The Big Picture | July 2005

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End of July Linkfest

Sunday, July 31, 2005 | 05:22 PM

This was quite the busy week, at least in terms of interesting stories and links. Here is my own (biased) list of favorites:

In Barron's, Alan Abelson explains why GDP data ain't all that. (If no Barron's subcription, than click here).

It turns out that the Dow Theory Still Works. (Who knew?)

I mix it up again with the prediction market folk here in Prediction Markets Redux; Recall last year, my column on Political Futures Markets caused a bit of a stir amongst the futures cognesceti.

Slate's Dan Gross looks into vice investing versus socially responsible funds in (the amusingly titled): God vs. Satan: Who's the better investor?

This week's Apprenticed Investor takes a look at how our emotions wreak havoc on investing returns. Curb Your Enthusiasm. Turns out the solution to this is just a little brain damage.

Don't overlook the (surprisingly) good two part series in the Washington Times on China:

1) Thefts of U.S. technology boost China's weaponry
2) Chinese dragon awakens

This week's music and film discussion covers a lot of ground:

Content Consolidation & the Long Tail looks into how consolidated media of all sorts (radio, movies, and even journalism) lowers the variety and quality. Problem for these companies are that there are free and easily accessible replacement available on line.

A recent UK Study found that Downloaders Buy More Music; This led an music industry insider suggest that labels should Give It Away.

And for those hardcores who are interested, Why Payola Matters.

I mentioned (via the NYT) the shameful behavior by Altera management not allowing analysts with a sell rating on the stock to ask questions in their conference call; Well, now that Altera apologized to the analyst it snubbed, we can all thank Gretchen Morgenson of the NYT.

One of my favorite stock blogs is Jeff Matthews Is Not Making This Up; Its got just the right mix of snark and info.

And just for laughs, Hacking Halo so Warriors do Ballet

Ray Dalio

Sunday, July 31, 2005 | 02:30 PM

in Economy

Bipolar Disorder

Interview with Ray Dalio, Chief Investment Officer, Bridgewater Associates

By SANDRA WARD

WHEN YOU MANAGE NEARLY $120 billion in institutional assets and your hedge fund provides consistent returns of about 15%, after fees, on average, every year for nearly 16 years running, who wouldn't want to hear your views on the economy? Dalio, founder of Westport, Conn.-based Bridgewater Associates, has built an organization renowned for its penetrating analysis of world markets and its ability to seize investment opportunities among different asset classes, particularly the credit and currency markets. Clients gain access to Bridgewater's latest thinking on global markets through the firm's Daily Observations newsletter. We thought you might like to get the scoop straight from the horse's mouth.

Barron's: What's your outlook for inflation?

Dalio: I think inflation is gradually trending higher. It won't emerge as a threat probably until late 2006. World economies are late in the economic cycle, and there are not the same excesses there used to be. The dollar will go down a lot and commodity prices will go up a lot. There is a structural surplus of labor and there's disinflation from labor and manufactured goods and productivity, but commodity inflation will offset that. The rate at which this will occur will be gradual at first, and as we get later into 2006 we'll have run out of slack and there will be more of a depreciation in the value of the dollar and more appreciation in commodity prices and the Fed will lag that move. Real rates will be relatively low.

You're not concerned the Fed tightens too much?

No, I don't believe they will tighten too much. Rates will continue to rise and the Fed will continue to tighten, but their moves will lag the forces of positive economic growth, a declining dollar and rising commodity prices. The Fed is looking at general inflation, and that will rise slowly. The economy is growing at a moderate pace, and so any tightening will be comparatively slow and modest. The balance- of-payments issue is a major issue, but it is not going to be a major problem this year. This year will be the first attempt to remedy the problem, but what is going to happen is our balance-of-payments position is going to worsen a lot. In 2005, 2006 and 2007 we are going to see our current-account deficit go from 5½% to 6½% to 7½% of gross domestic product. Our need for foreign capital is going to continue to grow at the same time that China's desire to buy our bonds -- and Japan's to some extent, as well -- will diminish. China's desire to have an independent monetary policy will be a driving factor. But there is a bipolarity in the world: The mature industrialized countries are in relative stagnation, and the big reason the U.S. is growing faster than most of other countries is because we are being lent capital. We are substantially dependent on foreign lending.

To put that in perspective, we import about 65% more than we export. Then there are the emerging countries. These countries, with their economic booms, are running current-account surpluses and are net lenders to the developed world. This is a very, very healthy set of circumstances. Emerging countries are using their capital to pay down their debts, and they are buying the U.S. Treasury bonds to hold their own currencies back. There is a very favorable structural shift in wealth to developing nations. We are very, very bullish on emerging countries, particularly Asian emerging countries and their currencies. Fundamentally, though, you have to ask yourself whether the ties between us and the emerging countries that are buying our bonds will last. It doesn't make sense. The balance-of-payment situation reminds me very much of the Bretton Woods breakup in 1971.

Continue reading "Ray Dalio"

Human Behaviour as a Barrier To Trading Success

Sunday, July 31, 2005 | 07:27 AM

in Investing | Psychology/Sentiment

We've discussed the impact of emotions as recently as Friday. Its fairly apparent that "Human beings are simply not rational creatures. If they were, then no one would have ever made money out of selling pet rocks. Yet someone did, which only emphasises the long held belief that a fool and his money are easily parted."

That's a quote from Whitney Tilson in a recent article in the AustralAsian Investment Review. He obserrves that one of the biggest problems facing human investors is that they tend to be overconfident in their view of things. Not just "robustly", but "wildly" overconfident. He provides the following statistical examples:

- 82% of people say they are in the top 30% of safe drivers;

- 86% of Harvard Business School students say they are better-looking than their classmates;

- 68% of lawyers in civil cases believe their side will prevail;

- 81% of new business owners think their business has at least a 70% chance of success, but only 39% think any business like theirs would be likely to succeed;

- Mutual fund managers, analysts, and business executives at a conference were asked to write down how much money they would have at retirement, and how much the average person in the room would have. The average figures were $5 million and $2.6 million respectively.
In regards to the last example, apparently it doesn't matter who the audience is, the ratio is always about 2:1.

Tilson has put together an excellent guide for the "Rational Investor." It is, as he notes, "hewn from years of good and bad experiences."

Here's his rulebook:

- Don't anchor on historical information, perceptions, or stock price;

- Keep an open mind;

- Update your initial estimate of intrinsic value;

- Erase historical prices from your mind; don't fall into the "I missed it" trap;

- Think in terms of enterprise value, not stock price;

- Admit and learn from mistakes, but learn the right lessons and don't obsess;

- Put your original investment thesis in writing so you can refer back to it;

- Sell your mistakes and move on; you don't have to make it back the same way you lost it;

- Be careful of panicking and selling at the bottom;

- Don't get fooled by randomness

The entire article is worth a read.

Incidentally, I have been reading Tilson's sober analysis for years, and was pleased when I found out he was opening his own mutual fund. Whiole I do not knpow his long term performance record, he has always impressed me as the sort of fund manager that Wall Street needs more of: Contemplative, ethical, and investor-focused.

Source:
Human Behaviour: The Greatest Barrier To Trading Success
Australasian Investment Review (AIR), May 30 2005
http://www.aireview.com/index.php?act=view&catid=6&id=1968

Income Lag? Blame China

Saturday, July 30, 2005 | 12:30 PM

in Economy

Interesting article in The Economist about China and its growing economic (and therefore political) influence. I was particularly struck by these comments on the global wage arbitrage:

In America, Europe and Japan, the pace of growth in real wages has been unusually weak in recent years. Indeed, measured by the growth in income from employment, this is America's weakest recovery for decades. According to Stephen Roach, an economist at Morgan Stanley, American private-sector workers' total compensation (wages plus benefits) has risen by only 11% in real terms since November 2001, the trough of the recession, compared with an average gain of 17% over the equivalent period of the five previous recoveries (see chart 3). In most developed countries, average real wages have lagged well behind productivity gains.

The entry of China's vast army of cheap workers into the international system of production and trade has reduced the bargaining power of workers in developed economies. Although the absolute number of jobs outsourced from developed countries to China remains small, the threat that firms could produce offshore helps to keep a lid on wages. In most developed countries, wages as a proportion of total national income are currently close to their lowest level for decades.

The flip side is that profits are grabbing a bigger slice of the cake (see chart 4). Last year, America's after-tax profits rose to their highest as a proportion of GDP for 75 years; the shares of profit in the euro area and Japan are also close to their highest for at least 25 years. This is exactly what economic theory would predict. China's emergence into the world economy has made labour relatively abundant and capital relatively scarce, and so the relative return to capital has risen. It is ironic that western capitalists can thank the world's biggest communist country for their good fortune.

Hat tip: New Economist

Source:
China and the world economy: From T-shirts to T-bonds
The Economist, July 28th 2005
http://www.economist.com/displaystory.cfm?story_id=4221685

GDP Yet Another Misleading Indicator

Saturday, July 30, 2005 | 09:04 AM

in Economy

I was out of pocket all day yesterday, and didn't get a chance to address the GDP data. At 3.4%, it came in slightly below the consensus of 3.5%.

There were two significant factors: A slight increase in wages, and big decrease in inventory. We'll see the July NFP report this Friday (more on this below) -- but lets address inventories, via Barron's Alan Abelson:

"The gleeful assumption by the sunshine crew that the inventory drop in the GDP report augurs big growth in output in the second half is more than slightly misplaced. The reason simply is that a huge chunk of the inventory reduction was the result of auto companies staging fire sales to clear their dealers' lots, an action certain to take a sizable bite out of future sales."

No big surprise there. Giving away cars at cost is hardly indicia of a red hot economy. But what about Industrial output? Isn't that a significant factor?

In a word, no. More than half of the uptick in output was Utilities cranking out more juice thanks to the heat wave. And a sizable chunk of the rest was (you guessed it) these same auto makers producing more cars to be given away at cost. GM's July numbers showed a 46% sequential monthly increase.

Where I disagree with much of the bear camp is where they go anti-Candide -- where every data point is the wosrt of all possible worlds. Instead of focusing on the underlying weakness below the headline numbers, investors of the Ursine variety are calling the data proof that the Fed has to keep raising rates. To me, that's an after the fact rationalization -- they were gonna keep raising anyway.

As to the Jobs situation, the slack in the Labor market, as Sir Alan likes to call it, continues to get even slacker:

"Moreover, something's definitely askew when the stock market starts to go bananas while the job market remains depressingly limp. As Challenger, Gray & Christmas, the placement outfit, observe, layoffs typically ease in the summer months -- but not this summer. Instead, it has produced a bitter harvest of job cuts. In May and June alone, layoffs totaled nearly 200,000. And more recent weeks have brought no respite."
-Barron's

And that's just layoffs.

As to NFP, we have yet to see a single good number that was not been the result of some hedonic adjustment or another (Prime suspecty: The Birth/Death adjustment, added in 2001). Between the inherent upside bias built into the BLS models, and the other assorted massages, its astonishing the data is this bad. And that's before we back the least significant aspect of NFP -- governement hiring.

Bottom line: Torture the data long enough, and it will confess to whatever you want it to.

Source:
Poor Darth Vadar
UP AND DOWN WALL STREET
By ALAN ABELSON
Barron's, Monday, August 1, 2005
http://online.barrons.com/article/SB112268001231000448.html

Apprenticed Investor: Curb Your Enthusiasm

Friday, July 29, 2005 | 05:06 PM

in Investing | Psychology/Sentiment

The latest "Apprenticed Investor" column is up, and its titled Curb Your Enthusiasm. (Here's where I Should insert an inside reference to the show, but they are all R rated).

The ongoing issue of emotional trading is this week's subject. Its timely, especially in light of the WSJ article about brain damaged investors (no, really) discussed earlier here.

Here's an excerpt:

Want to become a better investor?

Get brain damage.

That's the finding of a rather unusual study by researchers from Carnegie Mellon University, the Stanford Graduate School of Business and the University of Iowa. It was published in Psychological Science in June, and its conclusions were reported in The Wall Street Journal last week.

But don't start playing football without a helmet just yet: It's not any type of brain damage that helped investors in the study, but rather, a very specific form: a site-specific lesion (a kind of tissue damage) in the region of the brain in charge of controlling emotions.

The investors who have these lesions are unable to experience fear or anxiety. It turns out that lacking the emotionality ordinary investors exhibit leads to better investment decisions. It is not at all surprising that the emotionally limited investors outperformed their peers. We know from experience that when investors allow their emotions to unduly influence them, they tend to make foolish -- and expensive -- decisions.>

Emotions disrupt the process in s suprising number of ways. Its more than mere fear and greed -- surprisingly, it also impacts us analytically.

Prior Apprenticed Investor columns can be found here.

Content Consolidation & the Long Tail

Thursday, July 28, 2005 | 04:35 PM

in Books | Film | Media | Music | Television

There's an interesting discussion over at the Chris Anderson's blog on the ascendant forces that are creating a new era of Long Tails.

There's yet another source that is helping to give rise to the Long Tail: The continual consolidation and commensurate decline in quality of mainstream media content output. This is especially true for music and radio, true of some journalism, and (partially) true for film.

Let's look at few examples: The quality of music found and promoted by big labels has, over the past few decades, dropped precipitously (think insipid boy bands); Making matters worse, the major radio companies use shorter playlists to play less and less (payola funded) music.

Its no surprise both industries are in decline -- while Indie labels --the LT alternative -- are actually thriving.

Then there are films -- as they become ever more expensive to produce, producers aim for the lowest common denominator. While the LCD may help an individual film, collectively, it lowers the quality of the entire film industry's output. Is it really such a surprise that movie theatre attendance is down?

The good side of this is that it creates an opportunity for well written, inexpensive, indie films to gain exposure.

Even the mass media itself has succumbed to increasing consolidation and quality slippage: We've seen time and again investigative journalism falter as owners attempt to increase profits by reducing expenses. Good investigative journalism is expensive and difficult; But the net result is that people trust corporate journalism less and less. That's created the opening for another source of content: The Long Tail of blogs, podcasts and video logs.

Newspaper and magazine subscriptions are in decline, as is TV viewership. Why? Its Hamburger Helper all over again. None of these events occur in a vaccuum; Media consolidates, quality declines, what's left over all start to look alike.

But the internet allows for an viable alternative to come into use: Blogs. Poof! There go your readers. For Radio, its the rise of iPods and Satellites. Poof! There go your listeners. Print media is deep into the effect. Hollywood is only starting to feel it, as is TV. (Haven't figured out about books, as we produce so many unique titles each year).

Bottom line: Any content industry that finds itself dramtically reducing variety or quality or both, is an industry heading for long term trouble -- especially if the internet can be used to easily and cheaply find an adequate or superior substitute.

UPDATE: July 31, 2005 11:12 pm

Judge Richard Posner wastes nearly 5,000 words of primarily obtuse filler to observe that MSMedia is liberal, and that blogs threaten them.

He could have written a much more interesting essay if he understood the 1) Long Tail, 2) the impact of consolidation on content producers, and 3) the consumer's exercise of choice.

And all he had to do was read either this or this . . .

Bad News
By RICHARD A. POSNER
NYTimes, July 31, 2005
http://www.nytimes.com/2005/07/31/books/review/31POSNER.html

How China Will Change Your Business

Thursday, July 28, 2005 | 07:02 AM

in Economy

Fascinating story I somehow overlooked from INC, excerpting a book (China, Inc.) I am halfway thru:

How China Will Change Your Business :

1. China's economy is much larger than the official numbers show.
2. The growth of China's economy has no equal in modern history.
3. China is winning the global competition for investment capital.
4. China can be a bully.
5. China's economy is an entrepreneurial economy.
6. The most daunting thing about China is not its ability to make cheap consumer goods.
7. China is closing the research and development gap -- fast.
8. China now sets the global benchmark for prices.
9. China's growth is making raw materials more expensive.
10. No company has embraced China's potential more vigorously than Wal-Mart.
11. There are hidden costs associated with doing business in China.
12. Piracy is a problem.
13. China's heavy buying of U.S. debt has lowered the cost of money in the U.S.
14. Americans and Chinese have become reliant on each other's most controversial habits.

The article is worth reading (as is the book if you have the time).

Sources:
How China Will Change Your Business
Ted C. Fishman
(Illustrations by: Tommy McCall)
Inc. Magazine, March 2005
http://www.inc.com/magazine/20050301/china.html

Cycle of Co-Dependency
http://images.inc.com/tools/china/china.pdf

Unacceptable Corporate and Market (NASDAQ) Behavior

Wednesday, July 27, 2005 | 04:35 PM

in Investing | Markets

My jaw dropped on the way into work this morning as I was reading an article by Gretchen Morgenson in the NYT:

For the 25 years that Tad LaFountain has been a technology stock analyst on Wall Street, he has often written negatively about the strategies or prospects of the companies he followed. Not once did a company retaliate, he said.

Until now.

Mr. LaFountain, who follows 21 semiconductor companies at Wells Fargo Securities in New York, said yesterday that he was dropping coverage of the Altera Corporation, an industry giant, because its executives had told him they would not take his phone calls, would not let him ask questions on analyst conference calls and would no longer give him the information he needed to analyze its business.

Why the cold shoulder? According to Mr. LaFountain, the company objected to his negative opinion on Altera stock. Before he withdrew his coverage, Mr. LaFountain had a sell rating on Altera shares.

Writing his final report on the company yesterday, Mr. LaFountain said he expected to replace Altera in his list of companies with one "that takes a more appropriate view of the role of independent investment research."

I find that astonishing. If there's a problem with this analyst's work, than use the appropriate channels to complain about his work. But banning the guy from asking questions?

There are two major problems with this issue: First, it reflect poorly on management. Quite frankly, it smacks of the time ~~Ken Lay~~ Jeff Skilling called an analayst who had the temerity to question his numbers "an asshole." I don't know about you, but I sure as hell don't want to own any company whose management in any way shape or form reminds me of Kenny-Boy Lay. If ever there's a reason to simply dump a stock, this is it.

Second, it makes me wonder what the hell the exchanges are doing; Isn't there some minimal requirements -- besides capitalization --- that companies should have to meet in order to maintain their listing status?

Hey Nasdaq and NYSE! You wanna get on the ball with this please?

UPDATE July 27 7:57pm

Michael correctly notes in the comments that it was Skilling and not Lay who said that:

April 17, 2001: Raised eyebrows during an conference call with stock analysts and reporters. Richard Grubman, managing director of Highfields Capital Management in Boston, asked to see Enron's balance sheet and was told it would not be available until later. "You're the only financial institution that can't come up with balance sheet or cash flow statement after earnings," Grubman grumbled. "Well, thank you very much, we appreciate that. Asshole," Skilling replied. This incident would later be cited over and over as evidence of Skilling's unsuitability as a CEO. Skilling's explanation: "The specific fellow that I was not real happy with is a short-seller in the market. I don't think it is fair to our shareholders to give someone a platform like that they are using for some personal vested interest related to their stock position."

I stand corrected.

Source:
An Analyst Receives a Time Out From Altera
By GRETCHEN MORGENSON
Published: July 27, 2005
http://www.nytimes.com/2005/07/27/business/27place.html

Bloomberg TV (1:10 PM, 7/27/05)

Wednesday, July 27, 2005 | 12:32 PM

in Media

>
A quick heads up: If you are in front of a set over lunch, I'll be on Bloomberg TV (US) today at 1:15 pm for a quick Earnings / Econ / Oil / Markets discussion . . .

UPDATE: July 27 2005 1:56pm

The new Bloomberg studio is pretty cool hi-tech space. Here are a few camera phone snaps from today:

click for larger (but poor resolution) photos

Studio

Control Room

One of two curved Escalators in the world

large aluminum cloud sculpture

UK Study: Downloaders Buy More Music

Wednesday, July 27, 2005 | 11:39 AM

in Finance | Intellectual Property | Music

A belated Tuneful Tuesday post. A recent UK study confirms what we've known all along:

"Computer-literate music fans who illegally share tracks over the internet also spend four and a half times as much on digital music as those who do not, according to research published today.

The survey confirms what many music fans have informally insisted for some time: that downloading tracks illegally has also led them to become more enthusiastic buyers of singles and albums online.

Unlikely to be music to the ears of record companies, who have previously argued the opposite, the results will raise a question mark over the companies' recent drive to pursue individual file sharers through the courts."

According to the study, music fans who regularly share and download music illegally -- active P2P users -- typically spend over 400% more on legal music downloads than other music fans.

Speaking from personal experience, I have never discovered or purchased more music than I did during the heyday of Napster.

Paul Brindley, one of the authors of the study, noted "There's a myth that all illegal downloaders are mercenaries hell-bent on breaking the law in pursuit of free music. In reality, they are often hardcore fans who are extremely enthusiastic about adopting paid-for services as long as they are suitably compelling."

Sources:
The Leading Question
http://www.theleadingquestion.com/

Music pirates spend four-and-a-half times more on legitimate music downloads than average fans
http://www.musically.com/theleadingquestion/files/theleadingquestion_piracy.doc

Radio is still the number one source for finding out about new music
http://www.musically.com/theleadingquestion/files/theleadingquestion_radio.doc

Downloading 'myths' challenged
BBC NEWS,Published: 2005/07/27 08:10:56 GMT
http://news.bbc.co.uk/1/hi/technology/4718249.stm

Online file sharers 'buy more music'
Owen Gibson, media correspondent
The Guardian , Wednesday July 27, 2005
http://media.guardian.co.uk/city/story/0,7497,1536889,00.html

File sharers 'spend more on music downloads'
By Tony Smith (tony.smith at theregister.co.uk)
Published Wednesday 27th July 2005
http://www.theregister.co.uk/2005/07/27/p2p_users_legal_downloads

Why Not Just Raise the Price of Sin?

Wednesday, July 27, 2005 | 09:05 AM

in Economy

Habit forming:

A few weeks ago, we noted that Economics of Smoking were such that raising prices reduced the amount people smoked. While many other factors may have also contributed to the decline, the simple fact may be basic economics of cost has been the prime mover.

The NYT takes this a step further. They look at a variety of teen vices, and conclude that:

"There is in fact a surefire way to get teenagers to consume less beer, tobacco and drugs, according to one study after another: raise the cost, in terms of either dollars or potential punishment.

In just about every state that increased beer taxes in recent years, teenage drinking soon dropped. The same happened in the early 1990's when Arizona, Maryland, New Jersey and a handful of other states passed zero-tolerance laws, which suspend the licenses of under-21 drivers who have any trace of alcohol in their blood. In states that waited until the late 90's to adopt zero tolerance, like Colorado, Indiana and South Carolina, the decline generally did not happen until after the law was in place.

Teenagers, it turns out, are highly rational creatures in some ways. Budweisers and Marlboros are discretionary items, and their customers treat them as such. Gasoline consumption, by contrast, changes only marginally when the price of a gallon does."

Fascinating stuff . . .

Our streak of beating the NYT continues

Sources:
To Reduce the Cost of Teenage Temptation, Why Not Just Raise the Price of Sin?
By DAVID LEONHARDT
All Consuming
NYT, July 25, 2005
http://www.nytimes.com/2005/07/25/business/25consuming.html

Fed and Markets

Wednesday, July 27, 2005 | 07:15 AM

in Fixed Income/Interest Rates | Markets

I rarely find anything to disagree about with Gary B. Smith (Chartman for Bulls & Bears, and columnist on RealMoney) -- so when I do, I find it noteworthy. His comments yesterday on the Fed and Markets were exactly one of those incidents:

"OK, here's a trivia question: Over the past 10 years, when has the Federal Reserve raising rates caused the market to decline?

The answer? Never.

I've shown the chart below on a few occasions, but with Fed Talk likely to heat up soon, it's worth looking at again.

The chart maps out what the market has done over the past decade or so along with what the Fed was doing with the fed funds rate. As you can see, they've pretty much followed one another up and down."

click for larger chart

chart courtesy of Real Money

What the Chartman is overlooking is that the Fed's impact on markets is not typically coincidental -- meaning, the result of their actions does not show up as an instantaneous correlation. Instead, the causative relationship between what the Fed does and the market's subsequent reaction typically includes a 6 to 9 months lag. Just look at he chart GBS used:

In late 1995 / early '96 -- the Fed cut -- markets were higher 6 months later;

From late '99 to early '00 -- the Fed raised -- markets were lower 6 months later;

From late '02 to early '03 -- the Fed cut -- markets were higher 6 months later;

I would explain the delay between the Fed event (cut or hike) and the reaction simply: the subsequent impact on the economy takes about a year, and therefore corporate profits take that at least that long to improve or decay (at least those attributable to Fed action). Hence, even a 6 month lag in stock prices is anticpating the impact of Fed action further down the road. The entire process takes a while to work their way through the system.

So where are we today?

From late '04 to '05 -- the Fed tightened; Let's see where markets are 6 months later.

Source:
ADP's Gains Need to Be Processed
Gary B. Smith
RealMoney.com, 7/26/2005 8:35 AM EDT
http://www.thestreet.com/p/rmoney/techforumrm/10234584.html

Gyration Causation

Tuesday, July 26, 2005 | 03:30 PM

in Investing | Markets

Ever wonder why Markets sometimes shrug off bad news, and in other instances, seem to over-react? It’s one of the frustrating things about reading market commentary. All too frequently, attempts are made to explain day-to-day gyrations by referencing recent events. Any decent trader will tell you by the time a story hits the headlines, the impact is mostly in the stock’s price. The exceptions are purely unknown binary events (i.e., FDA approvals) or events not anticipated (such as September 11th).

As we have seen time and again, similar - even identical - causal events often produce different market responses. This happens due to many different reasons, but can help explain why similar headlines often yield a totally different market reaction.

For example, Markets are peculiarly sensitive to initial conditions. Consider event X: What came before X this time might have been different than what came before X last time. The resulting responses seem inconsistent to X, but is in fact evidence that the markets are responding to more than this single input.

That’s why trying to predict the market based upon the behavior of a single variable is so futile. Given the massive size and complexity of capital markets, it is safe to say that no one single factor can be used to accurately forecast the market consistently. Indeed, none of the recent “suspects” for market gyrations - Oil, terror, interest rates, earnings, GDP - operates in a vacuum. Not just what came before, but what is going on simultaneously with any single event can cause different outcomes. Because of this, its foolhardy to describe market doings solely on the basis of Y.

Sometimes a sell off produces nervous holders, and the net result is more sellers; other times it creates a condition of exhausted holders. When that happens, we get a selling vacuum, which sets the stage for a strong move higher.

Then, there’s the issue of collective sentiment. In the first half of the year, the markets were suffering through a malaise; It wasn’t until the late April lows that a significant shift in attitude occurred. Institutional buyers found a new want for stocks after that wash out. The net result was an increased appetite for risk as well.

These various explanations are why the markets sometimes rally while Oil is moving higher; why they shake off a terror attack, using it as a launch pad for a move up; Why Fed hikes haven’t had a particular bite yet.

Chart of the Week: NASDAQ w/ MACD momentum

Tuesday, July 26, 2005 | 01:38 PM

in Economy | Markets | Technical Analysis

Kevin Lane notes that “Both the fast and the slower stochastics are turning down from overbought levels suggesting momentum waning here in the short-run. Given that NASDAQ is bumping up against prior resistance here near 2,220 it makes sense that it may need to back off first and regroup before making another assault on resistance.”

NASDAQ w/ MACD momentum
click for larger chart

Source: Technimentals

>
“MACD momentum is rolling over near-term (green circle) on the NASDAQ so we wouldn’t be surprised to see a short-term set back towards support near the 2,100 level (red line).”

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Quote of the Day:

"Everything in the world may be endured except continued prosperity.”
-Goethe

White PSP

Tuesday, July 26, 2005 | 11:03 AM

in Technology

Way cool white PSP -- wonder when PS2 will be out in iPod white?

Payola 2: Why it matters

Tuesday, July 26, 2005 | 10:48 AM

in Music

What is the significance of the Payola settlement? Why was this even a legal matter? There are 3 keys to this event:

1) Federal law prohibits broadcasters from accepting secret payments or anything of "substantial value" in exchange for airplay of a specific song; (I'm not sure about airplay of a specific artists). Its clear the broadcasters violated that law;

2) Broadcasters are granted a license to use the public airwaves -- there are specific standards they must maintain, in order to maintain that license and keep that privilege (and it is a privilege, not a property right). Anything fraudulent, misrepresentative (even a failuire to disclose) violates FCC governing practices and standards, as well as legislation. Again, a clear violation;

3) The FCC is the primary agency charged with regulating this, but like so many other Federal regulatory agencies, they have been asleep at the switch. This is a political issue;

This is not like, as has been suggested, supermarkets selling shelf space to food companies, or Barnes & Noble selling book racks to publishers. That's because the supermarkets and B&N's owns their own shelves; They are private property, free to be used as their owners see fit.

The airwaves, on the other and, are the publics'; Broadcasters are merely given a license to use them for the benfeit fo the public. If they can make a buck doing so, that's all the better -- but do not think that Clearchannel or Infinity or any othe broadcaster over the public airwaves has a specific right to dispose of the public's property at their own discretion.

Here's a few select quotes from the settlement announcement:

"This is not a pretty picture; what we see is that payola is pervasive," Mr. Spitzer said, using a term from the radio scandals of the 1950's in describing e-mail messages and corporate documents that his office obtained during a yearlong investigation. "It is omnipresent. It is driving the industry and it is wrong."

The Attorney General's findings alleges that the illegal payoffs for airplay were designed to manipulate record charts, generate consumer interest in records and increase sales:

"Instead of airing music based on the quality, artistic competition, aesthetic judgments or other judgments, radio stations are airing music because they are paid to do so in a way that hasn't been disclosed to the public," Spitzer said at a press briefing.
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click for larger graphic

Graphic courtesy of NYT

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The Washington Post noted:

"With the recording-industry settlement, Spitzer has again uncovered widespread wrongdoing in an industry primarily regulated by a federal agency, in this case the FCC. Previous Spitzer investigations into misleading stock research in the brokerage industry and abuses in the mutual fund industry were widely seen as an embarrassment to the Securities and Exchange Commission, Wall Street's primary regulator."

The FCC should be similarly embarrassed . . .

UPDATE: July 28, 2005 6:22am

Slate's Dan Gross asks, What's Wrong With Payola?

UPDATE: July 29, 2005 5:52 pm

The NY Post observes: Music execs sacrifice the great for the glitz; They go even further than I do, blaming Payola for all lousy music on the Radio:

It turns out that the monotonous repetition of awful music played on commercial radio stations is largely caused by companies like Sony, the world's second-largest record label, that regularly paid millions of dollars in under-the-table bribes to radio hosts and producers to get specific songs played over and over, without regard to a tune's worth or initial popularity.

The select handful of illegally hyped tunes eventually catch on from sheer repetition and sell well, but the overall result has been a tidal wave of mediocrity that causes record sales to drop year after year.

In the category of hip-hop music, industry insiders have long complained that payola bribery has fueled the rise of marginally talented gangsta rappers - who endlessly boast of "keeping it real" even while relying on corporate bribery to purchase airplay and popularity they could never dream of achieving honestly.

It wasn't always so. Once upon a time in the music business, the key to success was "having ears" - spending long nights haunting bars, nightclubs and juke joints scouting new talent.

The legends in the business were men like the late John Hammond, who exchanged a Yale degree and wealthy pedigree as part of the Vanderbilt family for a life in the Greenwich Village jazz clubs, where he discovered and promoted a 17-year-old unknown named Billie Holiday in the 1930s, along with groups like the Count Basie Band.

Decades later, as a talent scout for Columbia Records, Hammond helped launch the career of another teenager named Aretha Franklin and had the ears to discover folk singers like Pete Seeger and Bob Dylan.

One of Hammond's last finds before his death in 1987 was a kid from Jersey named Bruce Springsteen.

Clive Davis, another talent scout for Columbia, signed Janis Joplin, Carlos Santana and Billy Joel in the '60s and '70s, then formed Arista Records in 1974 and brought us pop giants like Patti Smith and Whitney Houston.

Arista was later bought by Sony, which last year fired 110 Arista workers and folded the label into RCA.

As corporate giants purchased and shut down independent labels, the men with ears have been replaced by lazy, greedy company men who see popular music as nothing more than a commodity to buy, sell and manipulate by any available means.

These payola crooks are denying the rest of us access to the real talent in our land - and breaking the law to boot.

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Sources:
SONY SETTLES PAYOLA INVESTIGATION
Office of NYS Attorney General Eliot Spitzer
July 25, 2005
http://www.oag.state.ny.us/press/2005/jul/jul25a_05.html

Evidence: Internal Industry Pay-for-Play Memos
http://www.oag.state.ny.us/press/2005/jul/payola2.pdf

Discontinuance Order
http://www.oag.state.ny.us/press/2005/jul/payola.pdf

Radio Payoffs Are Described as Sony Settles
JEFF LEEDS and LOUISE STORY
NYT, July 26, 2005
http://www.nytimes.com/2005/07/26/business/26music.html

Sony BMG Settles Radio Payola Probe
Firm to Pay $10 Million to End Role in Spitzer's Ongoing Inquiry
Dean Starkman
Washington Post, Tuesday, July 26, 2005; Page D03
http://www.washingtonpost.com/wp-dyn/content/article/2005/07/25/AR2005072501624.html

DVRs -- Not PCs -- will be Home's Media Center

Tuesday, July 26, 2005 | 10:41 AM

in Film | Music | Technology | Television

THE online REPORTER notes that its the DVR -- not PCs -- which will dominate the home media center:

"It's increasingly unlikely that the PC will become the media center for the home's entertainment network; as we have reported previously particularly after the cablecos' NCTA trade show in April and the telcos' SuperComm trade show in June. It's the DVR, not the PC, that will probably emerge as the central repository for home entertainment for a number of reasons:
- DVRs are already connected to a TV - no fiddling around with hooking up a PC.
- Content delivered to a DVR is more secure than that downloaded to a PC. The studios and labels have more confidence in the copy protection of DVRs than they are of PCs.
- DVRs are also capable of storing music, which can be played on the stereo or surround system.
- Media Center PCs are costly, noisy, heat producing and frankly unattractive. They don't fit into the décor of other home entertainment gear.
- DVRs are already storing lots of entertainment video - movies, TV shows - that come into the home.
- DVRs can be equipped to handle downloaded video and video-on-demand.
- DVRs can store digital pictures and home videos.
- DVRs can be capable of playing on any TV in the home.
- Most homes already have coax cabling that can be used for an entertainment network.
- The cable and satellite TV companies already have an "in" into the home - to the decision maker - with gear already in place and a billing relationship already established.
- DVRs don't have spyware, malware, spam, adware, viruses or the other maladies that afflict PCs. It's bad enough dealing with it at the office. Who wants to wrestle with a PC when it's time to kick back and relax?
What consumers lose with a DVR-based entertainment network is the flexibility and processing that a computer provides. However, the PC has proven to be leaky -and difficult- when it comes to security to integrate with conventional home entertainment gear such as the TV and stereo.

Let no one think that Microsoft hasn't noticed the PC's failure to become the center of the home entertainment network. It's working to become the software that goes into all the IPTV-based DVRs that the world's phone companies are thinking about buying.

The PC has made a convenient device for ripping and burning PCs and as a way station for getting songs off the Net in order to copy them to a portable music player, but as a video download and storage center, it's come up short.

Here's betting the DVR wins out over the PC in the home entertainment space.

Give It Away

Tuesday, July 26, 2005 | 07:16 AM

in Finance | Music

I get some interesting questions about my interest in music/film. (You may have noticed that commentary on this subject tends to run on Tuesdays). In particular, I find the intersection between technology and entertainment to be fascinating. Clearly, its been a huge driver of so many new innovations and products, from iPods to plasma screens to TiVos.

Understand where my criticisms of the recording industry come from: While I am interested in music and film as a fan, my issues with some of the poor decision making of the labels and studios comes from a business/investment perspective.

As an investor, I want to know how the Labels have managed their key assets, how they have strategized, what their business model is for the future, how they incorporated new technology, what their responses are to changing consumer tastes.

In short, they have done a horrible job. Not just recently, but historically. The recording industry has failed to recognize several key ideas:

- all business models are temporary;
- change is ever present;
- adapt or die.

On that note, I would like to share a terrific commentary/rant from music industry insider Bob Lefsetz. His take on the Music Industry's failure to adapt to P2P and other new tech is fascinating:

Give It Away
"Call it the Metallica Rule. When you can't get arrested, give it away. When you're a star, arrest people for stealing your music.

Radio's over. The model is done. Unless iPods start coming with commercials and every Internet radio station has to have twenty minutes of ads, terrestrial radio is done. Oh, it will survive in a fashion. As a place for news and talk. But for music it's history.

OH NO, you say. It's in all those cars!

Don't be a fucking idiot. Of course radio counts today. But if you're thinking about today, you're just as dumb as the major labels. Because really, it's what's gonna happen TOMORROW!

Look at major label release schedules. It's not like the seventies anymore. If something doesn't have hit potential, it doesn't come out. Furthermore, that which DOES come out is tweaked endlessly, making it palatable for sporting events and fashion shows, but it lacks that one essential ingredient of TRUE hit music