The Big Picture | November 2004

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Your world with Neil Cavuto: (11/30/04)

Tuesday, November 30, 2004 | 03:07 PM

A heads up: I'll be appearing on Fox today: Cavuto on Business @ 4:15pm EST.

The topics will be the market's performance for November, as well as the usual (Iraq, Oil, GDP, Jobs). Also on will be ENTrust Capital's Greg Hymowitz, and Reagan afficianado Tom Atkins.

What If . . . ?

Tuesday, November 30, 2004 | 12:07 PM

in Economy

Over the weekend, I penned a corny piece “Giving Thanks” for the technical improvements we have been blessed with (broken downtrend, above 50 & 200 day MAs, etc.) But a chance encounter yesterday with a peer from a competitor led to a rather intriguing economic discussion. That chat thankfully spared you of my holiday hokum, sending me back to my keyboard instead, to ask:

“What If . . .?”

Third quarter GDP came in at a robust 3.9%; What if Oil was at $30 instead of $50 per barrel? Let’s acknowledge that related factors impact both energy and growth, so as avoid a disingenuous query. Oil is higher because of the weak U.S. dollar, as well as due to increased global demand, both of which get reflected in improving GDP numbers. The War in Iraq has also contributed to rising Oil prices, while increased military spending and government hiring has been a significant part of that GDP growth. That said, what might the world look like if Oil were at $30/brl?

From a macro perspective, back out higher energy prices’ drag on GDP (estimated at 1.2%), and growth is a robust 5.1%. Other commodities priced in Dollars (Gold, etc.) would be significantly below their recent highs. Consumer sentiment would improve, sending discretionary spending higher. Manufacturing activity would also expand, with some positive impact on employment numbers. Perhaps corporate margins might progress to the point where some Hiring and Capex spending became all but inevitable. Unfortunately, Oil prices have no impact on Productivity or Outsourcing, so the hiring gains would be rather muted.

Drilling down to specifics, many sectors would see relief. Retail numbers, especially at the big discounters, would be significantly better. Dining, travel and entertainment would also perk up. Airlines would see reduced margin pressure; Domestic automakers – long overly dependent on gas-guzzling SUVs for the bulk of their profits – would find immediate sales and margin improvements.

But let’s not paint this scenario too rosy. The economy’s heartiest sector – refinance/refurbish/new homes – are also the most rate sensitive. $30 oil would have long ago forced Fed Chair Greenspan to raise rates considerably. The fallout of a less accommodative Fed: Homebuilders top lines would drop, as would those of real estate agents, mortgage and home equity loan originators. Big box retailers and durable goods manufacturers would suffer also.

Policymakers may lament high-energy prices, but should also consider the ramifications of the alternative in our complex economy. $50 oil may make investing challenging, but we should bear in mind that there are no silver fiscal bullets. Investors must play the hand they have been dealt.

Universal Dominance (so much for Piracy)

Tuesday, November 30, 2004 | 10:26 AM

in Finance | Music

Vivendi-owned music giant Universal Music Group "shattered a music industry record, scoring a whopping 43% share of albums sold last week."

Massive sales of the heavily downloaded Eminem CD, "Encore," has Universal capturing the top three slots on the pop charts, along with six out of top ten. Toby Keith, Shania Twain, and Ja Rule were amongst the Universal best sellers -- all heavily traded artists on the P2P networks.

Sayeth Universal Music Group chairman Doug Morris: "We're winding up a very nice year. We sold 43 out of every 100 records in the country. That's amazing."

Earlier in the month, Vivendi reported that music profits surged sevenfold to $38 million, thanks to lower costs and rising sales. When Vivendi decided against selling its music business, it was a bet on a recovery in the macro-economy, as well as the industry, despite the continued increase in file swapping.

So much for Piracy . . .

Source:
Universal dominance
Phyllis Furman
Daily News, November 17, 2004
http://www.nydailynews.com/business/col/story/253783p-217279c.html

Chart of the Week: Chinese and World Exports

Monday, November 29, 2004 | 03:55 PM

in Markets

Chinese exports, which were growing 10% faster than world trade in 2002, are now growing nearly 20% faster, according to Charles Dumas of Lombard Street Research. Asian surpluses contribute to the US deficit “problem.” The dollar-yuan currency contains the undervalued yuan as well as the overvalued greenback.

Chinese and World Exports (12 month MA, Y/Y)

Source: Lombard Street Research

Dumas believes China is slowing, and will likely to suffer a hard landing. Rapid export growth - even unfairly rapid export growth - will be welcome in 2005.

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True love’s Christmas gift tally: $66,334

Quote of the Day:

“To me, the ‘Tape’ is the final arbiter of any investment decision. I have a cardinal rule: Never fight the tape!” - Martin Zweig

Wal-Mart / U2

Monday, November 29, 2004 | 11:28 AM

in Finance | Music

Wal-Mart throws the gauntlet down on CD sales for the holiday: The retailing giant is discounting U2's new CD by 37%, to $8.84 (shipping is $1.97).

U2_dismantle

The rest of their CDs are priced between $9.94 and $13.94.

As mentioned previously, I expect to see Wal-Mart continue to apply additional pressure on the labels to drive the price of CDs to under $10.

I disagree with several commentators who believe Wal-Mart "needs" CDs to drive foot traffic; In the entertainment space, its DVDs -- not CDs -- that are the growth product. CDs growth chart is sloping down the other side of the mountain.

Wal-Mart focuses on revenues and profits per square foot. Their real estate is the most valuable in the retail landscape. If CDs fail to generate significant sales because they are priced too high, or significant profits because the margins are not advantageous, they will simply be dropped as a product line.

And noted before, DVDs are priced far more competitively than CDs are. Indeed, the DVD/CD combo is the only interesting audio product outside of the iPod to generate any sort of buzz . . .

An Energy Illusion of the Highest Order

Sunday, November 28, 2004 | 10:15 AM

in Economy

"We are living with an energy illusion of the highest order,"

So warns oil banker Matt Simmons, 61, whose "bold and often prescient pronouncements have won him followers -- and detractors -- in the course of his 30-year career."

According to Simmons, whether the Saudis have overestimated their crude reserves or not is the key question for energy prices the next decade or so.

In an interview with Barron's, Simmons lays out the Bull case for Oil:

"With global demand for oil on the rise, and prices hovering near $50 a barrel, the Saudis' production profile is more than academic. The No. 1 oil producer, Saudi Arabia pumps 13% of the world's oil and boasts 23% of its oil reserves. Moreover, the Saudis alone claim to have excess production capacity and the ability to increase output if demand continues to rise.

Simmons' conclusions are based largely on his analysis of the high water content and other signs of aging of Saudi oil fields. Not surprisingly, they have caught the attention of Saudi Aramco, the kingdom's national oil company, which has dismissed his views and remains committed to previously published numbers of the size of Saudi reserves.

Because the Saudi oil industry is state-run, and there is no independent auditor of national reserves, it is impossible to determine just how large -- or small -- the Saudis' are.

If the Saudis' numbers are correct, the kingdom could continue to produce at current levels of about 10 billion barrels a day for the next 50 years, or more. That would give the industrial world time to develop alternative energy sources and prepare for a graceful transition.

If Simmons is right, however, the world could face a dangerous imbalance between rising oil demand and diminishing supply, perhaps within the next 10 years. Oil prices could soar, economies could suffer, and oil-dependent nations, such as the U.S., China and Japan, would be forced to scramble for additional energy sources."

Consistent with my long term view on this sector, Simmons may not be that far off.

Source:
Field Theories
JACQUELINE DOHERTY
Barron's, NOVEMBER 29, 2004
http://online.barrons.com/article/SB110152010916584643.html
Table
http://online.barrons.com/article/SB110151949497784635.html

Continue reading "An Energy Illusion of the Highest Order"

Guess who's blogging?

Saturday, November 27, 2004 | 08:54 AM

in Economy | Finance | Markets | Weblogs

Guess who's blogging?

Larry Kudlow!

Whether you agree or disagree with his politics (and I'm more moderate / progressive than LK), he has long since proven his economic chops. I always find him intelligent, eloquent, and thought provoking.

Since he has been so kind to me personally, my objectivity stands about zero. But if you disagree with him, its all the more reason to understand the thought process from his school of economics.

Flame away . . .

Source:
Kudlow's Money Politic$
Pro-growth, strong defense, virtuous values, business, and stocks
http://www.lkmp.blogspot.com/

Media Appearance: Forbes on Fox (11/27/04)

Friday, November 26, 2004 | 11:06 AM

in Media

Quick media appearence note: I will be on Forbes on Fox, Saturday (11/27/04) at 11am on FoxNews. Look for the "Makers and Breakers" segment towards the end of the half hour.

Economic Metablog Roundtable

Friday, November 26, 2004 | 05:47 AM

in Economy

Several readers had asked for a list of economic blogs (which I discussed back on October 8)

Since that post, I've discovered a new resource: The Economics Roundtable. Its a metablog of economic and market related publications, hosted by economics professor William R. Parke of the University of North Carolina, Chapel Hill.

Warning: Highly addictive (Some posts may cause drowsiness).

Live at St. Ann's Warehouse: DVD + CD

Wednesday, November 24, 2004 | 12:05 AM

in Finance | Music

This past June, I saw Aimee Mann Live at St. Ann's Warehouse in Brooklyn, an intimate little venue just under the Brooklyn Bridge. It was a special evening, with Mann's performance perfectly in sync with the capacity audience's expectations. All told, a great concert was enjoyed by the 1200 people in attendance.

By coincidence, the show I saw was video recorded, and just came out on DVD .

Here's what I cannot understand: The DVD is $15 -- but it also comes with a CD of the concert. Will someone explain to me why major labels release 45 minutes of music on disc for the same price as a small label's DVD and CD ?

Perhaps its Mann's notorious dislike of her past labels. The New York Times' Jonathan Van Meter wrote: "Mann is known for writing clever, disappointed love songs that can also be read as damnations of the music industry." Her Album "I'm with Stupid" was a thinly veiled reference to Geffen (What label are you with?) as were numerous songs on that disc (Choice In The Matter, Par For The Course, You're With Stupid Now); The song "Nothing Is Good Enough" off the CD Bachelor No. 2 was reputedly based on a conversation with a music exec.

Mann subsequently dumped her label (Geffen's Interscope, mentioned previously), negotiated the purchase of her masters, and set out for own label: Superego Records, part of United Musicians, a cooperative, artist owned label. In a further break with the big labels, her most recent albums can be streamed -- for free -- at her site (click "listen").

I doubt that releasing a DVD/CD -- for the same price as a major label CD -- is a money losing idea. Even a 9 camera shoot will be profitible, if it sells modestly. It just goes to show ya how corrupt the major label $15 CD business model is.

Maybe someone with basic math skills can explain to the major labels what they are doing wrong.

UPDATE: November 28, 2004 12:29pm
A quick trip this morn to Best Buy reminded me that "Coldplay - Live 2003" was a similar DVD + CD; There was also a Sarah McLachlan DVD + CD combo (Mirrorball?)

UPDATE 2: November 28, 2004 1:32pm
On a hunch, I went ot Amazon's DVD section, searched fro DVD+CD, and came up with 152 results. These combo DVD+CDs are apparently an ongoing trend, and gaining in popularity . . .

Makes sense -- if a CD at $15 is a lousy deal, than a DVD+CD at $15-20 is a pretty good one

UPDATE 3: November 29, 2004 3:33pm
More DVD+CD: R.E.M. will reissue their entire Warner Bros. catalog on February 15th, with each two disc set including the original album and a bonus DVD featuring the record remixed in 5.1 surround sound, as well as unreleased documentary and video footage.

Volume Volume Volume

Tuesday, November 23, 2004 | 04:54 PM

in Markets

A few people have mentioned the volume on the Nasdaq was large today;

You can mostly ignore the huge volume spike on the Nasdaq; Sirius Radio traded 420 million shares today; Back that out and you have a lite volume day . . .

Counter Trend Rallies

Tuesday, November 23, 2004 | 02:36 PM

in Markets

The relatively simple concept of the counter-trend rally is generating a disproportionate degree of confusion amongst nervous traders and fund managers. Allow a brief clarification of what these retracements mean to a variety of differing but interrelated asset classes: Oil, U.S. Dollar, Stocks and Bonds.

All asset classes traded in free, liquid markets tend towards eventual over-extension. Commodities, fixed income, currencies, equities, and options all must retrace their prior gains or losses after an emotional move in either direction. As traders press their bets, they eventually reach the point where the temptation for profit taking becomes overwhelming. That’s often the initial move counter to the previous trend.

Or, consider what happens when a trade becomes too crowded: the path of least resistance is the opposite direction, as everyone who could lean one way already is. The next move is the unwinding of that excess enthusiasm.

What makes the most recent activity so complex has been a series of simultaneous counter trend moves in Oil, interest rates, currencies and equities. It is no coincidence, as the chart nearby shows, that as Oil pulls back, equity markets rally. Concurrently, the U.S. dollar has bounced after ongoing weakness. Short term, a weak dollar helps multi-nationals by making their exports cheaper. Longer term, the effects are deleterious. Not only does the weak dollar pressure Crude prices higher, it discourages foreign purchases of U.S. assets, i.e., fixed income and equities.

The complexity of all these moving parts was revealed during last week’s Tuesday and Friday sell offs. This holiday-shortened, light-volume week has equities particularly sensitive to any twitch in the price of Crude. But the thinness of trading suggests that the markets can be easily pushed around, on Wednesday and especially the short session on Friday.

We continue to advise using these pullbacks as opportunities to add to long positions. Look for the Nasdaq to pull back toward 2040. I hope the S&P500 sees 1150, but since I suspect it won't, I would start adding as the SPX approaches 1160. Perhaps the Dow pulls back to 10,350, but on the chance it doesn't, use 10,425 to start scaling into that index.

More P2P Promotion: Napster Rescues Shaggy

Tuesday, November 23, 2004 | 09:18 AM

in Finance | Music

I just finished Jacob Slichter’s So You Wanna Be a Rock & Roll Star. Slichter is the drummer for Semisonic, which had a breakout hit single with “Closing Time.” Its an amusing look at the music industry by an insider, and was a welcome reprieve from my usual fare of economic/market related reading.

Towards the end of the book, there’s an interesting discussion: It turns out that Semisonic’s label, MCA, had a well deserved tin ear for deciding what was “single worthy” or not. The book suggests that a long series of missteps by MCA very much hindered the band. Despite critical acclaim, they never managed to really gain much traction on format radio beyond Closing Time.

Slichter offers Shaggy as an example of the pooor judgement of the execs at MCA. It seems the Jamaican born rapper handed in his new album, Hot Shot to the label, and the first two songs on the record suggested as singles were “It wasn’t me” and “Angel:”

“Remember those song titles and read on: The MCA bosses listened to the album and complained “They’re no singles.” The bosses demanded that Shaggy return to the studio and record new songs, and Shaggy agreed. This was exactly the scenario that Semisonic had faced in late 1997 when Jay Boberg and other [MCA] senior executives heard no hit potential in Closing Time and suggested we return to the studio to record more songs. Jim warned us that if we recorded a new batch of songs, the label would choose the single from the new batch and forget about “Closing Time.” Fortunately, we heeded Jim’s warning.

When faced witht he same dilemma, however, Shaggy accepted MCA’s mandate to record more material, and no surprise, one of the new songs was selected as the single. The CD came out in August 2000, the single flopped, and within weeks MCA stopped working the album.

Meanwhile, a DJ in Honolulu, Pablo Sato of KIKI 93.9-FM, had downloaded Shaggy’s album off of Napster and started to play one of the other songs, “It wasn’t me.” KIKI was flooded with calls and “It wasn’t me” became a local hit. Bonnie Goldner and other Shaggy supporters at MCA seized on the success and advocated the song be pushed to other stations, and within a few weeks the song was a nationwide smash. By Christmastime, the album was on its way to number one, and after another hit, “Angel,” the album had sold 12 million copies worldwide, no thanks to the people running MCA. It was Pablo Sato, his listening audience, and Napster -- the dread enemy of the music industry -- who pulled Shaggy’s album from its grave at the Music Cemetery of America.”

I'm lost as to which is more amazing: the astonishing incompetence of the label at promoting their own bands, or artists actually being saved by P2P.

How many more of these stories are out there? Eminem, U2, Wilco, Radiohead and now Shaggy.
(If you have any other concrete examples of P2P functioning as a defacto promotional machine for the labels, please post them in the comments or send me an email).

UPDATE: November 28, 2004 2:40pm
A commentor reminds me of Steve Albini's The Problem With Music; In many ways, this book lays out that critique from the musician's perspective . . .

Source:
So You Wanna Be a Rock & Roll Star
Jacob Slichter
Broadway Books, 2004
http://www.amazon.com/exec/obidos/tg/detail/-/0767914708/ref=ase_thebigpictu09-20/102 7131547 9942524?v=glance&s=books

Shaggy
Hotshot
MCA, August 8, 2000
http://www.amazon.com/exec/obidos/tg/detail/-/B00004S7FJ/ref=ase_thebigpictu09-20/002-4755284-4456864?v=glance&s=music

Semisonic
Feeling Strangely Fine
MCA, March 24, 1998

http://www.amazon.com/exec/obidos/tg/detail/-/B0000062XN/ref=ase_thebigpictu09-20/002-4755284-4456864?v=glance&s=music#product-details

The Problem With Music
by Steve Albini
http://www.negativland.com/albini.html

Continue reading "More P2P Promotion: Napster Rescues Shaggy "

More Dollar Woes

Tuesday, November 23, 2004 | 08:58 AM

in Economy

wsj_format_logo

Think the selloff in the US dollar is over? Think again:

"Asia appears to be in the early stages of a regionwide currency revaluation, partly in anticipation that China will let its own currency float higher sometime in the next year.

From Tokyo to Seoul to Singapore, some investors are buying up large volumes of Asian currencies, a strategy that assumes Asian countries will tolerate somewhat stronger currencies in the year ahead. The South Korean won is trading near its highest level against the dollar in seven years, while the Japanese yen is up nearly 7% since the beginning of October.

Investors also are pouring capital into Asia's equity and bond markets -- a bet that appreciating currencies will boost the value of their assets over time. Meanwhile, a number of Asia's largest companies are drafting strategies to deal with current and anticipated adjustments in Asian currencies, including cutting costs and changing the amount of business they do in dollars."

We are only in the 5th inning or so of this major, global shift -- the reverberations of which will be felt for years. (That Alan Greenspan seems to have only recently discovered this isn't of consequence).

While the immediate impact on US multi-nationals will be a short term positive, consider the effects of Asian investors finding U.S. fixed income and equities too expensive -- due to currency concerns.

I suspect this will end rather badly . . .

Source:
Asia Bets on Stronger Currencies
PATRICK BARTA in Bangkok, Thailand, and ANDREW BROWNE and MARY KISSEL in Hong Kong
THE WALL STREET JOURNAL, November 23, 2004; Page A2
http://online.wsj.com/article/0,,SB110106445465680132,00.html

[ I N S I D E ] With Radiohead's Kid A, Capitol Busts Out of a Big-Time Slump. (Thanks, Napster.)

Tuesday, November 23, 2004 | 05:31 AM

in Finance | Music

Lee Rosenberg points us to an article by Bruce Webber in the now defunct site [I N S I D E] about Radiohead's use of P2P (found archived here)

You can see the full article here:

With Radiohead's Kid A , Capitol Busts Out of a Big-Time Slump. (Thanks, Napster.)

Worth a full read.

Slowing CD sales ?

Monday, November 22, 2004 | 05:30 PM

in Finance | Music

Consider the spike in GDP in the second half of 2003 preceded an increase in CD sales in early 2004. Now, with GDP slowing, might that be impacting CD sales?

Turns out yes:

"Music industry hopes for a recovery from a long slump may have been premature. Disc sales rose by almost 10% during the first nine months of 2004, but have dropped by approximately 20% for October and most of November. As of Friday, November 19, year-to-date sales were ahead of the previous year by slightly more than 5%, indicating that the surge seen earlier in the year may not carry through the winter holiday season, a time when the music industry typically enjoys up to 40% of its annual retail sales.

Perhaps not coincidentally, on Thursday, November 18, the Recording Industry Association of America (RIAA) announced the filing of copyright infringement lawsuits against 761 computer users, part of a continuing campaign to contain the file-sharing phenomenon. Recent suits include students at Amherst College, Boston College, Bridgewater State, Iowa State, Northeastern, and the University of Massachusetts."

What? Are CDs merely another consumer product subject to the vagaries of the marketplace and business cycle? Quelle horror!

Note: I haven't seen this report anywhere else yet; I'll try to find confirming data on this . . .

Source:
Industry Roundup
Barry Willis
Stereophile, November 22, 2004
http://www.stereophile.com/news/112204roundup/

Chart of the Week: S&P 500 vs. Continuous Crude Oil Contract

Monday, November 22, 2004 | 01:01 PM

in Economy

This chart helps visually highlight the chart we just displayed above and hammer home the point that the next move in crude from its support should dictate near term market direction.

S&P 500 vs. Continuous Crude Oil Contract
click for larger chart

Source: Technimentals

As this layover chart shows crude and the S&P have tended to remain inversely related. When crude scored its recent peak (black arrow) the S&P was setting a trough (blue arrow) and as crude continued to fall the S&P continued to rally.

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Quote of the Day:

“Whoever wants to reach a distant goal must take many small steps.”

-Helmut Schmidt, German Chancellor

Unlocking Google

Monday, November 22, 2004 | 06:03 AM

in Markets

A large cause of Google's spectacular rise has been the very small trading float. Very little of the firm's float actually trades -- of the 273.42 million shares outstanding, only 22.5 million shares were issued to the public in the IPO. 4.6 million and 39.1 million have since "unlocked," allowing insiders a window to sell their shares.

And why not? Early investors own the stock much cheaper. Kleiner Perkins recieved a billion dollar windfall when they sold their shares purchased at (brace yourself) 49 cents each.

The WSJ created a terrific chart showing all the subsequent unlockings over the next year. As this supply hit the market, one would expect it to satiate some (or even all) of the demand for Google shares. (Do the math as to what happens after next).

Click for larger graphic

Graphic courtesy WSJ

Some common sense might be getting trampled in all the teeth gnashing about Google insiders dumping shares: Larry Page and Sergey Brin own about 33 percent Google class B common stock (along with CEO Eric Schmidt). Their recent sales will account for less than 20% of their holdings, and free up over $1 Billion each.

Anytime an individual has the opportunity to put aside a billion in cash -- and still own a commanding percentage of their company -- its a no-brainer. Bank the money, and there really isn't anything you cannot do (Fund your own philanthropic organization, own an MLB/NFL/NBA team, collect anything you want, fund your own VC firm).

This isn't a matter of greed, as some have insinuated -- its simply smart diversification.

Sources:
Unlocking Google
Wall Street Journal Interactive Online
November 17, 2004
http://online.wsj.com/documents/info-googstck04-frame.html

Google insiders selling shares
Founders Page, Brin to sell 7.2 million shares each
Bambi Francisco
CBS.MarketWatch.com, 7:51 PM ET Nov. 19, 2004
http://cbs.marketwatch.com/news/story.asp?dist=&param=archive&siteid=mktw&guid=%7B63DABD36%2DA3B3%2D4BD9%2D820C%2D8311CDEF8CB9%7D&garden=&minisite=

Do Free Downloads = Lost Sales?

Sunday, November 21, 2004 | 10:34 AM

in Finance | Music

Very timely academic discussion of the impact of P2P downloading on the music industry in the Sunday New York Times.

This past week, we discussed how several bands have been using P2P as a promotional vehicle for new CDs. Wilco's frontman Jeff Tweedy said "The internet is like radio for us", The release of Eminem's 8 mile high on P2p, as well as U2's "How To Dismantle an Atomic Bomb." All three managed to use P2P to drive sales of their new CDs.

For now, they are supplementing their label's promotional activity; How long will it be before they start supplanting their labels altogether?

Here is the ubiquitous excerpt:

"From the outset, however, economists have been skeptical that every free download represented a lost sale. And several years after the explosion, and subsequent implosion, of the original Napster, academics have begun to plug data about free downloading into complex equations and theoretical frameworks.

Stan Liebowitz, an economist of the University of Texas at Dallas who has synthesized much of the research, sees economists as generally coming to an agreement. "I think the consensus is going to be that file sharing and downloading is going to be harmful to sales of music," he said. The question is, how much?

Two professors at the Wharton School at the University of Pennsylvania, Joel Waldfogel and Rafael Rob, measured the downloading and CD-buying behavior of students at the University of Pennsylvania, Hunter College in New York and City College of New York. In a working paper published recently by the National Bureau of Economic Research, they concluded that students each spent $126 on the best-selling CD's without downloading and $101 with downloading. While conceding that their research did not cover a representative sample, they concluded that every 10 downloads of music resulted in 1 to 2 lost sales.

Why such a small correlation? Many downloads represent transactions that would not have taken place at the asking price. As part of the study, the professors asked students to place a dollar value on CD's they bought and on CD's they effectively obtained free. The average valuation of downloaded hit CD's was only $8.81 - far below the retail price. "If they were downloading things they would not have purchased, that would tend not to reduce industry revenue and not to increase displacement," Professor Waldfogel said.

Source:
Does a Free Download Equal a Lost Sale?
Daniel Gross
New York Times, November 21, 2004
http://www.nytimes.com/2004/11/21/business/yourmoney/21view.html

Pearls of Wisdom for Traders

Sunday, November 21, 2004 | 06:01 AM

in Markets

Alan Farley, my colleague over at RealMoney.com, put together a list of "25 Pearls of Wisdom for Traders."

Here are my favorites:

· The best trades come when the crowd leans the wrong way. In other words, the majority piles in one way but profits come from trading it the other way.

· Market direction is only as strong as the leadership that guides it. Stocks play follow-the-leader even when the charts tell a different tale.

· Follow the professionals in quiet times and the public in wild times.

· Don't trust others' opinions. It's your money at stake, not theirs.

· Good timing on bad stocks makes more money over time than bad timing on good stocks.

Our styles are very different -- I'm much less of a swing trader than him -- but Alan's got a good eye for pithy wisdom.

Source:
25 Pearls of Wisdom for Traders
By Alan Farley
RealMoney.com , 11/18/2004 12:02 PM EST
http://www.thestreet.com/p/rmoney/theswingshift/10195109.html

The kinda-eventually-sorta-mostly-almost Efficient Market Theory

Saturday, November 20, 2004 | 06:12 AM

in Finance

"I guess we're all behaviorists now"
-Richard Thaler

One of the most widely believed theories on Wall Street is the Efficient Market Hypothesis (EMH). Adherents of this charmingly naive thesis believe that markets are an incredibly effective distributor of information. Because of this, say EMH theorists, it is impossible, therefore, to beat the market, because prices already incorporate and reflect all relevant information.

Given the random nature in which market and company information comes to investors, and the assumption that prices react/adjust almost immediately to reflect this information, no one can consistently outperform the market over time.

Or so goes the theory.

The thesis has two problems: 1) Many fund managers and investors HAVE outperformed the market. Theorists have never come up with an adequate response to this reality, claiming instead that chance or mere short term market swings explain the out-performance; and 2) it imbues the market with an almost mystical ability to disseminate information, regardless of the emotions and analytical failures of its human participants.

Now Eugene Fama, the father of the EMH, has surprised much of the academic world. At a conference honoring Professor Fama last month, he presented a paper that made the case that poorly informed investors could theoretically lead the market astray; Stock prices, he noted, could become "somewhat irrational."

Are you suggesting that people may a times be irrational? Shocking!

What the good professor is finally acknowledging is the inherent fallibility of mortal investors. Human beings are highly imperfect organisms as investors. They are impatient, given to bouts of fear and greed, make analytical errors, suffer from bad data interpretation, overrate their own abilities. And that's before we get to POS (plain ole stupid).

Thomas Gilovich points out a myriad of flaws in Human decision making in his seminal work, "How We Know What Isn't So." Gilovich makes a very strong case that we are hard wired for self-deception, rationalization, and faulty logic. The human mind tends to bring order from randomness, and the markets are a perfect example of that.

EMH proponents suggest most participants would be better off owning index funds -- something I agree with for many time constrained or uninterested investors. By definition, if someone is outperforming, than someone else is under-performing. The odds favor that its more likely to be a small private investor (not that institutional players don't stink up the joint). Over time, money flees professionals who consistently under-perform. The same ruthless Darwinian competition that drives pros out of business merely makes lousy individual investors poorer.

Here's an excerpt from a recent WSJ article discussing Professor Fama's change in thinking:

"The shift in this long-running argument has big implications for real-life problems, ranging from the privatization of Social Security to the regulation of financial markets to the way corporate boards are run. Mr. Fama's ideas helped foster the free-market theories of the 1980s and spawned the $1 trillion index-fund industry. Mr. Thaler's theory suggests policy makers have an important role to play in guiding markets and individuals where they're prone to fail.

In a study of Sweden's efforts to privatize its retirement system, Mr. Thaler found that Swedish investors tended to pile into risky technology stocks and invested too heavily in domestic stocks. Investors had too many options, which limited their ability to make good decisions, Mr. Thaler concluded. He thinks U.S. reform, if it happens, should be less flexible. "If you give people 456 mutual funds to choose from, they're not going to make great choices," he says.

If markets are sometimes inefficient, and stock prices a flawed measure of value, corporate boards and management teams would have to rethink the way they compensate executives and judge their performance. Michael Jensen, a retired Harvard economist who worked on efficient-market theory earlier in his career, notes a big lesson from the 1990s was that overpriced stocks could lead executives into bad decisions, such as massive over-investment in telecommunications during the technology boom.

Even in an efficient market, bad investments occur. But in an inefficient market where prices can be driven way out of whack, the problem is acute. The solution, Mr. Jensen says, is "a major shift in the belief systems" of corporate boards and changes in compensation that would make executives less focused on stock price movements."

Your own belief system will help determine which camp you may find yourself in: If you think that Human Beings are rational, calculating machines, without systematic biases, whose behavior can be predicted with mathematical models, then EMH is for you. If you believe that investors are fallible, emotional, biased and error-prone, than the behaviorist school will be more to your liking.

As someone who has long scoffed at EMH, I particularly enjoyed Yale University economist Robert Shiller's comments on the subject: EMH proponents have made one huge mistake: "Just because markets are unpredictable doesn't mean they are efficient." The leap in logic, he wrote in the 1980s, was one of "the most remarkable errors in the history of economic thought."

Indeed. I doubt it will be the last . . .

UPDATE: February 13, 2005 8:48am

I came across an economist joke on point with the ideas in this post:

Seven habits that help produce the anything-but-efficient markets that rule the world by Paul Krugman in Fortune.
1. Think short term.
2. Be greedy.
3. Believe in the greater fool
4. Run with the herd.
5. Overgeneralize
6. Be trendy
7. Play with other people's money

Sources:
Stock Characters As Two Economists Debate Markets, The Tide Shifts
JON E. HILSENRATH
THE WALL STREET JOURNAL, October 18, 2004; Page A1
http://online.wsj.com/article/0,,SB109804865418747444,00.html

Disciple of Stiglitz?

Friday, November 19, 2004 | 10:25 AM

in Economy

Apparently, I (unknowingly) come from the same School of Economics as Joseph Stiglitz.

In a speech to Wharton Investment Management Conference last month, the Nobel prize-winning economist laid out his critique of what's wrong with the U.S. economy. He believes that several Bush policies have only made economic problems worse.

Stiglitz's criticisms (direct quotes in italics) will be all too familiar to readers of The Big Picture:

· President Bush's economic policies have failed to spur growth, while exacerbating rising household indebtedness;

· Increased productivity was a squandered opportunity. Higher productivity should raise living standards -- at least when the economy is growing at its full potential. Instead, companies get by with fewer workers and less hiring, and unemployment rises: "In the last four years, we have failed the challenge of increased productivity and lost the opportunity it affords because we have not had enough economic growth."

· The economy has limped along, losing jobs for the first four-year period since the Great Depression: "We should have created something like six million or seven million new jobs. In fact, we have lost net one million new jobs. The only part of employment that's growing is the public sector. The private sector is down 1.5 million."

· The unemployment rate (5.4% in September) understates job problems -- it doesn't i