Shareholder Activism, K-12 Edition

Posted on June 26, 2008 by Felix

The shareholder-activist playbook is simple. "You are working for us," say a group of outspoken people who know how to throw their weight around and how to apply pressure to the board. Pretty soon, the board is putting pressure on the CEO, who starts embarking on high-profile rounds of layoffs, and generally doing the activists’ bidding: otherwise, he’ll probably be gone himself.

Now cast your mind back to Gabriel Sherman’s 6,000-word article on Web 2.0 and the way that it intersected, unhappily, with politics at New York’s elite Horace Mann private school: it turns out that, these days, there are a lot of similarities.

Who should make the rules? In the past, there had been at least a rough assumption that teachers were parental surrogates, authority figures who were charged with making decisions regarding education and discipline, and that the rules governing this kind of behavior were clearly the faculty’s to make. But… now, at times, teachers can seem merely like hired help…

The students were more aware than ever of where the real power resided. So when the Facebook situation was brought into the open, the teachers found themselves powerless to act, and the students did not passively wait to be disciplined.

"The Facebook situation" was a case of students posting extremely offensive and provocative entries about their teachers on the social-networking site. And the upshot, in the end, was that one of the prime offenders became student-body president, while the teachers in question ended up getting fired.

I was reminded of the article by Kevin Maney, who’s a big fan of RateMyTeachers.com:

Why don’t schools use the Web to ask parents AND students to evaluate teachers? Aren’t they the real customers?

The answer is simple, in a world where students are well aware of the power they can wield, especially when their parents sit on the board. The power dynamics at the school become inverted: students can act with impunity, because "they are the real customers," and teachers live in fear of negative ratings or doing anything which might adversely affect their popularity among the kids.

RateMyTeachers and its like are here to stay, and are undoubtedly useful resources for parents such as Maney. But I think the unintended consequences of explicitly using RateMyTeachers scores to evaluate and pay teaching staff would be enormous. The power which children already hold would become enormously magnified: any time a group of kids wanted to punish a teacher, for any infraction real or imagined, it would be easy to drive down that teacher’s ratings online.

Sherman’s article described the politics at Horace Mann as being a function of the enormous amounts of money now sloshing around the school and the board. But Maney’s talking about public schools, where having too much money is not usually top of the list of problems. Maybe there’s a bigger phenomenon here, linked to the very Web 2.0 sites that precipitated the Horace Mann debacle. The internet gives everybody a voice – even those, like schoolkids, who have historically lacked one. And given a loud voice and a bully pulpit, you don’t need to be Carl Icahn to want to try to throw your weight around.

Posted in education, governance | Comments Off on Shareholder Activism, K-12 Edition

Have Any Bank Boards Done Anything Right?

Posted on June 26, 2008 by Felix

Francesco Guerrera and Peter Thal Larsen have a long and intelligent article on banks’ boards today. They point out that board members, the people with ultimate oversight over the multi-billion-dollar losses which have devastated the industry, have emerged all but unscathed from the turmoil of the past year. But they smartly stop short of pointing fingers: the issue turns out to be very complex.

It’s true that bank boards are often light on financial experience in general and risk-management experience in particular. But interestingly, if you had to pick two banks before the crisis whose boards had a lot of finance-industry experience and expertise, there’s a good choice you’d point to Bear Stearns and Northern Rock. The fact is that bankers didn’t see this crisis coming, wherever they were on the org chart: it didn’t matter if they were the head of fixed-income, the chief risk officer, the CFO, the CEO, or whether they were on the board. It’s far from obvious that having more bankers on boards would have made any difference at all – and there’s even a good chance it could have made matters worse rather than better, since bankers tend to have a rather larger risk appetite than most of the rest of us.

In any case, finding people with extensive financial experience to serve on boards is not nearly as easy at it sounds, given that those people will almost automatically be conflicted out of trying to make money elsewhere in the financial sector as a result. According to the article, board members could be next in the firing line:

Shareholders could decide to attack underperforming boards by voting against individual directors at companies’ annual meetings. Some dissatisfaction has already surfaced in this year’s shareholder meetings but, with many of the chief executives seen as responsible for the problems gone, directors could find themselves even more in the firing line in 2009.

In the next few months, board members will have to show investors and capital markets that their ability to oversee companies that are striving to come out of the credit squeeze is better than the stewardship displayed before the crisis hit. Failure to do that may well lead them to face the kind of brutal justice that Wall Street and the City have already meted out to thousands of other employees.

Before they kick out the existing directors, however, shareholders should be very clear who they’re likely to be replaced with. My feeling is that just about any board where the CEO is also the chairman is likely to be pretty ineffective when it comes to noticing potential difficulties in the business. Maybe, before sweeping changes take place in the industry, it might be worth finding just one board which seems to have done something right, and trying to copy that.

Posted in banking, governance | Comments Off on Have Any Bank Boards Done Anything Right?

Why Wall Street Analysts Shouldn’t Own the Stocks They Cover

Posted on June 25, 2008 by Felix

The normally-astute Evan Newmark has gone a little crazy in his latest missive for Deal Journal: he’s decided that it would be an excellent idea if Wall Street stock analysts were to start trading for their personal accounts in the very stocks and asset classes they cover.

This is what should interest investors: The true depth of a Wall Street analyst’s or fund manager’s conviction. When you place your chips on red, is your adviser putting a chunk on red, too?

Now with fund managers, I can see Newmark’s point, although he’s blind to the concept that a fund manager might be in charge of a fund aimed at investors who have a very different risk profile to his own. But analysts? They’re not financial advisers. Their job is not to tell you where to put your money; their job is to analyze. The "buy" and "sell" recommendations on the front page are ignored by the clients who matter – the institutional investors. What matters is the quality of the analysis, not the future direction of the assets being covered.

Besides, if analysts had long or short positions in the companies they covered, that would inject a whole new set of unhelpful biases. Individuals who are long or short a stock often get wedded to their own thesis; that’s a danger with analysts, too, but there’s no point in making a bad situation worse. And what purpose in any case is really served by leaving analysts open to accusations of market manipulation and front-running? If analysts were allowed to own stocks, that would serve as an incentive to put out ever more extreme research reports, with the "buy" reports downplaying all the downsides, and the "sell" reports downplaying all the upsides. In other words, they would make the reports less useful.

Especially given the fact that asking analysts to put their own money on their own predictions isn’t going to make those predictions any more accurate. Analysts don’t know where stocks are going, any more than Evan Newmark does. If they were really good at predicting the future in that way, they would be fund managers, not analysts. The distinction is a useful one: let’s not obliterate it.

Posted in banking | 1 Comment

Illinois-Countrywide: Potentially Devastating

Posted on June 25, 2008 by Felix

I’m a huge fan of Tanta, but I think she’s either being far too dismissive of Illinois

attorney general Lisa Madigan’s lawsuit against Countrywide, or else she’s being faux-naive. This case is a very big deal for Angelo Mozilo, for Countrywide, for Bank of America, and for pretty much any housing lender in the US still standing.

Is Madigan throwing everything and the kitchen sink into her 76-page complaint? I’m sure that she is. And I’m sure that some of those complaints cover behavior which was neither unusual nor illegal. But as the Wall Street banks who went up against Eliot Spitzer learned to their cost, in this kind of case it’s the government, not the defendant, which holds all the cards.

What is Countrywide to do? It can’t settle: the minute it did, functionally-identical suits would be launched by California, Florida, and all manner of other states, and would bankrupt Countrywide in no time. But what alternative does it have? A jury trial? You try finding 12 jury members not just itching to mete out some justice to the subprime lenders who have caused such devastation nationally. Never mind copycat lawsuits, the Illinois case alone could consign Countrywide to bankruptcy.

And of course if Countrywide settles or loses this case, any other subprime lender is likely to face something similar. There aren’t many standalone subprime lenders left, but there’s no shortage of banks which extended subprime loans over the past few years.

If I were Ken Lewis, I’d be desperately trying to work out whether it was possible to let Countrywide fail financially while still managing to retain its underwriting and origination network. Officially, the takeover is due to close on Tuesday. But in the wake of this case being filed, I’m not holding my breath.

Posted in banking, bonds and loans, housing | Comments Off on Illinois-Countrywide: Potentially Devastating

The $11 Million Goncharova

Posted on June 25, 2008 by Felix

Christie’s had a blow-out sale last night, selling $284.5 million of art in its Impressionist and Modern sale in London. That’s an eye-popping figure, since Impressionist and Modern sales have been a little bit out of favor of late (the buzz tends to surround contemporary art much more), and also because the huge auction totals have most often been seen in New York rather than London. If there was any doubt, let it be dispelled: the art market is still in rude health.

The headlines have concentrated on the $80.5 million Monet, and well they might, seeing as how the artist’s previous auction record – set only last month – was $41.5 million. The thing which surprises me most about this lot, however, isn’t the hammer price so much as the pre-sale estimate of just £18-24 million – only half the £41 million it finally sold for. This painting had everything going for it: it’s huge (79 inches wide), it’s beautiful, it’s extremely important, and it’s pretty much the last major water-lily canvas still in private hands. (There is one other, but that’s almost certainly going to a museum.)

In a world where a stainless steel bunny is worth $80 million, spending that much on these water-lilies is almost a no-brainer: call it the Jeff Koons arbitrage. The Guardian’s art critic Jonathan Jones says that the water-lily paintings are "in many ways the greatest paintings of the twentieth century": they are certain to hold their art-historical value, even if their mark-to-market price falls, and there isn’t an art museum in the world which wouldn’t be proud to own this painting.

So when it comes to gauging the strength of the art market in general, it’s elsewhere in last night’s sale we should look. A Degas work on paper for $26.5 million? That’s huge. And how about this: Henry Moore’s Draped Reclining Woman, an edition of six, sold for $8.4 million, a new auction record for the artist, who will never be considered particularly important. Nice to look at, sure. A lovely addition to any English-style park, definitely. But $8.4 million? I’m impressed.

But most impressive of all, for me, is the fact that a canvas from around 1912 by Nathalia Goncharova sold for $10.9 million: a record not only for Goncharova but also for any female artist ever sold at auction. This is what happens when new Russian money enters the market: artists you’ve barely heard of start selling for eight-figure sums.

This might be the first time that a female artist has sold for more than $10 million at auction; it won’t be the last. But even though it was bound to happen eventually, I doubt many people would have put much money on Goncharova being the artist to break that barrier.

Posted in art | Comments Off on The $11 Million Goncharova

The Opposite of a Bubble

Posted on June 25, 2008 by Felix

"In current markets," says John Kay, "what we need is a term for the opposite of a bubble."

In the opposite of a bubble, prices become disconnected from values because sellers believe that, whatever the fundamentals, they will soon be able to buy what they have sold at a lower price.

It’s a cute idea, but I don’t think it really bears much relation to current markets. What assets are or even might be trading at irrationally low levels? Certainly not stocks. Maybe some bonds, but really the bonds aren’t the things which are trading weirdly: there’s much more trading in credit default swaps than in the underlying bonds. And those are going up in value, just like any garden-variety bubble.

Posted in economics | Comments Off on The Opposite of a Bubble

Extra Credit, Wednesday Edition

Posted on June 25, 2008 by Felix

What Exactly Concerns Us About Gas Prices? Justin Wolfers is sensible.

Citigroup Considers Repealing a Pledge, and the Slogan With It: First, make a promise in order to duck new regulations. Then, break that promise in order to make more money!

Who really knows how many bankers are unemployed? No one, but it does seem the NYC Comptroller is being a tad optimistic.

Is the FT eclipsing the WSJ as the definitive business paper? If so, blame Barney Kilgore, not Rupert Murdoch.

Are children’s carseats necessary? Steven Levitt at TED in Oxford.

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

Why Female Academics Don’t Appear on Op-Ed Pages

Posted on June 25, 2008 by Felix

Tyler Cowen, in conversation with Wil Wilkinson, says that most people massively overestimate the probability that their beliefs are true. Robin Hanson provides a transcript:

Take whatever your political beliefs happen to be. Obviously the view you hold you think is most likely to be true, but I think you should give that something like 60-40, whereas in reality most people will give it 95 to 5 or 99 to 1 in terms of probability that it is correct. Or if you ask people what is the chance this view of yours is wrong, very few people are willing to assign it any number at all. Or if you ask people who believe in God or are atheists, what’s the chance you’re wrong – I’ve asked atheists what’s the chance you’re wrong and they’ll say something like a trillion to one, and that to me is absurd, that even if you think all of the strongest arguments for atheism are correct, your estimate that atheism is in fact the correct point of view shouldn’t be that high, maybe you know 90-10 or 95 to 5, at most. So that maybe is my most absurd view. Most things are much more up for grabs than we like to say they are.

But here’s a question: what would happen if Tyler is right, but he’s much more right about men than he is about women? What if women are more likely to be rationally accepting of the idea that their own beliefs might not be true, while men barge headlong into irrational certitude? If that were the case, might it not explain results like this?

Men wrote 78 percent of the academics’ opinion pieces in The Star-Ledger, 82 percent in The [New York] Times, and 97 percent in The [Wall Street] Journal. “Of all our analyses,” the authors wrote, “this is perhaps the most astonishing.”

Op-ed pieces are, after all, chosen for being provocative and opinionated: an essay saying "X" is much more likely to appear than one saying "I think X but I might well be wrong", even if that would be a more sensible and considered approach.

And what if men were just simply more interested in having opinions on things than women in the first place? I see this a lot in the blogosphere, which is very male-dominated, and where many of the best female-edited blogs (Gothamist, Lifehacker) are notable for their lack of controversial opinions. Recently I got this email from one prominent female econoblogger, who has nothing but disdain for the arguments which get batted around the blogosphere:

I like reading other blogs but the whole echo chamber around those arguments is like teenage girls squealing "ohmigod, what are you going to wear tomorow?? Omg me too!" The clique is just not interesting to people outside of it.

Personally, I love that kind of debate, but then again I often involve myself in it, and I’m also the kind of person prone to writing blog entries saying that technical analysis is no more reliable than astrology. I believe that strongly-expressed (if not strongly-held) opinion is a good and fun and interesting thing, and that belief is pretty much the driving force behind any decent op-ed page. But it’s entirely probable that if you’re looking for strongly-expressed opinion, you’re more likely to find it from men than from women.

The process of getting an op-ed into the NYT or the WSJ is quite a long one: it involves pitching ideas and talking to editors and often writing pieces on spec. It’s entirely sensible not to do that; the only people who go through it all, for little if any pay, are people who feel very strongly about their opinions and who feel a great need to get them out to as many people as possible. And it seems to me that those people are simply more likely to be men than women.

So no, the reason why male academics are so overrepresented on op-ed pages isn’t sexism, and it isn’t that there are more male academics than female academics. It’s probably much simpler than that: maybe female academics are just more rational and more sensible than their male counterparts.

Posted in Media | 2 Comments

Another Use for Lottery Tickets

Posted on June 25, 2008 by Felix

Buying lottery tickets can be rational, and it can be a means to the end of investing your money for the right reasons rather than the wrong reasons. But it’s still a great way of losing money, and most people shouldn’t do it.

Which, weirdly, makes lottery tickets great gifts. The ideal gift is something the recipient wants, and values, but would never buy themselves. Which is why when they’re given lottery tickets, people feel so good they’ll even donate blood. Powerful things, lottery tickets.

Posted in economics | 3 Comments

City-Dwellers of the World, Unite!

Posted on June 25, 2008 by Felix

I have an essay in the June issue of Poder magazine, wondering whether city-dwellers "could be the defining political force of the 21st century":

More than half the world’s population now lives in a city, and cities provide most the creativity behind the economic growth upon which the rest of the world relies. University of Toronto urbanist Richard Florida calculates that just 40 global megaregions are responsible for two-thirds of the world’s entire output. And yet cities inevitably, consistently, and dispiritingly punch below their weight politically…

Please read the whole thing.

Posted in cities | Comments Off on City-Dwellers of the World, Unite!

The Quixotic Quest for Growth, Non-Profit Edition

Posted on June 24, 2008 by Felix

Carol Vogel reports on Philippe Vergne, the new director of Dia:

Among Mr. Vergne’s biggest challenges will be to find a permanent exhibition space in New York City for Dia, a nonprofit institution devoted to contemporary art…

Mr. Vergne, 42, said he believed Dia could rally and hold a more important place than ever in the art world. “I’ve always been a big fan of Dia,” he said. “It’s a place with an incredible history and is different than the traditional museum model. The chance to take it to a new chapter is exciting.” …

Mr. Vergne said he hoped to fortify programming at Dia:Beacon, which opened in 2003, so that it will become a vibrant site for special exhibitions…

I couldn’t help but be reminded of Evan Newmark’s blog entry on Les Moonves, and more generally of the idea that the CEOs of public companies are hamstrung by an often ill-advised desire to achieve higher growth at almost any cost.

Of all the arts organizations in the world which don’t need to "rally" and be "a more important place than ever" and "become a vibrant site for special exhibitions", I’d say that Dia was pretty much at the top of the list. What Dia is magnificently good at is doing very boring, very un-vibrant things like looking after Walter De Maria’s “New York Earth Room” and “Broken Kilometer” in Manhattan. Its Beacon outpost is pretty much perfect as a permanent home for the very specific artists whom Dia collects: nowhere does Dan Flavin look better, or Blinky Palermo, or Gerhard Richter, or Sol LeWitt.

Dia:Beacon, especially, was always viewed as a low-traffic temple of Minimal art, one which is a relatively easy (but not too easy) pilgrimage from New York City. Yes, there was always going to be a burst of publicity when it opened, but to get a real feel for the ambition of the place all you need to do is look at Robert Irwin’s parking lot, which is much more interested in looking good than in packing people in.

One of the key achievements of former Dia director Michael Govan was that he didn’t just manage to build Dia:Beacon; he also managed to give it a large enough endowment that it can continue to operate indefinitely without having to rely on support or enthusiasm from the public at large. Dia’s great strength through the years is that it has been serene in its convictions. It does what it does, and if you love that, great, and if you don’t, that’s fine too.

To use a stock-market analogy, Dia is a low-growth utility. It’s great if you like that sort of thing, but the CEO of such an operation is basically in charge of keeping it ticking over, not reinventing it or trying to make it grow. That’s why I’m worried about pledges "to fortify programming" and the like. It’s almost impossible to break Dia by neglect; the only way to do so is by trying to improve it. Let’s hope that Mr Vergne isn’t too ambitious.

Posted in art | Comments Off on The Quixotic Quest for Growth, Non-Profit Edition

The Plight of the Wine Lover

Posted on June 24, 2008 by Felix

Keith Levenberg weighs in on the economics of wine with a very smart insight:

If one aims to study “the welfare gains” to wine consumers, measured in those magic units of happiness that economists and philosophers call “utils,” then one should focus on serious wine drinkers, not “average” wine drinkers. It stands to reason that the more seriously one is interested in wine, the more of his total welfare is derived from the pleasures of wine in comparison to the “average” consumer. Limiting one’s study to the welfare of “average” consumers therefore measures only a small proportion of the total welfare derived from the product, and a small gain in the welfare of those who don’t care much about it may disguise an enormous decline in the welfare of those who care about it a whole lot. Which, if you’ve been paying any attention to wine prices the last few years, is pretty much what happened.

I believe that there is a negative correlation between wine price and quality – but I don’t believe that holds for, say, Robert Parker. And in general, the more of a "serious wine drinker" you are, the more the probability rises that, for you, there will be a positive correlation between the two.

It’s never a certainty: I know a lot of pretty serious wine drinkers who have displayed a negative correlation in blind tastings. But remember that the overwhelming majority of tastings aren’t blind: we nearly always have a pretty good idea of how much (roughly) the wine we’re drinking costs. And it’s a well-known fact that simply knowing that the wine you’re drinking is expensive is, in and of itself, sufficient to raise your enjoyment of that wine.

So it’s quite uncontroversial to assert that most of the enjoyment of wine, in (let’s say) "utils", is concentrated in a minority of wine-lovers who spend a relatively large amount of money on the stuff. It’s also pretty uncontroversial to assert that those wine lovers tend to love most the most celebrated wines – i.e., the most expensive wines. And it’s simple fact that the most expensive wines have soared in price over the past decade or two.

Now, it’s probably fair to say that a bottle of 1982 Lafite tastes better, subjectively, if you just paid $3,000 for it than if you just paid $150 for it. But on a dollar-per-util basis, there’s no doubt you’re getting less bang for your buck. Which means that Levenberg’s entirely right: while those of us with a relatively happy-go-lucky approach to wine might well have benefitted from globalization over the past 20 years, the serious wine lovers among us can only look back wistfully at prices in the 70s and early 80s, and curse themselves for not buying much, much more back then.

Posted in consumption | Comments Off on The Plight of the Wine Lover

File Under “Honors You’d Really Rather Never Receive”

Posted on June 24, 2008 by Felix

Zubin Jelveh reports on the Congressional Medal of Honor:

In all wars before World War I, less than 10 percent of honorees died in battle. After WWI through Vietnam, the probability of dying increased from 25 percent to between 60 and 70 percent. And since then, every honoree has died in battle.

Posted in economics | Comments Off on File Under “Honors You’d Really Rather Never Receive”

Extra Credit, Tuesday Edition

Posted on June 24, 2008 by Felix

Germany is the greenest country: With energy consumption down 5.6% in one year!

Three Questions for McCain: From David Leonhardt.

Getting this off my chest about the Olympics: James Fallows is worried.

Met Opera — A New Act: How Peter Gelb turned an old warhorse around.

And finally, Antony Currie finds Ralph Cioffi’s business card:

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

Anti-Protectionist One-Liner of the Day

Posted on June 24, 2008 by Felix

Joe Wiesethal, on the news that the NYSE is taking a 25% stake in the Doha stock exchange:

With any luck, the Qatar government won’t bring up national security issues at the prospect of a foreign purchaser making such a big buy of one of their key financial institutions.

Posted in trade | Comments Off on Anti-Protectionist One-Liner of the Day

More on Technical Analysis

Posted on June 24, 2008 by Felix

It seems I hit a nerve yesterday: 26 comments and counting here, as well as 18 over at Seeking Alpha, and quite a few more chez Ritholtz both yesterday and today; Barry Ritholtz also has a more formal response here. Adding it all up, it seems that the majority of the comments disagree with me, but they all seem to disagree for different reasons.

Some say that technical analysis is a trading tool which tells you how and when to enter or exit positions which you’re getting in or out of for fundamental reasons. Some say that it’s a way of quantifying market psychology, and that there are real causal reasons for what it says. Some say that it’s a fine art, which only works when used in the hands of the adept. Some say that it’s all one big self-fulfilling prophecy, that it works because people believe that it works, creating a herd mentality. And then there’s my favorite comment of all:

TA showed me a seven-year double top last year (2000-2007) and I sold all my stocks on the day in July that the DOW closed at 14,002 and have been in a money market fund ever since…

Evidently for some people technical analysis is so powerful that recognizing a "seven-year double top" can and should be a reason to sell every single stock you own.

And a lot of people decided to take the ad hominem route, asking whether I was a trader, how much money I’ve made in the market, etc etc. For the record: I’m not a trader, I’ve made no money in the market, and I would never, ever recommend that anybody ever come to me for investment and/or trading advice. The full extent of my advice on both fronts is simple: don’t do it. Don’t try to be clever, don’t try to beat the market, don’t think you’re smarter than anybody else. If you’re asking me for advice, that’s a pretty good indication right there that you’re not going to be any kind of outperformer. On the other hand, don’t think you’re going to outperform through use of technical analysis, either.

The most basic argument against technical analysis is the same as that against any kind of active investment strategy. There are technical analysts, and then there’s everybody else. If the technical analysts outperform, then everybody else, in aggregate, must be underperforming. Put aside the passive index performers: they simply track the market as a whole. So who are the investors who consistently underperform the market? Do they happen to be exactly or even mostly the same as the group of people who don’t use technical analysis? It seems improbable, to say the least, especially given the fact that celebrated investors like Warren Buffett and Peter Lynch loudly and frequently declare that they think technical analysis is bullshit.

I think the silliest arguments in favor of technical analysis are the ones which basically assume their conclusions:

Technical analysis is a tool. Like any tool, it needs to be used correctly, or the tool user is likely to sustain injuries… TA expertise takes time and effort… The reading part of a TA education would begin with Technical Analysis of Stock Trends (Edwards and Magee)…that’s about 700 pages. Then add more reading, and a few years of daily market observation and price behavior, and then, maybe, you’re qualified to make pronouncements on the usefulness of this tool.

The problem here is that the argument is unfalsifiable: anybody who has anything bad to say about technical analysis, and anybody who’s lost money using technical analysis, is by definition unqualified to make such a determination. It’s worth remembering that given the sheer number of people who use technical analysis on a daily basis, statistically speaking a lot of them will make money quite consistently on say an annual basis for many years. But the existence of such people is no indication that technical analysis is any better than picking stocks based on Super Bowl results.

As for the idea that technical analysis is one big self-fulfilling prophecy – well, I think that’s easily disproven by the sheer quantity of disagreement that there is in the field over pretty much any chart.

Barry’s take is more sophisticated – but then again he says right off the bat that technicals "are not a way to forecast the future", which does kinda make you wonder what they’re good for. He asks what is for me a very easy-to-answer question:

If you could look at one and only one source before buying your next stock or fund, which would you choose: a fundamental analyst’s report (with no charts in it), or any chart of your choosing?

I’m no fan of fundamental analysts, but largely because they spend altogether too much time looking at the share price. An analyst’s report which was written with no concept of the share price could, I think, be hugely valuable. The best investments on both the long and short side are where you buy a company trading at a fraction of its value, or where you sell a company trading at a large multiple of its value.

Let’s say you have a good fundamental analyst’s report which came to a compelling conclusion that a company is worth somewhere in the region of $35 per share. Then if it’s trading at $7, you buy. If it’s trading at $150, you sell. No chart could ever be clearer than that. The problem is that fundamental analysts tend to be shy, and generally base their valuations on wherever the stock is trading right now. And that’s not very useful at all.

Insofar as technical analysis is any better than pure guesswork or astrology, I think it works as a way of gauging market sentiment and psychology. But here’s the problem: everything in technical analysis seems to work backwards. No one ever seems to start from first principles and make predictions of what would happen to price-and-volume charts when sentiment does this or does that.

Instead, people start with historical charts, and look at the way prices and volumes have historically behaved during periods of given market sentiment. It’s a way of guaranteeing that you’re always right about the past, but I’m far from convinced it’s at all useful when it comes to being right about the present or the future. As any quant fund will tell you, those kind of models work until they don’t. Meanwhile, the technical-analysis crew seems to think that they’re dealing with immutable, permanent, semi-scientific probabilistic laws. In the markets, there’s no such thing.

Posted in investing | Comments Off on More on Technical Analysis

The Beijing Consensus

Posted on June 24, 2008 by Felix

Alex Tabarrok reports on Sino-Syrian relations:

"What can we do," the Syrian finance minister asked, "to increase Chinese investment?" "Well," the Chinese minister replied, "before we invest in Syria you most open your markets, cut your subsidies, and reduce regulation…"

Posted in china, emerging markets | Comments Off on The Beijing Consensus

Are We Facing a New Wave of Sovereign Bond Defaults?

Posted on June 24, 2008 by Felix

Carmen Reinhart and Ken Rogoff have a very peculiar op-ed in the WSJ today, warning of the risk that there will be another wave of emerging-market sovereign bond defaults. Now Rogoff, a former director of the IMF’s research department, is the kind of person who tends to know what he’s talking about. So let’s just say I’m puzzled by his attitude here, and would love him to clear up a couple of things.

Reinhart and Rogoff are certainly provocative: "Already, a good share of Argentina’s debt is in default," they write, and they’re not talking about untendered pre-restructuring debt:

What else do you call it when a government that owes over $30 billion in inflation-indexed debt manipulates its consumer-price statistics? Through a variety of crude measures (such as firing its top statisticians), the government is publishing an understated inflation rate that is used for calculating indexation payments.

Well, I, for one, don’t call it default, I call it manipulation of consumer-price statistics. Someone buying inflation-indexed debt runs both default risk and statistics-manipulation risk; the latter is not a subset of the former. There’s a big debate raging in the US about whether and how the US CPI might understate "actual" inflation, however that might be defined, but no one is suggesting that if CPI is understated then TIPS are somehow in default. And default is a state of affairs, not a state of mind: you can’t say that Argentina is in default just because it is deliberately manipulating its statistics.

But the idea that CPI fudging is a form of default seems to be key to the rest of Reinhart and Rogoff’s argument:

Governments do not usually cheat holders of only one type of debt. In April, we published a National Bureau of Economic Research paper based on centuries of debt data from many countries. We found that most countries default on external debt only a bit less freely than on domestic debt.

So my first question is: does the April paper consider fudged inflation statistics in the presence of index-linked debt to be the same thing as a default? Somehow I doubt it, I can’t see how it would be possible to come up with a rigorous metric of inflation fudging.

I can quite readily believe that outright default on domestic debt is a good indicator that the country in question is likely to default on external debt as well. But I’m not convinced that the same is true of inflation-fudging, which, at the margin, is more of a means of avoiding a default on domestic debt.

Reinhart and Rogoff then make a huge leap from Argentina, with its fudged inflation statistics, to any country with high inflation:

Considering the duress of domestic bond holders across the world as global inflation rises, it is surprising that both private investors and multilateral international financial institutions seem so complacent about the rising risks of defaults on external debts.

I really don’t understand what this means. Yes, inflation is a good way of reducing a government’s real debt burden, especially if a lot of that burden is in the form of bonds carrying a nominal interest rate. Insofar as inflation is higher than investors expected when they first bought the debt, domestic investors especially will get a lower real return than they had hoped for. But again, this is inflation risk, not default risk. Indeed, my intuition is very much that inflation can be used to "inflate away" nominal debts and thereby avoid default. I really don’t understand the logic here; how does rising global inflation mean a rising risk of default on external debt?

But maybe it’s not rising inflation that Reinhart and Rogoff are worried about, so much as rising domestic debt:

There have been many episodes in the past where rising levels of domestic debt have sharply raised risks to external debt holders. There is nothing new about the rise of domestic debt markets. They are simply growing again after a bout of suppression during the high-inflation 1980s and 1990s.

Well, are levels of domestic debt rising? In real terms? I understand that not all emerging-market countries are commodities powerhouses with massive balance-of-payments surpluses which have already achieved net creditor status (Brazil). But I also haven’t seen much evidence that levels of emerging-market sovereign domestic debt are rising particularly quickly. Still, Reinhart and Rogoff do have one example of the kind of thing they’re talking about:

When India effectively defaulted on its domestic debt through massive inflation and financial repression in the early 1970s, external debt holdings suffered payment reschedulings even though they constituted only a tiny fraction of overall debt.

So we’re back to Argentina, it would seem – we’re not worried about "global inflation" rising a point or two, but rather about countries with "massive inflation" – inflation so massive, indeed, that it constitutes an effective default.

If Reinhart and Rogoff were making a narrow argument – that Argentina’s inflation constitutes an effective default on its domestic debt, and that having defaulted on domestic debt the country is unlikely to have a lot of qualms about defaulting on its external debt – then I wouldn’t really have a problem with the op-ed. I’m not sure I’d buy the argument completely, but at least it would make a certain amount of internal sense. And with Argentina’s external debt trading at 570bp over Treasuries, there is indeed quite a lot of default risk priced in already.

But Reinhart and Rogoff seem rather to be making a much broader argument, that inflation globally is a warning sign that emerging-market sovereign debt generally could be facing a new wave of defaults. And the case for that seems to me to be much weaker.

Posted in bonds and loans, emerging markets | Comments Off on Are We Facing a New Wave of Sovereign Bond Defaults?

No-Money-Down Mortgages: Still Not Dead

Posted on June 24, 2008 by Felix

Nick Timiraos has an important front-page WSJ article today on the reappearance of no-money-down mortgages. At 1,500 words, it’s far too long – Robert Thomson clearly has a ways yet to go before he achieves the Murdoch dream of short and punchy articles. But if I were a mortgage lender operating in the current market, I’d be hanging on every word.

The problem is that even if lenders aren’t offering 100% mortgages any more, on the grounds that they tend to default at very high rates, their borrowers might still not in reality have any skin in the game. In which case their default probability is likely to be much higher than their models are telling them.

For sellers, by contrast, these things are great. Don’t drop your price by 10% or 20%: if you do, many potential buyers still won’t be able to come up with a down payment. Instead, keep the headline price unchanged, and funnel the price-drop through a non-profit "down-payment-assistance program". Presto, you’re effectively making the buyers’ downpayment for them, allowing them to buy with no money down, which allows you to sell your house.

Who loses? The lender, for starters: it isn’t modelling no-money-down default rates. And also the taxpayer: a lot of these mortgages are being backed by the Federal Housing Administration.

These schemes also have the effect of artificially inflating nominal house prices, since the sale price is not the same as the amount netted, at the end of the day, by the seller. I’m sure that a lot of politicians and realtors reckon that house prices need all the artificial inflation they can get at the moment, but my feeling is that over the medium to long term, no good can come of this.

Posted in housing | Comments Off on No-Money-Down Mortgages: Still Not Dead

Zimbabwe Datapoints of the Day

Posted on June 24, 2008 by Felix

Comparing Old Mutual’s share price in London and Harare, Josh Giersch concludes that there are now 35 billion Zimbabwean dollars to one US dollar – up from a mere 17 billion on Friday. Which would put annualized inflation, he says (I haven’t checked his math) at 430,000,000,000,000,000,000,000,000,000,000,000,000%. May as well just round it up to the nearest billion quadrillion quadrillion, at this rate.

Josh also notes that this kind of inflation does very interesting things to past profits. Insurance company NicozDiamond, for instance, wrote total premiums, at today’s exchange rates, of $5,171 in the year to May. I hope they invested them wisely!

Posted in development, foreign exchange, stocks | Comments Off on Zimbabwe Datapoints of the Day

Annals of Crap Research, M&A Leaks Edition

Posted on June 23, 2008 by Felix

You might recall that about three weeks ago, there was a mini-spate of articles about how leaks imperil M&A deals. Here’s a typical one, from CFO.com (not to pick on them in particular, there were many others). Here’s how it reported the contents of a new study from Cass Business School:

The Cass research — which included results among more than 350,000 mergers and acquisitions between 1994 and 2007 — found that 49 percent of all leaked deals are completed, for example, compared to a 72-percent completion rate for those not leaked.

It’s fair enough reporting, since all that reporters had to go on was a press release. In the pitch which got sent to most of Portfolio we were told this:

In a study analyzing over 350,000 global M&A deals, it was found that less than half of all leaked deals complete, compared to 72 percent of non-leaked deals.

It was enough to pique our interest, at any rate, and Portfolio’s Caitlin Roman went back and forth a few times with the PR agency trying to get a bit of color on the whole thing, and/or to get a copy of the actual report. We were vouchsafed an executive summary, along with this note:

Please note that the contents are only for background, we do not

want them

used in coverage.

Were they trying to hide something? Turns out, yes they were. And now that the report has finally appeared online, the whole world can see exactly what they were trying to hide:

leaks.jpg

Look, they have figures down to the nearest basis point! They must be super accurate!

"The exhaustive research project" – words dutifully quoted in many news articles – turns out not to have analyzed "more than 350,000 mergers and acquisitions" after all. In fact, the total number of M&A deals that it examined was, er, fifty-nine.

Here’s what the study did not do: it didn’t take a universe of deals, work out which were leaked and which weren’t, and then calculate how many of each group were completed. Instead, it took a (very small) universe of leaked deals, most of which were never completed, and then compared that to an enormous universe of "total deals", most of which were completed. As far as I can tell, they never even checked to see that all their 59 leaked deals were even included in the "total deals" in the first place.

In other words, it’s almost a textbook case of an apples-to-oranges comparison. The study specifically targeted pre-announcement leaks: that is, deals which haven’t been done yet and could fall apart at any time and for any reason. It found just 59 such leaks, over a period of 13 years.

The researchers then took a deals database of more than 350,000 deals over the time period in question. The database is in no way intended to include every instance of one company looking at or talking to another company: it’s a database of deals, after all, not a database of failed M&A bankers’ fantasies. And it turns out that most of the deals in the deals database were completed; some fell apart, but only after they had been formally announced.

And by comparing these two utterly incomparable figures, the researchers concluded that the probability of a deal going through was 2,286 basis points higher if it wasn’t leaked than if it was. What on earth were they thinking? Oh, hang on, let’s have a quick look at the introduction to the study:

Welcome to this important new research study commissioned by IntraLinks from Cass Business School –

M&A Leaks:Issues of Information Control.

In the current M&A environment, getting your deal process right has never been more necessary…

As the market leader in secure online document exchange, IntraLinks is committed to delivering a better

way to control and monitor the exchange of confidential information involved in the entire deal lifecycle.

We look forward to continuing to work with all participants in the M&A marketplace over the coming year and helping to ensure the highest level of security and control.

Aha, things are getting clearer. This isn’t a proper academic study at all, it’s a report commissioned by a document security company to try to demonstrate the need for document security. Of course it always helps if such reports get press, so might as well tell reporters that the study is "exhaustive" (without actually showing them the study, of course) even when it simply isn’t.

I’ve never quite worked out why professors at reasonably high-profile schools like Cass allow themselves to be pimped out in this manner. But it would be nice at least if journalists insisted on seeing research before writing about it. That way the rest of the public might not end up being fed misleading information.

Posted in M&A | Comments Off on Annals of Crap Research, M&A Leaks Edition

Extra Credit, Monday Edition

Posted on June 23, 2008 by Felix

Richard Bookstaber’s Senate testimony on risk management and its implications for systemic risk: Very sensible stuff.

Calvo on commodities: Krugman disagrees with Guillermo Calvo on the role of "global liquidity" in driving oil prices. Thoma commentates.

Microsoft to Internet: Drop Dead: Ballmer still doesn’t get Google.

The Trouble With Markets for Carbon: I’m a supporter of cap-and-trade, but James Kanter has a clear-eyed view of the problems with such a system.

Offsetting distributional effects of a cap-and-trade program: Peter Orszag on the options.

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

Are Top Wine Prices Really Falling?

Posted on June 23, 2008 by Felix

Omer Gokcecus reports on the cost of Wine Spectator’s annual wine listing:

The real price (in 1988 prices) for the basket of the entire Top 100 list was $4,313 in 1988; $3,132 in 1993; $2,533 in 1999; and $2,421 in 2004. That is nearly a 44% decrease in prices from 1988 to 2004.

Tyler Cowen buys it, but after looking at the data, which Gokcecus helpfully provides, I don’t.

Here’s the chart of the cost of the wine basket, by year; for some reason, 1998 is missing. The red bars are the ones cited by Gokcecus; click on the chart for a bigger version.

As you can see, the 44% decrease in prices cited by Gokcecus is largely a function of the fact that 1988 was an extreme outlier, and partly due to the fact that the other years were chosen quite strategically. You might instead say that the average price from 1994 to 1999 was $2,434; the average price from 2000 to 2005 was $2,728. Which is a rise of 12%. Or you could say that the price of the basket soared by 67% between 1996 and 2000.

It’s all true, but the fact of the matter seems to be that the real price is more or less constant, over the years, with a pretty high standard deviation from whatever the mean might be. I’m a huge fan of the globalization of wine. I even believe that it’s helped to bring prices down. But not necessarily in the Wine Spectator top 100 wines – those are the kind of wines which are often considered collectible, and a lot of them have been rising in price quite dramatically.

Posted in consumption | Comments Off on Are Top Wine Prices Really Falling?

Wheat and Water Subsidy Datapoints of the Day

Posted on June 23, 2008 by Felix

Elie Elhadj reports on Saudi Arabia’s misadventures in agricultural subsidies:

Between 1980 and 1992, wheat production grew 29-fold–from 142,000 tons in 1980 to 4.1 million tons in 1992–making the Saudi desert the world’s sixth-largest wheat exporting country…

For the sixteen years between 1984 and 2000, it may be estimated that the assessable cost of Saudi agricultural development could be put at about $85 billion, representing 18 percent of the country’s $485 billion in revenues from oil exports during the period. This huge investment produced wheat at an average cost of more than $500 per ton. During the same period, the international market price for wheat averaged about $120 per ton. When the waste resulting from abandoning the newly reclaimed and irrigated lands plus four unquantified government subsidies are added, the cost might more than double…

Between 1980 and 1999, a gargantuan volume of water–300 billion cubic meters, the equivalent to six years’ flow of the Nile River into Egypt–was used in Saudi Arabia’s agricultural adventure. Two-thirds of the water thus used is regarded as nonrenewable, according to estimates by the Ministry of Agriculture and Water (MAW).

And here’s the punchline: as Alexander Campbell points out, $500 per ton is actually lower than the current market price of wheat.

Posted in commodities, water | Comments Off on Wheat and Water Subsidy Datapoints of the Day

Monoline Datapoint of the Day

Posted on June 23, 2008 by Felix

Gari finds a gem in an FSA presentation:

Of its roughly $19 billion investment portfolio, $13.5 billion is parked in residential mortgage-backed securities, and of those RMBS holdings, almost $8 billion is first lien subprime.

Bill Ackman, as we all know by now, has decided to start shorting FSA credit; FSA is responding by getting its parent to put up a $5 billion 5-year line of credit.

But it does seem that whereas the problems with MBIA, Ambac, and the rest were that they insured some very dodgy credits, that wasn’t the case with FSA. FSA just behaved like a jejune Norwegian municipality, and bought billions of dollars’ worth of dodgy assets. Oops.

Posted in insurance | Comments Off on Monoline Datapoint of the Day