Trading Obama and Clinton

In April, Obama was Google and Clinton was General Electric. By Friday, Obama was the alternative-energy sector while Clinton was Citigroup. Today, we’re told that Obama is Apple, and Clinton is Dell. None of these metaphors are very useful, but they are quite a lot of fun, and in fact Dan Gross’s latest set is excellent.

On Clinton/Citigroup:

New York-based, enormously well-capitalized, longstanding market leader whose name is synonymous with the sector it dominates. A powerhouse in the 1990s is having difficulty reclaiming past glory.

Edwards/McDonald’s:

Disdained by the media elite as declasse, shunned by the fashionable as too populist and unhealthy to body politic, manages to thrive by working hard and dishing out cheap meat and potatoes to working-class patrons. Worldly sophistication is belied by simple message that appeals to economically disadvantaged consumers.

Romney/Blackstone:

While stock is at 52-week low, can’t be written off due to deep reservoirs of cash, ruthlessness, and cynicism.

As for the real-money InTrade markets, the speed with which Clinton and Obama have traded places is nothing short of astonishing. Here’s a live chart of Obama, over the past week:

And here’s Clinton:

Posted in prediction markets | Comments Off on Trading Obama and Clinton

Goldman’s Global Alpha Fund: Down 39% in 2007

How did the big investment banks’ flagship hedge funds do in 2007? Highbridge Capital, which is controlled by JP Morgan, ended in positive territory for the year (+6%), despite going through a nasty patch this summer. The Global Alpha fund at Goldman Sachs, by contrast, managed to lose an astonishing 39% last year.

Might there be a Goldman partner or two who actually lost money in 2007, thanks to the collapse of Global Alpha? Probably not, given the fact that the bank is shelling out record bonuses this year. But it’s possible.

(Via Alea)

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The Power of Market Capitalization

What is the correlation between a company’s size, as measured by market capitalization, and its power? I’m not sure how one would measure power, but I don’t think that market cap is a good proxy for it. ADM is worth $29 billion; Halliburton is worth $33 billion. Both, I think, have more power than, say, Procter & Gamble ($228 billion), and they surely have more power than Berkshire Hathaway ($218 billion) – although since "power" remains undefined, such determinations will always be a bit fuzzy.

All the same, it’s not surprising that Ken Auletta uses Google’s market capitalization as an indicator of its power:

In response to prodding by consumer activists, some government officials–notably Senator Herb Kohl, a Wisconsin Democrat–have begun to ask: Does Google, which today is among America’s ten richest corporations, with a market value of just over two hundred billion dollars, have too much power? (ExxonMobil, valued at just under five hundred billion, is No. 1.)

One problem here, of course, is that market cap is not a great proxy even for how "rich" a company is, and it might well make more sense to use revenues or profits instead. (In which case Google drops down the league tables quite rapidly.) Indeed, according to Justin Fox, using market cap for these kind of comparisons is a relatively new device:

I think it’s fair to say that, over the course of the 1990s, the idea that the stock market knew best gained an awful lot of strength in public discourse. Just think of the tendency to judge companies by their market capitalization. Very few people outside of investing circles did that before the 1990s, but by the end of the decade everybody was talking about Cisco or Microsoft being "worth" $400 billion (or whatever).

I do think that it’s silly to think that a company has much more power than it used to just because speculators have run up its stock price. Yes, the increasing power of the company might be part of the reason why the stock price has risen – but then again, it might not, or it might only be a small part. The classic "strip and flip" strategy employed by private-equity funds, in fact, is based on the idea that it’s possible to increase a company’s value by decreasing its power.

I would explain market cap’s popularity as a function not of increased adoption of the efficient market hypothesis, but rather as a function of the internet. It takes just seconds to find the market cap of any company in the US, and most companies in the world. And once you’ve done that, you have an easy apples-to-apples metric with which you can compare any company to any other. It’s almost impossible to resist.

Posted in Media, stocks | Comments Off on The Power of Market Capitalization

The $100 Oil Trade: Was Arens the Seller?

On Thursday, it seemed that the single $100 oil trade was a bit of a prank: Nymex trader Richard Arens basically spent $600 of his own money in order to be the person who first hit that mark.

Now, however, the New York Post’s Roberta Yafie reports that it’s the other way around: Richard Arens is the guy who sold the barrel of $100 oil, not the guy who bought it. The buyer, she says, is unknown, although "one Nymex source told The Post the buyer was commodities conglomerate Cargill". Insofar as Arens was involved in the trade heard round the world, he seems to have made money on it: "the trade cost the investor $600 and made Arens a profit of $600," says Yafie.

I’m not sure I buy it, since Cargill has some of the most sophisticated commodities traders in the world, and I doubt they’d buy a single contract from a "local" like Arens. If anything, I’d be more inclined to believe the opposite: that it was Cargill which sold Arens the $100 barrel.

But at least Yafie has done us the favor of reminding us all that any trade has two counterparties, which means that there are at least two traders – not just one – who can claim to have been part of this bargain. If Arens is one of them, he managed to make history and headlines no matter which side of the trade he was on.

Posted in commodities | 1 Comment

Gawker’s decline

Nick Denton has for some time been goosing Gawker’s pageviews by encouraging long comments threads on Gawker posts. There’s nothing wrong with that, and Gawker’s comments system is excellent. But it turns out that even Gawker’s loyal commenters will exit if pushed hard enough.

When Nick Douglas posted a truly execrable blog entry on Friday afternoon — a time when just about any blog entry is likely to get a longer-than-usual comments thread, since the site updates much less often on weekends — the commenters finally revolted. They knew that every time they reloaded that page in order to continue their conversation, Nick Douglas’s pageviews would go up. And so they moved their conversation over, to the blog entry which precipitated the pay-for-traffic model. Since that blog entry was authored by Alex Balk, Nick Douglas won’t get any bonus from their back-and-forth.

But it’s still Gawker, which means that Nick Denton gets advertising revenue from all those comments even if Nick Douglas doesn’t get a bonus. And so one of the more frequent Gawker commenters simply decreed that the comment thread should move over to his blogspot blog — which, impressively, it did, with 782 comments so far this weekend.

Let’s recap. First, substantially all of Gawker’s editors deserted it: Alex Balk led the exodus, followed quickly (and simultaneously) by Choire Sicha, Emily Gould, and Josh Stein. (Update: It was actually Doree Shafrir who led the exodus: she left two weeks before Balk gave notice.) And that wasn’t the last of the departures, either. In their wake, Gawker’s most loyal readers are now leaving the site as well.

Nick Denton has personally taken over running Gawker, which means he has no one but himself to blame if the site’s numbers start continue heading south. It’s not really fair to judge him on his first week on the job, but then again, this is Teh Blogs, where fairness has never been a strong suit.

In any case, I feel another wager coming on. Gawker’s traffic has been declining for the past couple of months: it got 11.5 million pageviews in October, 9 million in November, and 8 million in December. I’ll bet Nick a lunch at Lever House that he’s not going to beat Gawker’s October pageview figure at any time in the next three months.

Are we on?

Update: I haven’t heard from Nick Denton, but I have heard from Lockhart Steele. He reckons that Gawker’s going exactly as he anticipated: a total shitshow in January, followed by a serious uptick in quality in February, and then “every traffic trick in the book” leading to an all-time Gawker record in March. So the bet is on, albeit with Lock rather than Nick.

Update 2: Denton speaks! “You’ll ask when we’ll match October’s peak. Answer: I don’t know. But I would certainly like to get there in the first half of this year.”

Posted in Not economics | 36 Comments

O-ba-ma!

I watched the New Hampshire debates last night, the first debates I’ve watched this election season. (I would have watched more, I’m sure, but for the fact that I don’t have a television.) And after watching first the Republicans and then the Democrats, I’m increasingly convinced that Barack Obama not only should be the next president of the United States, but that he will be.

For me, the low point of the evening came when Hillary Clinton, asked to compare herself with Obama, instead desperately compared Obama to George W Bush:

In 2000, we unfortunately ended up with a president who people said they wanted to have a beer with, who said he wanted to be a uniter not a divider — who said that he had his intuition and, you know, really come into the White House and transform the country. And you know, at least I think there are the majority of Americans who think that was not the right choice.

Ugh. And that wasn’t her first attack on Obama, either; Obama, by contrast, while defending himself, managed to stop short of attacking Clinton, leaving that to John Edwards.

Clinton did well in the first part of the debate, on foreign policy: she was lucid and forceful and presidential. But she lost all of the goodwill she earned early on by becoming shrill and needlessly oppositional in the middle of the debate. While Barack Obama is going out of his way to appeal to independents and Republicans, I still see Clinton having very little appeal to non-Democrats.

And it’s not ridiculous to think that many Republicans would indeed vote for Obama. Ron Paul’s supporters, for one, are going to find it very difficult indeed to vote for a pro-war candidate. And Mike Huckabee really is the Republican Obama, in many ways: a nice, approachable guy with an anti-establishment message. I can definitely see his supporters voting for Obama over the likes of Romney and Giuliani.

If Obama gets the Democratic nomination, then, I think he has much broader appeal than the polarizing Hillary Clinton: I just can’t see many if any Republicans voting for her. Meanwhile, on the Democratic side of things, the likes of Larry Lessig are really excited about Obama, and very unexcited at the prospect of Another Clinton Presdiency.

Obama also has the ability to get a lot more votes than Clinton, just because he energizes people and makes them want to go out and vote for him. Democrats will, if given the choice in the presidential election, vote for Clinton over any Republican. But I’m not at all convinced that they’ll do so in the numbers that would vote for Obama: Obama is a man who can reach hearts as well as minds, and that’s very, very important.

Will Obama be a better president than Clinton would have been? That, no one can know. But Job Number One right now is to get a Democrat in the White House. And the best way to do that is to give the Democratic nomination to Barack Obama.

Posted in Not economics | 1 Comment

Against Traffic Lights

Roundabouts (traffic circles) are great. But traffic can be astonishingly good at navigating busy intersections even in their absence, and even without traffic lights. The point is that the absence of any traffic lights forces drivers to slow down and use common sense. Meanwhile, the existence of traffic lights can simply encourage drivers to speed up.

Hanoi:

India:

St Petersburg:

(Via Rodrik and Kedrosky)

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Extra Credit, Weekend Edition

E*Trade figure does not compute…

New Type of Analysis on the Iowa Results: How the big Republican winners in Iowa were McCain and Giuliani more than Hucakbee. But:

Are Political Markets Really Superior to Polls as Election Predictors? A link which comes from:

Closing the books: "It is ‘Twenty Years Ago Today’ that people wrote their first articles saying that it was ‘Twenty Years Ago Today’ that the Beatles sang that it was ‘Twenty Years Ago Today’ at the start of Sergeant Pepper… The Vietnam War is now as far in the past as the Second World War was at the beginning of the Vietnam War. There has, basically, been at least one complete political and cultural generation turned over since the 1960s. I therefore declare 2008 to be officially The Year That We No Longer Have The 1960s To Blame."

Buiter vs Dillow on Huckabee’s fundamentalism: The view from across the pond.

Harvard’s Financial Aid Reforms: Andrew Samwick on why Dartmouth shouldn’t be worried.

That name no longer holds any meaning for me: Accrued Interest on the "crisis" meme.

Few signs of relief for falling pound: Maybe, soon, I’ll be able to afford to visit my hometown again?

Posted in remainders | Comments Off on Extra Credit, Weekend Edition

Payrolls: An Apology

Why did I pick today to resuscitate my extremely occasional series of blog entries on the uselessness and irrelevance of the payrolls report? In reality, it would seem that the report was responsible for the decimation of technology stocks, the capitulation of the market into the realization that recession is now more likely than not, and generalized fear that inflation is going to prevent the Fed from cutting interest rates aggressively.

Well, you win some, you lose some, I suppose. I could attempt a correlation-is-not-causation post, trying to say that the markets are moving in a random fashion and that any connection to this morning’s payrolls report is entirely coincidental. I could, but that would be rather desperate, and a bit dishonest, to boot.

I don’t think that the report changed a lot of investors’ minds about the future of the economy – but then it didn’t need to: it only needed to change the marginal investor’s mind. And in practice there’s very little difference between stocks dropping rationally in reaction to new information, on the one hand, and a panicked stock-market sell-off precipitated by a worse-than-expected-but-hardly-paradigm-shifting statistical release, on the other.

The fact is that anybody who sold stocks or bought Treasuries when they got the NFP news is smiling this afternoon, and anybody who ignored the report on the grounds of its uselessness and irrelevance is looking rather sheepish right now. So, um, sorry. My bad.

Posted in statistics | Comments Off on Payrolls: An Apology

Witchcraft, and the Profitability of Goldman Sachs

Timothy Burke has a long piece up on the limits of rationality; Lance Knobel blurbs it as "the most fascinating post-Iowa analysis I’ve read", but it’s not really about Iowa, and although it’s mainly about politics it’s not only about politics.

Burke compares the views of many voters to "how southern Africans invoke ideas about witchcraft to explain how some people obtain wealth". People simply don’t necessarily vote for what they consider to be the most coherent argument or platform:

Offering a tangible plan that promises this tax incentive, that fact-finding commission, this reinvestment project, this funding for retraining doesn’t reach people who perceive the present as a slum left behind by a low-rent version of Benjamin’s angel of history. In fact, all it does is convince them that the candidate with the plans is one of those folks with his hands on the levers, one of them who always seems to come out on top. Yes, of course one of the things that makes me furious is that many Republican political leaders are exempted from this suspicion when in fact they ought to be the faces on the wanted poster, but that has something to do with the extent to which the Republican leadership since Reagan has largely avoided selling itself as the party of superior competency in policy-making, but instead as the party that can address the deeper spiritual condition of the nation, change the movement of the geist.

I would point out that the difference here is not binary; it’s a spectrum. No one this side of Robin Hanson is completely rational, and everybody – even Burke himself – has some kind of vestigial belief in witchcraft. He writes:

Southern Africans are right: some of the powerful are witches, if by that we mean people who illicitly manipulate invisible and hidden forces to produce selfish gains for themselves at the expense of everyone else.

Burke’s piece, for me, is the best explanation for Ben Stein, and his otherwise-inexplicable popularity, that I’ve yet read. Stein basically presents Wall Street’s bankers to his readers as latter-day witches, while extolling the virtues of ordinary God-fearing Americans who are duped by the powerful. So maybe my point-by-point rebuttals are always going to be wide of the mark. Weirdly, an ad hominem attack on Stein might resonate more with those who think there’s something to what he’s saying – I could point to his wealth and his high-powered connections and mutter darkly about how he managed to get to such a position.

On the other hand, maybe he is onto something after all. If you’re puzzling over the extraordinary profitability of Goldman Sachs, witchcraft does seem to explain a lot.

Posted in banking | Comments Off on Witchcraft, and the Profitability of Goldman Sachs

Bear Stearns: Now Trading Below Book Value

Bear Stearns is being clobbered today, down more than 5% to just $79 per share. And it’s passed a major milestone, too. Here’s its fourth-quarter earnings report:

Book value on November 30, 2007 was $84.09 per share, based on 136.2 million shares outstanding.

Next milestone to fall: at $73.41 per share, Bear will be worth less than $10 billion. Another day like today, and it’ll be almost there.

(HT: BVTV)

Posted in banking, stocks | Comments Off on Bear Stearns: Now Trading Below Book Value

What, Exactly, is Finra Investigating?

Paul Jackson has a smart take on the news today that Finra is investigating sales of mortgage-backed securities to retail investors. Basically, MBSs come in two flavors: very safe, and very dangerous. Since sales of very-safe securities wouldn’t trigger a Finra investigation, that would seem to imply that someone, somewhere, might have been selling mortgage-backed interest-only strips to individual investors. In 2007.

If this turns out to be the case, then it had better be some fly-by-night brokerage which is at fault. Any major shop which did this would deserve massive punishment.

Alternatively, if Finra turns out to be investigating plain-vanilla REMICs, then all brokers should start being very afraid, since these are, as Jackson says, "literally, your grandmother’s securities".

It’s also worth noting that according to a new SEC report, "investors typically don’t grasp the difference between brokers and financial advisers". Here’s one way of telling: if you’re an individual investor and someone is trying to sell you an IO strip, you’re not talking to a financial adviser who is acting in your best interest.

Posted in regulation | Comments Off on What, Exactly, is Finra Investigating?

Do Pickup Truck Sales Make Any Sense?

I have lived all my life in cosmopolitan cities, I was in my 30s before I got a driver’s license, I know little about cars and less about trucks. So do please help me out on this one: I am very, very confused by the year-end statistics now being released on pickup truck sales.

In 2007, as in every year, sales of light trucks – pickup trucks – were, at 8.5 million, significantly greater than automobile sales, which were 7.6 million. If I had to point to one reason for the atrocious fuel economy in the US compared to the rest of the world, this would be it.

But weirdly the year-on-year fall in pickup truck sales (2.4%) was smaller than the year-on-year fall in car sales (2.6%). That doesn’t make a huge amount of sense: after all, when monthly car sales briefly overtook truck sales in May, the reason given was high gas prices. And truck ownership is naturally very heavy in the construction industry, which was hurt very badly in 2007.

And according to Micheline Maynard in the NYT, sales of the Ford F-series, the best-selling vehicle in the country for the 31st straight year, plunged by 13.2% in 2007. On top of that, the F-series’ biggest competitor, the Chevrolet Silverado, saw sales fall 2.8%. Given those two numbers, and the fact that all the other numbers in the article are negative as well (Dodge Ram down 2%, Honda Ridgeline down 15%, Nissan Titan down 9.2%), how can total pickup sales have fallen only by 2.5%? (The number in the NYT article is one tenth of one percentage point away from the Wards Auto number, which is no big deal.)

More generally, why are pickup trucks so insanely popular in the US? And are the reasons strong enough to withstand high gas prices? I ask because without pickup trucks, Detroit is dead. But so far the pickup seems to be extremely good at refusing to die.

Update: A reader in Detroit comes to the rescue.

The 8 million number you’re looking at is all trucks — not just pickups. The definition of a "truck" for auto sales counting includes SUVs, vans, minivans and even small vehicles with a hatch and folding seats (such as the Chevrolet HHR). Pickup sales are hurting, but small SUV sales are way up.

Posted in consumption | Comments Off on Do Pickup Truck Sales Make Any Sense?

Will Buyout-Related Deals Flood the CMBS Market?

The CMBS market, where mortgages based on commercial paper office and retail space are traded – has been extremely quiet of late. Good prices are hard to find, but what’s clear is that the primary market has all but disappeared, and that volumes in general have been low.

Jonathan Keehner of Reuters picks up on some ominous news, however: Wall Street seems to have decided that the first quarter of 2008 is an excellent time to flood the market with $20 billion of brand-new CMBS issuance. And not just any old CMBS issuance, either: these issues are LBO-related CMBS issuance, which means they’re designed to help pay for big leveraged buyouts which were closed in 2007.

If all these deals end up being issued, the entire CMBS market could be severely damaged. There’s absolutely no indication whatsoever that the market has any appetite for $20 billion of new commercial mortgage bonds – but, at the same time, the banks doing these deals are extremely motivated sellers, and are likely to be quite happy to sell at loss to themselves.

Anybody holding CMBS today, then, might do well to start selling, since there will be new issuance some time this quarter which is likely to come significantly below today’s market level.

Posted in bonds and loans, housing | Comments Off on Will Buyout-Related Deals Flood the CMBS Market?

Ouch

Bill Ackman’s short bets seem to be rather better than his longs. Dow Jones reckons that he made over half a billion dollars in 2007 shorting MBIA and Ambac Financial. Which is good, because his long position in Target seems to have blown up spectacularly in December:

The $2bn special purpose company Ackman set up to invest in Target – Pershing Square IV – had lost 42.7 per cent of its value after a disastrous December in which Target’s share price plummeted.

It seems almost old-fashioned, the way in which investors can lose money on stocks, rather than simply on structured credit products and the like. Maybe that’s going to be the big theme of 2008.

Posted in hedge funds, stocks | Comments Off on Ouch

Payrolls: Still Best Ignored

The day after the Iowa caucus, with the media full of horse-race coverage of presidential politics, is a good one to miss the news of the monthly jobs report. Good. The non-farm payroll report, which comes out on the first Friday of every month, is increasingly irrelevant, and anything which takes attention away from it is a good thing.

Aside from the normal gripes about margins of error and higher self-employment rates, there’s another issue which today’s report highlights: it’s not even internally consistent. Apparently, employment rose (a tiny amount) from November to December, but unemployment spiked sharply, from 4.7% in November to 5.0% in December. I don’t think the growth of the working population was that big.

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Extra Credit, Friday Edition

Performance measurement and the challenge of active management: A basic hurdle any active investor should be able to clear.

Milan introduces traffic charge: A €10 congestion charge to enter the city center, but you can get around it by installing a smog filter.

Expert Coin Flippers

The CEO healthcare plan: Not only is Checkpoint’s ex-CEO covered for life, but his “eligible dependents or survivors” are all covered for their lifetimes, too.

Econ bloggers survey results: "Academic respondents appear to be less likely to leave comments on other blogs than non-academics".

How does Congress correlate to the stock market? In a word, negatively.

Firefox/Mozilla is NOT going to IPO — here’s why

And finally:

Posted in remainders | Comments Off on Extra Credit, Friday Edition

Blogonomics: Good vs Popular Blog Entries

Now that Gawker Media’s new pay scheme has been made public, Brian Lam of Gizmodo (a Gawker Media property) explains what the downside is, in practice, of paying for traffic. Gizmodo was one of the four blogs where the new scheme was tried out before being introduced company-wide, so he knows what he’s talking about here:

Easy hits cause CPM deflation over time, making your real news posts, the core posts, worth less and less. It also rewards laziness, which I know have to slap down with an iron fist. So the funny random viral videos we loved posting so much before have become a serious problem with making sure pay is fair across the site. It forces you to be very careful, actually.

On the same entry, there’s a bit of discussion about the distinction between good posts and popular posts. Paul Boutin agrees with me that it doesn’t make sense to simply define the two as being the same: his most popular post of 2007 was a throwaway blog entry about the origins of the Google name.

Deal Journal has gone through the same exercise, and their top blog entry of the year was, like Boutin’s, nothing particularly special. Sometimes it really is just blind luck which makes a post popular.

Nevertheless, looking at the top five Market Movers posts of 2007, there is some correlation between popularity, on the one hand, and [enter your criterion of quality here]. My #2 post was basically a copy-and-paste job from a reblog of a comment left elsewhere; the main thing I added was a little bit of HTML formatting. My #4 post I’m not very proud of, and in fact I posted a followup blog entry describing it as "long on the throwaway snark and a bit short on facts". But the #1 and #5 posts are both feature-length blog entries which took a fair amount of time to write and in which I try to explain quite complicated things with as much clarity as I can muster. In any event, here’s the list:

  1. Using the iPhone Abroad
  2. Mark-to-Model on Wall Street: The Numbers
  3. Ben Stein Watch: September 30, 2007
  4. Poetic Justice in NetBank Implosion
  5. Explaining CDOs, Overcollateralization Edition

Also heartening to me is that one of my personal favorites, the Ben Stein Watch of December 2, was in 6th place. But of course I simply don’t go in much for the funny random viral videos, and nor do I write provocative things about Ron Paul. Maybe if I did, none of these blog entries would have made it into my top 5.

Posted in blogonomics | Comments Off on Blogonomics: Good vs Popular Blog Entries

The Power of Round Numbers

On Wednesday, Richard Arens decided to celebrate the new year by having a bit of fun. He’s a "local" who trades for his own account on the floor of the Nymex, and he bought exactly one crude oil contract at exactly $100 per barrel, a level roughly 50 cents higher than the prevailing price, for an immediate mark-to-market loss of something over $500. Here’s the FT’s Javier Blas:

Stephen Schork, a former Nymex floor trader and editor of the oil-market Schork Report, commented: “A local trader just spent about $600 in a trading loss to buy the right to tell his grandchildren he was the one who did it. Probably he is framing right now the print reflecting the trade.”

The result of this New Year’s prank? Well, let’s just say that the front page of Thursday’s Wall Street Journal was a banner headline saying "Oil Hits $100, Jolting Markets". There were two big articles below that headline, and the coverage continued on most of page six, all of page seven, and most of page eight. And that’s just the first section of one newspaper; the total amount of coverage expended on this one trade, across all media and all countries, is mind-boggling to contemplate. Richard Arens is surely giggling, somewhere.

Posted in commodities, Media | Comments Off on The Power of Round Numbers

The Economics of Tom Wolfe

Tom Wolfe has left the publisher where he spent his entire career, Farrar, Straus & Giroux, and decamped to Little, Brown instead. Why? Money, of course:

People involved in the negotiations said on Wednesday that Mr. Wolfe’s advance for the new book was close to $7 million.

This deal makes sense for all three parties, since there are two variables at play: money, and prestige.

Wolfe took the highest bid, since his prestige is not particularly enhanced by staying at FSG rather than moving to Little, Brown.

Little, Brown, meanwhile, gets significant added prestige from getting Wolfe on its backlist: "It’s like publishing Mark Twain," publisher Michael Pietsch told the WSJ’s Jeffrey Trachtenberg. If Wolfe’s new novel fails to earn out its advance, that’s OK for Little, Brown, which is an arm of massive French conglomerate Lagardere.

As for Farrar, Straus & Giroux, Wolfe is already on their backlist, and so the marginal benefit that they get from publishing his 17th book is, well, marginal.

And then of course there’s the whole issue of self-regard among publishing houses: Little, Brown undoubtedly thinks that they can sell Wolfe better than FSG can. Indeed, they say so right in their press release, as quoted by Galleycat:

Just in case you missed the point, the release also quotes Hachette Book Group CEO David Young: "I am thrilled to bring the many assets of the Hachette Book Group, publishers of great literary fiction and of enormous bestsellers, to bear in helping Tom Wolfe find the biggest readership of his already extraordinary career."

I’d normally bet on the winner’s curse being at play here: if Little, Brown won a very competitive auction, then one could assume that they overpaid. But in this case I don’t think the auction was very competitive, since Wolfe is following his editor Pat Strachan, and Molly Stern, editorial director of fiction at Viking Penguin, told the NYT that she would have liked the chance to bid on the book. So it’s actually possible that everybody could be a winner in this particular deal.

Posted in Media | Comments Off on The Economics of Tom Wolfe

State Street Corp Should be Falling, not Rising

Another one for the annals of bizarre stock moves: State Street Corp, the parent of State Street Global Advisors is surging to new all-time highs today. This is on the news that the company has breached its fiduciary duties to its clients so egregiously that it has set up a legal reserve of more than half a billion dollars ($618 million, to be precise) which will be used to defend itself from – and probably make settlements with – investors who were sold safe products and ended up in very risky ones.

In a related move, the CEO of State Street Global Advisors, William Hunt, has been fired with severance compensation and benefits worth a total of $14.1 million, not including vested stock options worth another $4.1 million and retirement benefits worth $900,000. Not particularly bad for three years’ work, considering that it was he who was ultimately responsible for that $619 million liability.

Remember that the $619 million is State Street’s estimate of its narrow legal liabilities: the hit to its reputation is far worse. An asset manager sells one thing above all others: trust. No one in their right mind will park their money with an asset manger whom they can’t trust, let alone a manager which breaches its fiduciary duty to the point of opening itself up to massive lawsuits.

The stock market seems to be taking the legal liability as just another charge to earnings – and for reasons I don’t pretend to understand, the charge to earnings is just $279 million, less than half the size of the fund. That charge, of 71 cents per share, didn’t stop State Street from upping its earnings estimate for 2007 – which I guess is why the stock rose.

But I’m less sanguine about all this than the stock market. We’re talking about major lawsuits from the likes of Prudential Financial, here, as well as no fewer than three class-action suits. State Street might have done well in 2007, but it remains to be seen how this publicity will affect its business in 2008. I can’t imagine it’ll help.

Posted in stocks | Comments Off on State Street Corp Should be Falling, not Rising

How a Free WSJ.com can Beat Yahoo Finance

PaidContent’s Joseph Wiesenthal has found a research note from Bear Stearns analyst Spencer Wang which is bearish on the revenue prospects for a free WSJ.com, compared to the amount it currently generates in subscriptions.

Bloggers love to fisk Wall Street research notes, because it makes them feel superior. And in this case, doing so is pretty easy: Chris Anderson did a good job, and Mick Weinstein, the editor-in-chief of Seeking Alpha, made a rare appearance as a blogger in his own right to do an even better job. But anyone can do this: just look at Wang’s assumptions for a free WSJ.com ($6 CPM, 1.5 ad impressions per page, 50% sellthrough rate) and guffaw. None of them bear any relation to reality.

Everybody, too, notes the strategic aspect of making WSJ.com free: such an action can easily make all the sense in the world for Murdoch even if it does lose a small (by News Corp standards) amount of revenue in the short term. Anderson gives a good account of why WSJ.com wants to be free in New York; he doesn’t mention that such a strategy makes even more sense in countries like India, where no one is likely to pay for WSJ.com and where at the moment it’s incredibly difficult for advertisers to reach the most affluent members of society.

I’d only add that what most of these pundits consider to be unthinkable – that WSJ.com could get the same amount of traffic as Yahoo Finance – is, in fact, decidedly possible, if Murdoch invests in a truly great WSJ.com resdesign and is willing to break a few rules while doing so. (External links on the home page! Stories which are embeddable like YouTube clips! Paying blogs and other websites for sending traffic the WSJ’s way!)

Yahoo Finance is, at the moment, the best website for basic stock-market data and charting, and in turn that drives a lot of pageviews to the rest of the site. But Yahoo hasn’t been unbeatable in any of its other products, and a big investment in a free WSJ.com could give Yahoo some very serious competition.

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Latin State Oil Company Datapoint of the Day

In 2006, Venezuela’s PDVSA had revenues of $100 billion, on which it paid $36 billion in taxes.

In 2007, Mexico’s Pemex had revenues of $100 billion, on which it paid $54 billion in taxes.

(From "Woes mount for Mexico’s state oil titan," by Marla Dickerson, in the LA Times.)

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The Importance of Bonuses

Roger Ehrenberg has an end-of-year post about when he was happiest. He talks about his personal life, but he also talks about his professional life:

There are two distinct times that stand out. The first is when I was 30 and a derivatives pro at Citibank… false modesty aside, I did pretty damn well. I turned health care into a true partnership between banking and Sales & Trading, advising clients on comprehensive liability management strategies in tandem with the banking team. It was a potent combination and quite simply, we rocked it. I also began to chip away at some big, legacy M&T clients that were in need of help but simply hadn’t looked at us as trusted advisers. And now some of them did. And we did some excellent monetization transactions as well as buyback-related hedging strategies. I really began to see how I could cover the client base and make money in a way that hadn’t been done previously. I was making it happen. And at the end of the year I got paid well for the work I had done…

if I had to pick when I was truly happiest, it is when I got my bonus after my breakout year at Citibank. It really wasn’t about the money. The money was the symbol of what really mattered: I had arrived.

It’s easy to laugh at someone who says that he was truly happiest when he got his bonus, and then immediately says that it wasn’t about the money. One’s first reaction is to say, well, if it wasn’t about the money, then why weren’t you truly happiest when you were "quite simply rocking it" on the derivatives desk, rather than at the end of the year when the bonus arrived?

But that’s not the way that Wall Street works. On Wall Street, you’re really nobody until you get your first big bonus. So yes, of course it was about the money, it just wasn’t about what the money could buy.

I’d be interested to know what first springs to mind when you ask an athlete what it was like winning a gold medal at the Olympics. I wouldn’t be at all surprised to learn that it’s the medal ceremony, not the event itself. Symbols are powerful things, be they medals or bonus checks.

And I think this is where the big disconnect appears between people who really understand bonus culture, on the one hand, and people (like me) who say things like "if I had that much money I’d never be working at a bank". Yes, you’re working for your bonus, and it’s your bonus which makes you happy. But actually spending it – that’s an afterthought.

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Extra Credit, Thursday Edition

Will Home Prices Hit Bottom by June?

In flagrante delicto: Tim Price’s picks for 2008. Sensible.

Democrats: More Than Health Care: David Leonhardt compares the economic policies of Clinton and Obama.

Three Different Cures for Three Types of Financial Crises: Brad DeLong starts classifying.

The coming decline in UK house prices: how large and how helpful? Buiter’s analysis is germane for much of the US, too.

Project: Deciphering Financial Newsletter Speak

Planes to Nowhere

I’m probably never flying again

InTrade-TradeSports are fucking up contracts, once again Related: Arbitrage opportunities across election markets.

In the Fight Over Piracy, a Rare Stand for Privacy

February-December romances and their impact on Social Security: "There are 70 women aged 25 or younger in this country who are earning Social Security benefits as the spouses of retired workers. To qualify, they must be married to men 62 or older and have children…"

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