The Big Picture | January 2004

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Why the unemployment rate is really higher than it looks

Saturday, January 31, 2004 | 02:36 AM

Dan Gross' Moneybox column in Slate gives big ups to the Big Picture. Dan referred to our clear eyed view of what's become a contentious issue: the so called "Self-Employed Work-at-Home Contractors."

Thanks for the kind words, Dan!
(Sorry 'bout the wisecracks 'bout your alma mater!)

UPDATE: February 1, 2004 5:02PM
Dan also has an interesting column in the Sunday Times, which I will point to despite the fact that I am no where to be found in it, thus, ending my streak of mentions in intelligent commentary at a grand total of one straight.

Source:
Odd Jobs: Why the unemployment rate is really higher than it looks
By Daniel Gross
Posted Friday, Jan. 30, 2004, at 1:57 PM PT
http://slate.msn.com/id/2094690/

Growth Forecasts, Without the Wait
DANIEL GROSS
New York Times, February 1, 2004
http://nytimes.com/2004/02/01/business/yourmoney/01view.html

Will Stock Rally End in 2nd Half?

Friday, January 30, 2004 | 04:45 AM

in Finance

I've been meaning to post this for some time now . . . this week's sell off makes now as a good a time as ever:

I was trained in Technical Analysis by 2 people: Guy Ortmann, who was trained by Alan Shaw, and Ralph Acampora, who is a peer of Alan Shaw. So when a story appeared on Bloomberg about Shaw, you can be sure it got my attention:

"Shaw, 65 years old and a 45-year veteran of Wall Street, said the latest rally in stocks probably will end during the second half of this year. 'Unless the history books are wrong, we're only supposed to have one major bull market in one's lifetime,' said Alan Shaw, who received the No. 1 ranking for technical analysis on Wall Street along with colleague Louise Yamada in a survey by Institutional Investor magazine last year.
The rally happened from 1982 to 1999 and any gains now are taking place in the context of a longer-term bear market, Shaw said at a conference of the Market Technicians Association last week. Technical analysts rely on identifying patterns in price charts to make buying and selling decisions. "We are now in the midst of the first cyclical bull market'' that occurs after reaching a milestone such as 10,000, said Shaw, who has worked for Smith Barney and predecessor firms since 1958. Smith Barney is a division of Citigroup Inc. Analysts define a cyclical bull market as a rally that eventually fails and occurs within a longer period when stocks are little changed or declining."

I agree with Shaw's long term perspective. Its hard to argue with when you see it on a chart. Its even harder to advocate caution when momentum takes the market up a few 1000 points. Its a fine line to walk.

"The Dow flirted with 100 from 1905 to 1924, and had four rallies along the way. The average gain equaled 77 percent and lasted 24 months, Shaw's data show. In February 1966, the benchmark came within five points of 1000. It failed to surpass the level for good until 1982. There were also four bull-market rallies during that time, and they averaged 53 percent and 29 months in length, the data show.
The first close above 10,000 during the market's current rally took place on Dec. 11 and marked the 19th time that the Dow industrials crossed that threshold. "My conclusion from this is we do have further to go in the cyclical sense,'' said Shaw. The Dow and benchmarks such as the Standard & Poor's 500 Index could even reach their previous highs "and still be in a cyclical bull market,'' he said.

Understanding the difference between cyclical and secular may very well be the key to making money in the market over the decade.

"Another reason why a longer-lasting bull market probably isn't in store is that interest rates aren't likely to go much lower, Shaw said. The 4 1/4 percent U.S. Treasury note maturing in November 2013 yields 4 percent; last year, the benchmark 10- year note yielded 3.07 percent, the lowest since 1958. "There's very little leeway'' to support a more sustained advance in share prices, he said. The Dow returned 14 percent a year from 1980 through 1999, a period when the 10-year note's yield fell to 6.45 percent from a peak of almost 16 percent.
As for the Dow, Shaw assessed how far it might fall by applying the patterns of the benchmark around 100 and 1000 to what he called a "computer-generated simulation.'' The results showed the average would ultimately hit bottom in 2008 at around 6000, or 43 percent below current prices, he theorized. Even so, he and the other panelists at the conference said the current rally had further to go and investors could still generate positive returns over the next five years with the right investments.

Source:
Smith Barney's Shaw Sees U.S. Stock Rally Ending in Second Half
John Melloy
Bloomberg.net, January 15, 2004 00:00 EST
http://quote.bloomberg.com/apps/news?pid=10000151&sid=aNGj1crWeILA&refer=market_

Is Disney/Pixar the sequel to Apple/NeXT ?

Friday, January 30, 2004 | 12:57 AM

in Current Affairs | Film | Finance

Pixar to Disney: Buh-Bye !

Jobs gives Eisner the fin . . .

The WSJ called it a "stunning blow." CNN/Money quoted an analyst who said "It makes it look like Eisner did something wrong again." And of course, former chairman of Disney's animation Roy Disney piled on (I'm paraphrasing here): "The breakup would be bad for Disney shareholders long-term; Eisner failed to nurture the relationship with Pixar."

But here's the money quote -- from Jobs:

"After 10 months of trying to strike a deal with Disney, we're moving on. We've had a great run together -- one of the most successful in Hollywood history -- and it's a shame that Disney won't be participating in Pixar's future successes."

While everyone is chatting about likely suitors -- Viacom, Warner Brothers, Sony and MGM are said to be interested -- the larger story is being overlooked: It was Jobs who broke off the negotiations, catching Disney execs unaware. The timing of the Pixar announcement was impeccable, and certainly not coincidental, as it was reported Thursday that senior Disney management's had again taken hefty pay raises -- despite the company underperforming.

Its no coincidence these came out the same day - This is Jobs attempt to embarrass Eisner; the Disney CEO is considered by some to be amongst the most overpaid / underperforming CEOs in recent corporate history.

The more interesting aspect of this story is the probability that Jobs is angling for Eisner's gig. And not passively either. This is hardly a "Hey, if you ever decide you need a new CEO, you know my number." This was more of a "When are going to throw da bum out?" move by Jobs.

And why not? The Apple / Pixar chief craves the accolades given to execs like Bill Gates or Eisner. He does not think that Wall Street or the public appreciates his contributions -- and he may be somewhat correct in that assessment. Capturing the Disney CEO position would be Jobs' coup de grace.

Given his success with iTunes, iPod and the Apple Music Store, he already is a power player in the entertainment side of things. Pixar would be his backdoor entry into the Disney executive suite. Like at Apple, he might work for $1 a year -- after trading his Pixar holdings for about $2.25B worth of Disney stock. Disney is a $50 billion company, while the much smaller Pixar has a market cap of about $3.5B (Jobs owns about half).

Will a Disney/Pixar merger be the sequel of the Apple/NeXT deal?

Its pure Jobs . . . Stay tuned . . .

UPDATE: 1/30/04 1:39EST

Will wonders never cease: We actually discussed this very subject only last month ("Jobs to become Heir Apparent at Disney?"). Here was our take, all the way back on December 3rd:

With a market value more than 10X that of its important partner -- Disney's cap stands at $43.99 Billion to Pixar's $3.81 Billion -- DIS should just get it over with and buy PIXR outright. That would resolve the future of the lucrative animation business, and solve the issue of who's gonna replace Eisner, in one fell swoop.

Eisner, who's already sucked out over a billion dollars in compensation from the entertainment giant's coffers over the past decade, could make a graceful exit. The alternative may be an ugly ego driven battle with the company's largest shareholders (Walt's heirs) that would make Carly Fiorina's battles with the Hewlett heirs look like a mah-jong scrum.

That turns out to be prescient -- and its even more true today . . .

UPDATE 2: 1/30/04 2:49EST
A hardy hello to all you readers from Pixar. Appreciate y'all stoppin' by to read these humble musings. Feel free to tell me whether I'm smokin' crack or perhaps if I am on to sumpthin'.

Love your work . . .

UPDATE 3: 1/31/04 7:49am

Kudlow & Cramer weighed in on this very issue at the end of the show Friday nite. Mad props go to Larry for mentioning the Big Picture and this very discussion. (Too bad they ran out of time for a fuller discussion).

I love this angle of the story and would like to expand on it; Anyone interested in 750 - 1500 words as to why Disney must do this (or its toast!), you know where to find me.

Source:
The End: Pixar Breaks Up With Distribution Partner Disney
By BRUCE ORWALL and NICK WINGFIELD
WALL STREET JOURNAL, January 29, 2004
http://online.wsj.com/article/0,,SB107541081328315628,00.html

Disney Discloses Chief's Raise and Some Details of U.S. Inquiry
By LAURA M. HOLSON
NY Times, January 28, 2004
http://www.nytimes.com/2004/01/28/business/media/28disney.html

Pixar dumps Disney
CNN/Money, January 29, 2004: 7:20 PM EST
http://money.cnn.com/2004/01/29/news/companies/pixar_disney/

Pixar Says 'So Long' to Disney
02:47 PM Jan. 29, 2004 PT
http://www.wired.com/news/business/0,1367,62104,00.html?tw=rss.TOP

The Fed's "2 for 1" Sale

Thursday, January 29, 2004 | 01:24 PM

in Finance

All Hell broke loose yesterday when Fed Chief Alan Greenspan decided to replace the two most beautiful words ever whispered into a bond ghoul’s ear with a single term of far lesser endearment. The market, in search of an excuse to take profits for nine weeks anyway, held a "2 for 1" sale.

Such is what passes for thoughtful analysis on the Street sometimes. The market had made new highs on very light volume Monday, and then saw selling on much increased volume Tuesday and Wednesday. In the parlance of the technicians, these were “distribution days.” As the giddy momentum had driven the Bulls ever higher, this reversal of fortune became all but inevitable.

From a macro perspective, what significance do we ascribe to the substituting of the parental “patience” in the stead of a more exuberant (if we may use that word) “considerable period?” Warm Fuzzys aside, we believe these linguistic contortions signal three important changes in the Fed’s mind-set: 1) Incremental rate increases, formerly unthinkable (at least by us) in 2004, are now more likely by Summer; 2) The economy is showing resiliency, despite recent disappointing data series (Durable Goods, Home Sales, and Consumer Confidence); 3) An upside surprise may be in the offing from either 4thQ GDP or December employment data or both.

The tortured verbal gymnastics changes our prior expectation of no rate increases until after the ‘04 elections. In our opinion, higher rates in 2004 are now a very likely probability, starting with a ¼ point increase in June.

Given the horrific employment data we saw from December, the language change from the Fed may also be signaling that there is an imminent possibility of improvement in the Employment Situation. This would be a welcome - and long overdue - development. The Fed has access to data, which mere mortals (such as you or I) do not, and this early look may possibly be coloring their thought processes.

Nonetheless, we are staring at the kind of possible retracement, which made us so cautious last week. Look for short-term support around the 2000 level on the Nasdaq (then 1950), on the SPX, support is at 1076 then 1060. On the Dow, a move to 10,140 and then 9,900 would present good entry points, in our view.

There is an old cliché: for want of a nail, a kingdom was lost. It’s doubtful that for want of a word, a market will be lost.

Chart of the Week: 6 Month SPX chart

Thursday, January 29, 2004 | 12:56 PM

in Finance | Media

On a short-term basis, the S&P 500 broke a trading channel and with short-term momentum weakening there is some near-term risk to correct towards the 50-day MA just under 1,110.

6 Month SPX chart

Source: Bloomberg

Technimental’s Kevin Lane notes that “Given the strong tape action along the away, this corrective activity is likely to be modest; However, there has been minor trend lines on the S&P 500 violated and some internals that are weakening.”

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Quote of the Day
"Given the sluggish job growth and the virtual absence of inflation, the Fed has no reason to tighten monetary policy for quite awhile, regardless of the electoral calendar."
- Alice M. Rivlin, former vice chairwoman of the Federal Reserve

Apolitical Fed ?

Thursday, January 29, 2004 | 07:39 AM

in Finance | Politics

click for a much larger pop up chart

Interesting Fed piece out yesterday from the NYT before the rate announcement. (I wonder how many people overlooked it, choosing to shovel snow instead). Here's the most relevant excerpt:

Most economists dismiss such complaints of political favoritism. But the Fed is not totally above the fray. Indeed, there seems to be one clear political pattern in interest-rate decisions - one particularly relevant to today's circumstances. Precisely because of the potential impact of changes in monetary policy, the Fed tries not to start raising interest rates in the months before a presidential election.

"The Fed considers itself apolitical, but that does not mean ignoring politics; rather, it means trying to avoid becoming a political issue itself," said Laurence H. Meyer, a former Fed governor who advises investors on monetary policy. "It tries to do this by avoiding actions that are unnecessarily provocative."

This year, avoiding provocation could be awkward. With the economy perking up and interest rates at historic lows, there is little doubt that the Fed's next move will be to raise rates, for the first time since May 2000.

But when? Starting to raise rates in September, at the last meeting of the Federal Open Markets Committee before the election, could be seen as a slap at President Bush. Raising rates at the November meeting, a week after the election, might elicit charges that the Fed waited to avoid harming Mr. Bush's electoral chances by putting the brakes on the economy. The committee meets again in December, but few economists expect sharp policy changes in a month when financial market activity traditionally tails off.

Good stuff; Be sure to check out the pop up historical chart above.

Sources:
On Presidential Politics, the Fed Walks a Tight Rope
EDUARDO PORTER
NYTimes, January 28, 2004
http://www.nytimes.com/2004/01/28/business/28place.html

Economists Wanted

Wednesday, January 28, 2004 | 12:30 PM

in Finance

In celebration (if thats the right word) of today's Fed announcement (2:15pm EST), I thought I would share this puff piece found in this Sunday's Newsday.

Answering a Need for Analysis "When there is a question about the condition of the U.S. economy or where it is headed, the occupation most often quoted in the media is the economist. But what do economists actually do, and is it a good career choice?
Economists are found in all facets of government and business. That is because they not only study the macro conditions that make our economy work and make predictions, they also study the micro elements of business and make projections. The Department of Labor estimates that the number of economists in the United States is approaching 150,000. In the next 10 years, employment is projected to grow between 21 and 35 percent.

You'll be in good company: Among the nation's most prominent economists are Steve Friedman, chief economic adviser to President George W. Bush; Robert Reich, who played a similar role in the Clinton administration, and Alan Greenspan, chairman of the Federal Reserve.

So what would you actually do? Government officials and corporate boards often depend on the information provided by economists in their decision making. The nation's monetary policy is formulated by the information given by some of the best economic minds in the country. Without accurate data, the conclusions that go with it and the actions taken, the nation's economy as well as the world's economy would collapse.

Federal, state and local governments rely on their work. They may be involved in education, labor, international trade, transportation or even the lottery. However, most are directly concerned with the practical applications. Banks, insurance companies, security firms, pharmaceutical companies, hospitals, transportation companies and virtually every type of business hire economists.

So, yes, the job is crucial and influential. But you have to like numbers and analysis, and you have to be able to put up with being wrong a lot. Economics is sometimes more of an art, and even some of its biggest fans refer to it as "the dismal science."

Sources:
Answering a Need for Analysis
SCRIPPS HOWARD NEWS SERVICE
Newsday, January 25, 2004
http://www.newsday.com/business/local/newyork/ny-econ3640970jan25,0,5597187.story

Federal Reserve News and Events
http://www.federalreserve.gov/newsevents.htm

Best Buy Keeps Up the Heat on CD Price Competition

Wednesday, January 28, 2004 | 05:24 AM

in Current Affairs | Finance | Music

More evidence of price competition, as Best Buy maintains price pressure. From this past weekend's circular:

CD Sale: $9.99 or less
•   Helmet Unsung: The Very Best of Helmet (1991-1997): $7.99
•   No Motiv Daylight Breaking: $8.99
•   Twista Kamikaze: $9.99
•   Baby Bash The Smokin' Nephew: $9.99
•   Tupac Resurrection: The Soundtrack: $9.99
•   Yes The Ultimate Yes: 35th Anniversary: $15.99 (Double CD)

And of course, the continued "DVDs that are cheaper than CDs" sale:
•   Swingers $9.99
•   Clerks $9.99
•   Grosse Pointe Blank $9.99 (which is one of my all time favorite comedies; I will swing by BB and pick this up this weekend).

Given our prior discussions on Peter Gabriel and Brian Eno, I may just splurge and drop $15.99 on Peter Gabriel's Growing Live. 134 minutes long -- looks great!

Best Buy still offers free shipping -- so if the weather is as bad as predicted (we got a foot of snow last nite), I can still pick 'em up from home.

Ain't competition grand?

UPDATE: 1/28/04 6:56 am
Since we are all about competition here, Amazon has the Peter Gabriel DVD for $14.99. And since I earned a grand total of $24.76 as an Amazon Associate (buy something, people!) it looks like Amazon will get the Gabriel sale . . .

Musicians Looking To Let Internet Replace Record Cos

Monday, January 26, 2004 | 04:45 PM

in Finance | Music | Web/Tech

Graphic: Peter Gabriel's Real World

At least, that's the headline which Dow Jones ran for this story. Most everyone else who ran this AP story used the tamer headline: Musicians Unveil Digital 'Manifesto'.

But I suspect that Dow Jones got the basic premise correct: A highly respected and intelligent pair of innovative musicians are making a power grab on behalf of artists. They are taking advantage of the general chaos in the space, and the apparent cluelessness of the big labels vis-a-vis the internet.

In other words, the music industry's Hell just got a lot hotter.

Consider the players: Gabriel is an extremely bright and creative musician. He has been a major innovator in his entire career, from recording with Genesis and on his own, to live performances, to social activism (Human Rights, the Environment, his association with WOMAD) to his music business savvy. Gabriel owns recording studios, is a co-founder of the digital downloading service "On Demand 2" (OD2); He even founded his own label RealWorld.

If you followed Gabriel's career -- and his music -- over the years, than you know that he is not a mainstream thinker. I have a sneaking suspicion that Peter is a disarmingly charming negotiator --both formidible and clever. Now, along with his cohort, Brian Eno, the Music Industry's nightmare may have just gotten much worse.

Gabriel & Eno present an opportunity to turn the classic rocker cliché on its head: Think of a group of stoners, signing anything their label presents to them, while corrupt agents and business managers bleed them dry. Now imagine the polar opposite: that's Gabriel & Eno. Long term survivors of the industry, they are smart enough not to confront the industry head on -- they certainly do not want to turn this into a holy war. Instead, they are proposing a set of changes -- incremental in appearence -- which will gradually reduce the power of the record labels in favor of the musician. Gabriel is smart enough to retain a role for the labels, primarily that of marketing. That makes their model a compromise between the anarchy of P2P, and the disintermediation of a "labelless" pure internet model.

This may ultimately change the economic dynamics of the industry, reducing the role of the labels. Eventually, the changes could be dramatic.

CANNES, France (AP)--Peter Gabriel and Brian Eno are recruiting other musicians for a provocative online experiment: Since the Internet has changed the way fans buy and listen to songs, they say, why not transform the music itself?
The two independent musicians have dreamed up an online alliance for musicians, and they hope to launch within a month. By taking record labels out of the equation, artists could put downloads online themselves, becoming their own retailers and setting their own prices. They call it the "Magnificent Union of Digitally Downloading Artists" - or "MUDDA" for short, which has a less lofty ring to it. On Monday, Gabriel and Eno handed out a slim red manifesto at a huge dealmaking music conference in southern France.

Do you have any doubt that what these gentlemen are proposing is anything short of a major revamping of an industry? Than read on:

Gabriel, who has his own label, Real World Records, said he isn't trying to shut down the record companies - he just wants to give artists more options. "There are some artists who already tried to do everything on their own," he said, adding that they often found out they didn't like marketing or accounting. "I think we believe there will be all sorts of models for this."

One band that has found its niche online is the jam band Phish, which sells downloads of its concerts at www.livephish.com. The band's relationship with its devoted fans is often compared to that of the Grateful Dead, and the site is another chance for close contact. But it also made money: $2.25 million in sales since 2002. What's driving the movement is the success of legitimate download sites such as Apple's Internet music store, iTunes, which sells songs for 99 cents a pop in the U.S.

Gabriel co-founded a European company, On Demand Distribution, which runs legal download sites in 11 European countries. The company would provide the technology for MUDDA, though Gabriel and Eno are looking for online partners.

Stay tuned . . .

Sources:
RealWorld
http://www.realworld.co.uk/index/flash/

Musicians Unveil Digital 'Manifesto'
Associated Press, 1/26/04
http://abcnews.go.com/wire/Entertainment/ap20040126_1514.html

What Peter Gabriel gets out of Davos
By Tim Weber, Monday, 26 January, 2004, 09:04 GMT
BBC News Online business editor in Davos
http://news.bbc.co.uk/1/hi/business/3428437.stm

Gabriel to launch musicians' union
By Tim Weber Friday, 23 January, 2004, 17:19 GMT
http://news.bbc.co.uk/2/hi/business/3424483.stm

Musicians to Use Internet To Bypass Record Labels
Associated Press
http://online.wsj.com/article/0,,SB107516464904012346-search,00.html

Musicians Looking To Let Internet Replace Record Cos
DOW JONES NEWSWIRES
http://online.wsj.com/article/0,,BT_CO_20040126_006186,00.html

Just Say 'No' to Record Labels
Wired, 03:12 PM Jan. 26, 2004 PT
http://www.wired.com/news/digiwood/0,1412,62050,00.html

A “Considerable Period?”

Monday, January 26, 2004 | 11:58 AM

in Finance

What exactly is a “considerable period” of time? That seems to be the issue challenging so many on Wall Street this week. The correct answer seems to be “it depends.” It depends upon future economic conditions, and it depends upon your question’s perspective. So what exactly is the context of your inquiry?

If you are discussing this question this week, than you are likely doing so within the context of the Federal Reserve, which meets on Tuesday and Wednesday this week. Surely you must be referring to the interval in which the Fed said they will maintain an “accommodative” monetary policy of ultra low interest rates - for a “considerable period.”

As we have been writing for quite sometime, it has been our opinion that the Fed will maintain this posture, if not this precise language, until after the November elections. While this posture has prompted some to question the Fed’s political independence, maintaining accommodative rates makes sense in light of the low capacity utilization and continued lack of job creation. The “considerable period” will likely last until both of those issues appear to be significantly improving.

Perhaps you were discussing the major indices winning streaks as a “considerable period.” Nine straight weeks would certainly qualify - and that is just what the S&P index did, scoring its ninth straight weekly gain last week. (The Dow and Nasdaq saw their winning streaks end.) Jeff Cooper notes “You have to go all the way back to 1989 to find the last time that the S&P notched nine consecutive higher weekly closes. That's how unusual the current persistency is.”

The longest weekly winning streak in 15 years most certainly counts as a “considerable period” of time. Here’s another one worthy of notice: From the March 12, 2003 reversal day, until this very morning, the SPX has not yet had a 5% pullback. That certainly sounds lengthy, and in many respects, it is. One must look back to 1996 to find as long a correction free period of at least 11 months.

But if you thought that run was a “considerable period” of time, consider this: Recall the streak, which ended in July 1996. That streak makes our present run look positively modest: Beginning in December of 1994, that streak ran for 16 months. That’s right, 16 straight months without so much as a 5% correction in the SPX.

Now that’s a considerable period of time!

Chart of the Day: Nasdaq Near Term Overbought

Monday, January 26, 2004 | 11:29 AM

in Finance | Media

The Nasdaq break out over the ascending triangle is a longer term Bullish sign. Short term, the Nasdaq appears to be over extended. Look for a pullback towards the red trendline.

Nasdaq Near Term Overbought

Source: Technimentals

A retracement towards the 2000 level, while staying above the red trend line, would provide a lower risk entry point.

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Quote of the Day:
“Despite the mania of the 1920s and the subsequent crash of 1929 into the 1932 low (a three-year decline much like March 2000 into March 2003), the market rallied for five years -- until 1937 -- before a new secular bull began in 1942. Bear market rallies are impressive. That's their job, of course, to convince the herd that the bear is dead.”
-Jeff Cooper

Music Royalties Rise, Even as CD Sales Fall

Sunday, January 25, 2004 | 11:32 AM

in Finance | Music

"Despite the travails of the music industry, with CD sales still slumping and record executives still suing suspected Internet pirates, one part of the business is thriving. Royalties paid to songwriters and music publishers from radio and television broadcasts of their songs, and from live performances, are at record highs.
"When it comes to the downloading issue, which is killing record labels and music publishers, we're only indirectly affected by it," said Bill Velez, the head of Sesac, one of the leading performing rights organizations in the United States. "We're able to weather economic storms better than other segments of the entertainment industry."

In 2003, America's three recognized performing rights organizations - Sesac, B.M.I. and Ascap - reported record revenues, which, in turn, have generated bigger royalties distributions to songwriters and music publishers.

Ascap - the American Society of Composers, Authors and Publishers, a nonprofit association - is the oldest and by most measures the largest of the performing rights organizations in the United States. Its preliminary data indicate that Ascap took in $668 million in 2003, 5.2 percent more than in the previous year. The association plans to release its official year-end results at its annual meeting in February.

B.M.I. - Broadcast Music Inc., also a nonprofit and the longtime chief competitor to Ascap - reported that revenue in its last fiscal year, which ended in October, increased 9.7 percent, to nearly $630 million, from $574 million in fiscal 2002."

Source:
Music Royalties Rise, Even as CD Sales Fall
DAVID BERNSTEIN
The New York Times, January 26, 2004
http://www.nytimes.com/2004/01/26/business/media/26tune.html

Iowa and Prediction Markets

Saturday, January 24, 2004 | 11:15 AM

in Finance | Politics

Markets are not God.

To many people, this statement is a form of economic blasphemy.

I suggest those people should get over it. In the past, I've challenged the issue of how "predictive" markets actually are. I note that many people read what they want into short term jags and twists, despite the obvious limitations of such forecasting. Even longer term trends are less revealing of the future than they are of the recent past -- other than to say that the trend is more likely to continue than not.

Consider the Democratic Caucus in Iowa. There's been a solid year of campaigning leading up to the Iowa Caucuses, with the last 3 months totally intense; Its the first -- and some will argue the most influential -- primary of the entire process. If any prediction market should function correctly, this one was it. No excuses, just right or wrong forecasts. Otherwise, the markets would amount to little more than a polling mechanism of popular opinion.

Up until a few days before the primary, this market's "prediction" was that Dean would win -- and do so handily.

The Prediction Markets got it dead wrong:

Predict This!

The chart shows exactly where each candidates "futures" traded. The Dean futures had reached a peak of 76 cents late November, and maintained a fairly high value until just before the primary. In early January, they were still as high as 60 cents or so.

Meanwhile, Kerry has been trading no higher than 35 cents since 11 months prior in February 2003. Kerry went mostly sideways (with a slight negative bias) until August, when he started trending down more rapidly. In December, Kerry futures traded at just a few pennies. He had one last "dead cat bounce" to a dime, and then slumped back to 2 cents in early January 2004.

So much for the predictive value of futures markets.

The current Democratic National Convention Nomination Market shows a very different picture. Dean dropped some 75% to 15 cents or so. Meanwhile, Kerry is partying like he's Yahoo! and its 1999: His futures rallied about 3,000%, from 2 cents to 60 cents in a week. Talk about overbought!

The stock market's up since March -- therefore it must be predicting a recovery, right? Well, not necessarily. We've had 4 previous bear market rallies since 2000, although this one has lasted the longest by a large margin. But ask yourself: What was the market predicting late February 2000, when the Nasdaq broke 5,000? What was it predicting in October 2003, at Nasdaq 1,100?

There are myriad problems with this form of interpretation. Financial markets act not as "predictors," in my opinion, but rather as future discounting mechanisms. Think of them as racetracks: you get paid lower odds the better the horse looks before a race. When the nag appears ill, old or tired, the odds are highest, and buyers get the greatest potential payoff. When the steed starts to look healthier, the odds slide lower -- they get "discounted" -- as an economic recovery starts looking more and more likely.

If "Prediction Markets" do not actually predict the future, than what do they actually do? I suggest they merely reflect the majority opinion at a given moment. That does not imbue them with any special omniscience. I think of them as polls that avoid random spoofing 'cause the polled must pay an entry fee to participate. That generates more serious responses than other polling data -- but the answers are just as potentially wrong as any other future guess. Like the majority, sometimes they are right, and sometimes they are wrong.

I'm not suggesting that market data can't be informative. In the hands of thoughtful and skilled analyst, it can indeed impart some measure of knowledge. But interpreting market data is far more complex and significantly less predictive than is the common wisdom on Wall Street.

What, then, can we learn from futures markets? The smart answer is, "It depends." Interpretating what markets are saying requires flexibility, skepticism, and an open mind. It behooves the market watcher to recognize that "the crowd" is what takes markets higher -- or lower. One must also recognize that when the crowd turns into a thoughtless mob, a reversal of fortune becomes ever more likely.

The sooner people understand what market data suggests, the more financially secure they will be in their own futures. "Thy shall have no false idols before me," exhorts the old testament. Markets are not God. People who think they are eventually succumb to a Hell -- tragic losses -- of their own making.

UPDATE: 01/28/04 3:48pm
Frontline has a Presidential Futures Market, albeit one where you do not have to put any money at risk, thus removing what little predictive powers it might have had. Hey everybody, its an internet poll!

Source:
via Junkie Wire

Iowa Electronic Markets
http://www.biz.uiowa.edu

2000 - 2003 Rally Comparisons, Excel (July 2003) Download file

GE's Welch on Leadership

Friday, January 23, 2004 | 06:04 PM

in Media | Politics

Its hard to discuss the stock market without, at some point, talking about General Electric, the biggest company in the United States. And its impossible to talk about GE, without disucssing the man at the helm for so many years, Jack Welch

Jack has an intriguing article on "leadership" in today's WSJ: Four E's (a Jolly Good Fellow)

Every time I speak to a group, I get asked about leadership. Mainly, people want to know how I feel about that age-old question: Are leaders born or made? And I always answer the same way: Who knows? What I do know is what leaders look and act like. Not because I'm a great thinker on the subject, but because I hired (and occasionally fired) leaders for about 30 years. After a while I got the hang of the characteristics that made some people better than others at setting the right goals, reaching them the right way, and doing both in the right amount of time, which is what leadership is when you get right down to it . . .
Basically, my process assesses four essential traits of leadership (each one starting with an E, a nice coincidence). One, successful leaders have tons of positive energy. They can go go go; they love action and relish change. Two, they have the ability to energize others -- they love people and can inspire them to move mountains when they have to. Three, they have edge, the courage to make tough yes-or-no decisions -- no maybes. And finally, they can execute. They get the job done.

Jack adds that a fifth element, "Passion -- a heartfelt, deep and authentic excitement about life and work" -- is also necessary.

But we really can't discuss these 4 (or 5) characteristics unless you get past two threshold questions.

"First: Does the leadership candidate have integrity? That means, does he or she tell the truth, take responsibility for past actions, admit mistakes and fix them? . . . Second: Before applying the Four E's, you have to ask, is the candidate intelligent? Does the candidate has to have the breadth of knowledge, from history to science, which allows him to lead other smart people in a world that is getting more complex by the minute."

Jack slices the issue even finer:

"A leader's intelligence has to have a strong emotional component. He has to have high levels of self-awareness, maturity and self-control. She must be able to withstand the heat, handle setbacks and, when those lucky moments arise, enjoy success with equal parts of joy and humility. No doubt emotional intelligence is more rare than book smarts, but my experience says it is actually more important in the making of a leader. You just can't ignore it."

Jack then applies this to several of the Democratic candidates. While I find some of his analysis inconsistent, its still a very interesting approach to political handicapping and candidate selection.

It would be fascinating to see the results of applying Jack's own standards to his preferred candidate, President Bush. Always amusing to see theory applied to real life . . .

Source:
Four E's (a Jolly Good Fellow)
By Jack Welch, January 23, 2004
(Mr. Welch is a former chairman and CEO of General Electric Co.)
http://online.wsj.com/article/0,,SB107481763013709619,00.html

Retracement ?

Friday, January 23, 2004 | 07:04 AM

in Finance

I always find it interesting when people from different disciplines arrive at similar conclusions. Earlier this week, Alan Farley (author of "The Master Swing Trader") made this observation regarding how most of the major indices have retraced to their post 9/11 highs:

"The table shows three of the averages moving together and rapidly approaching their recovery highs. But the Nasdaq 100 is the odd man out, underperforming the other indices by a wide margin. The most likely reasons for this divergence are twofold: First, index behemoth Microsoft (MSFT) still trades 30% below its recovery high. Second, the keepers of the index rejiggered the components during the bear market, and its lower tech weighting is now undermining its performance."

Market Retracement (as of 1/14/04)

Index	Post-Sept. 11 High	Jan. 16, 2004 High	Difference
Dow Industrials	10,673	10,601	-72
S&P 500	1177	1140	-37
Nasdaq Composite	2098	2140	+42
Nasdaq 100 Index	1734	1554	-180

Source: Real Money.com

Farley also notes how Fibonacci numbers play into the retracements:

Source: Real Money.com

"Given the 100% retracement magnet, will the Nasdaq 100 play catch-up with the broader Nasdaq Composite that has already exceeded its recovery high? Or is it destined to come up short when the market finally turns? Last week's re-emergence of the 1990s bubble plays may offer important clues."

I also find his description of the stage the rally is at -- by seeing which stocks happen to be finding the most action -- to be persuasive:

"Rally expansion into secondary-tier stocks has an upside and a downside. On one hand, it warns us that traders are having a tough time finding stocks that have genuine prospects or that represent good value. Alternatively, the expansion provides a whole new set of trading opportunities as the market's mangiest canines pop out of long-term bases and into multiweek uptrends.

It also suggests the rally is maturing quickly and will soon give way to a corrective environment, whether through a sideways pattern or a steep pullback. Of course, everyone has been waiting for this correction to start for weeks now, so it won't be a surprise when it finally appears."

All told, a very interesting take on the matter.

Sources:
As the Rally Expands, Who Let the Tech Dogs Out?
Alan Farley
RealMoney.com, 01/20/2004
http://www.thestreet.com/p/_rms/rmoney/theswingshift/10137734.html

Market Flashes Yellow Caution Light

Thursday, January 22, 2004 | 12:30 PM

in Finance

Over the past few weeks, we have mentioned several indicators which we described as “very early warning signs.” Specifically, we have noted the ever lower VIX as a sign that the investors were starting to get complacent. The VIX made yet another 52-week low yesterday, closing at 14.34. In our opinion, the slide lower will continue until we see a healthy correction. We do not pretend to know precisely when that may occur. However, we see a realistic possibility of strong corrective action occurring during the next 90 days, very possibly sometime in mid February.

This is not exclusively - or even mostly - a VIX call. Several other sentiment measures have also caught our attention. We noted the stunningly low 10.11% Bearish sentiment amongst AAII survey takers previously. That is significant because of the investor tendency to become bullish after buying equities - not before. So few Bears around make us wonder who else is left to be “converted” into buyers.

Yesterday, yet another signal caught our attention: The Put/Call ratio. As measured by the CBOE, the ratio dropped to 0.33 on January 21, 2004*. We have not seen a data point that low since 12/26/97, when the ratio registered a mere 0.30 following the Asian currency crises (precipitated in large part by LTCM). The last period with a data series between 0.35 - 0.40 was during February to July 2000. You may recall the subsequent period as somewhat uncomfortable for those who were exclusively long.

There is a stark difference between bottoms and tops. At bottoms, shareholders become collectively disgusted with their losses, cathartically heaving shares overboard. Tops are entirely different animals, as wannabe shareholders continue to pile on, late to the party. Assessing tops is more difficult, as one can never be sure how much “dry powder” buyers potentially have. Their ardor is why markets can continue to look healthy, despite contrary warning signs. As we have mentioned previously, the internals of this market have been strong, particularly when viewing Trend and Breadth. We do not feel it is prudent to ignore the flashing warning signs we see in these contrary indicators.

Guessing market tops has been a fool’s errand. But that does not mean we should ignore the warning signs. For those who are long, we offer the following advice:

1) Move up your stop losses;
2) Observe the 25% profit rule: Sell any position where you “give back” 25% of a stock’s gains (i.e., if you bought a stock at 40, and it went to 60 (a 20 point profit), once you give back 5 points, protect the rest of your profits by selling;
3) Buy protective Puts 6-12 months out for your long term or core holdings;
4) Reduce your margin as close to zero as possible.

For those of you who are short: let ‘em ride.

* NOTE: CBOE data comes out weekly, and our series used ILX as a data source for the 1/21/04 put call ratio. Mixing data sources is considered to be bad form by quants and statisticians; We will monitor this and report back if the CBOE data is any different from ILX . . .

CBOE February 2000 put call ratio data series is here:

Chart of the Week: 15 Year VIX Chart

Thursday, January 22, 2004 | 10:25 AM

in Finance | Media

A long-term chart of the VIX shows several recent lows, which led to a subsequent retracements.

15 Year VIX Chart (monthly) (click to open)

Source: ILX

The previous period of ultra low volatility was from 1992-97. That low volatility period began 5 years after the 1987 crash, when interest rates were much higher than at present.

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Quote of the Day

"The public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which earnings are again being discounted indicate that it will be difficult to quench the fires of stock market enthusiasm for long."

- Barron's, March 24, 1930

Ahead of the Tape

Wednesday, January 21, 2004 | 11:12 PM

in Finance | Media

We've been discussing sentiment and volatility a lot lately. Some of our recent comments got picked up by Jesse Eisinger's Ahead of the Tape column, "Cool and Calm."

Source:
Cool and Calm
Jesse Eisinger
WSJ, January 22, 2004
http://online.wsj.com/article/0,,SB107472674203408192,00.html

Scary data!

Wednesday, January 21, 2004 | 05:17 PM

in Finance

We have now retraced 100% of the drop from March 2002 on the Dow and S&P500; On the Nasdaq, we are back to levels not seen since June 2001.

A few data points reaching multi year extremes:

1) The Volatility Index hit a 52 week low:

15 year VIX chart (click to open)

2) Put call ratio has dropped to levels not seen since March 2000:

CBOE Put/Call (1995 to present)
where data is below 0.40

12/26/97 0.30

02/23/00 0.37
03/09/00 0.38
03/10/00 0.39
04/07/00 0.37
07/12/00 0.39
07/14/00 0.38

01/21/04 0.33

Kinda scary, huh?