money and then booting him for taking it. The big shocker in the Grasso imbroglio may be that two years after Enron, almost a year and a half after WorldCom and long after corporate America told us that we were through with scandals and back on ethical ground, anyone who turns over a corporate rock can still find the earth crawling with maggots.

-Gretchen Morgenson, As Scandals Still Flare, Small Victories for Investors
The New York Times, September 21, 2003

Technologic Dyscalculia

Saturday, September 20, 2003 | 09:26 AM

in Finance | Media

Quote of the day:

For his part, Mr. Grasso demonstrated a remarkably impaired capacity to calculate the impression on both the man in the street and the man in the Street of his carting away four times as much as the exchange earned last year. Little noted and less commented on was that his booty included a $5 million bonus for making sure trading resumed a week after 9/11.
That strikes us as a singular act of witless generosity on the part of the directors, who were his nominal paymasters, but, in reality, functioned as his personal ATM machine. As head of the exchange, isn't that what Mr. Grasso was supposed to do? Perhaps we missed it, but we don't remember bonuses being awarded to the firemen, the cops, the hard hats, the medics or the scores of others who did their jobs at some greater risk and incurring a bit more inconvenience than did Mr. Grasso during those horrific days and nights without end.

In denial right to the last, Mr. Grasso adamantly rejected any notion that there was anything untoward or even unseemly in his massive slurping at the exchange trough. An incredibly long and mostly improbable list of names was floated as possible replacements; much to our disappointment, it did not include Saddam Hussein, but only, it turns out, because he failed to leave his cell-phone number.

-Alan Abelson
The Miscalculators
Barron's, Up And Down Wall Street
September 22, 2003

Iraq's 6 Month Anniversary

Friday, September 19, 2003 | 07:11 PM

in Current Affairs | Media | Politics | War/Defense

Nobody even mentioned it: Today was the 6 month anniversary of the Invasion of Iraq. I have to reread my magnum opus, Not-So-Hidden Agenda: Strategic and Economic Assessments of U.S. led Invasion in the Middle East (A Pre War Analysis, March 19, 2003), and figure out what to sy next on the topic. (I just haven't been in the mood to burn brain cells figuring out how this whole messy geopolitical / domestic election year hydra plays out going forward.)

If you haven't yet seen this, other people have told me that its worth the 10 minutes it will take you to read it. Pull up a chair and a cup of coffee and have at it in your favorite format:
Download Word Doc file
Download PDF file

Hedge Fund Capitulation?

Friday, September 19, 2003 | 07:27 AM

in Finance | Media

Do you want to be right, or do you want to make money?

That, in a nutshell, is the quandry facing hedge fund managers this year. They feasted on the short side for the past three years. Mr. Market gave them 4 significant rallies to short, with each followed by a brutal sell off, leading to new lows all 4 times.

But the 5th rally was not the charm. Starting from a higher low, and taking the market to a higher high, the short side has gotten slaughtered since the March 12 reversal. Although this rally may be getting long in the tooth, the market internals are much, much better than the prior air pockets. Iraq, at least as a media war, is behind us; the President's tax package passed; the economy seems to be gradually improving. Worst of all for the bears, the long term downtrend has been broken.

All this raises an interesting question: Is the present rally merely due to short funds finally repenting their Bearish ways, and going long? That's the thesis WSJ's Greg Zuckerman poses in today's "Ahead of the Tape" column:

It's one of the big secrets behind the market's recent climb: Hedge-fund managers are throwing in the towel. For much of this year, managers of large hedge funds, especially those specializing in tech stocks, have been bearish. Rising profits? The hedgies dismissed them as nothing more than the results of cost cutting, and a boost from a lower dollar. Even improved earnings prospects surely didn't justify those soaring stock prices, the bears said. Due to this stance, the average hedge fund is up just 9% this year, compared with the 43% gain for the tech-heavy Nasdaq.
Now, trying to stage a late-year comeback, some hedge funds are covering their short positions, or buying back stock they had borrowed and sold. (Hedge funds are investment pools that often use leverage and sell stocks short hoping they'll fall.) Others have begun to load up on tech shares. A survey from International Strategy & Investment, a research firm, shows hedge-fund managers are as bullish on the market as they have been at any time in the past year. Overall, short interest on Nasdaq has fallen to its lowest level since May.

Does this mean the market has clear sailing ahead? Perhaps not: "Many of the savviest hedge-fund managers are convinced stocks are overpriced." Some of the best known bears turned cautious and covered their shorts, just before the war began. That was a prudent and prescient move. But they never transmogrified into full blown bulls, and some got short again over the summer.

So why buy, if you think stocks are too pricey? It's a question of bearing the pain. Shorting theoretically exposes you to infinite losses; in reality, if your positions as a short manager move far enough against you, your fund can be totally wiped out. So to just stay in business, hedge fund managers must take off bets that could destroy their hedge funds.

As the WSJ notes, "That's not a ringing endorsement of the market, " notes the WSJ. Might these “worrywarts” being missing a secular turn in tech spending? Perhaps, but as the journal states, the "upturn doesn't justify sky-high prices for many tech stocks."

While we agree, and believe a consolidation is over due (see Arms Index chart, nearby), there’s no advantage in fighting the tape. The market trend remains upwards.

Chart of the Week
Arms Index moving into territory suggestive of a minor, short term pullback. Indeed, after the almost V-ish move up, a little back-and-filling might be healthy at this point.

10 day moving average Arms Index
Arms Index.gif
Source: RedTechResearch

As long as internals do not decay too much, expect mild profit taking and consolidation. Every pullback has been met with under-invested bulls buying the dip. There’s no reason to think that any new retracement will be different.

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Quote of the day: "I don’t know how speculation got such a bad name, since I know of no forward leap which was not fathered by speculation.
- John Steinbeck