Byrne's MarketView

New Address!

2006-11-26T05:09:00.000-05:00

Just in time for Google deploying a CAPTCHA, even for bloggers who've been using their software without spam-related incidents since 2003, I've moved to a new blog. Details there -- Blogger is kind of constraining, and I've wanted my name in a .com for a while now. See you there!

Confident Weasels

2006-11-21T02:33:00.000-05:00

It's easy to be confident in your plans for reform if they aren't serious plans at all, which is why I'm disregarding the otherwise good news that Treasury Secrectary Hank Paulson wants Sarbanes Oxley enforcement relaxed. Notice that he said enforcement, not the law itself. That's a great way to create a temporary reform (politicians do it with drugs, guns, immigration, and other controversial issues all the time, because it's comforting to be one bad poll away from a unilateral policy reversal). If we're going to have useful markets, we need full enforcement of fair rules, not sporadic enforcement of our current hodgepodge of last-minute reforms of the previous boom's most blatant loopholes.

"Peanut Butter"

2006-11-21T02:24:00.000-05:00

The Peanut Butter Manifesto is a Yahoo! strategy memo spreading fear, uncertainty, and doubt about the company's ability to compete with Google when Yahoo spends so much energy competing with itself. It's almost sad, though:

There are three pillars to my plan:

1. Focus the vision.

2. Restore accountability and clarity of ownership.

3. Execute a radical reorganization.

All of which can be summarized as "Be a couple grad students with a computer, a couple thousand dollars in Angel capital, and a burning desire to take on the corporate goliaths of the world," because at this point, Yahoo! has too many constituencies to please and obligations to fulfill. If they try to get 'radical', they're going to have to remember what happens when the radical reformers inside a big Internet content company fail. Yahoo! needs to stop thinking like a startup, because startups think of Yahoo! as a target -- a small startup can afford to slash and burn a market, because getting 10% of an industry that's only 10% of what it used to be is still a homerun for the VCs and a great payoff for the startup; Yahoo! needs to make markets bigger and make customers loyal, and that means thinking like a consumer products company or a media company. If they're going to succeed, Peanut Butter Style is the way they'll do it.

(Also, don't miss this memo-to-the-memo-guy)

Michael Kinsley is a little late to the party...

2006-11-21T02:07:00.000-05:00

...with his discovery that the stock market is, in fact inefficient. This op-ed is proof that phrasemongers don't make great economists: In his effort to prove that leveraged buyouts are unfair and thus that a perfect free market is a tenuous abstraction based on ludicrous assumptions, he makes the following rather interesting assumptions: That risk-tolerance is constant for all investors; that nobody is aware that executives running a company may know more about the company that all of the investors; that it is, somehow, a massive failure of the capitalism that millions of people aggregating gigabytes of financial data and extrapolating based on all kinds of assumptions into an infinitely distant future can still peg their estimated value of a company to within a couple percent -- when even getting within an order of magnitude would be a computationally intense task.

Even casting that aside, he ignores what a leveraged buyout really means. Management's pitch is usually something like this: "We know that you could read every single SEC filing and ananlyst report and look at every possible chart and still be not entirely sure that our company will be there tomorrow, much less that it'll be solvent and worth more than it was at the previous day's close. Rather than spend the rest of the time you own our stock feverishly hunting for an information edge, why not let us pay you extra for your stock right now and let you never worry about the company again? We'll worry. We'll not only worry about our competitors, and our friends, and our employees and our regulators and everyone else, but we'll have bankers and private-equity partners breathing down our necks until we can get an incomprehensibly huge debt load paid off. You get cash up front and a chance to relax; we get a lottery ticket and a couple years of hell on earth. Sound fair?" Most of the time, shareholders vote 'Yes'. Most of the time, they make the right choice.

Unbelievably Bad Advice

2006-11-21T02:05:00.000-05:00

James Cramer is still bullish on Nymex, and his argument still has a whiff of Money Shamanism. The stock punished late buyers by going up fast; they can only placate it by buying less than they originally intended, and then buying some more later on no matter what happens in the meantime. Come hell, high water, accounting fraud, or a general crash, Cramer still wants you to buy Nymex later in the week. I was going to use "People who made Nymex double its first day of trading" as a benchmark for Polyanish stupidity, but Cramer is -- as always -- a step ahead of crowd.

Update

2006-11-21T01:53:00.000-05:00

I'm visiting family in St. Louis for Thanksgiving, so blogging will be constrained by scheduling (and because my Blogging Chair in Brooklyn is kind of painful, whereas the office chair here is hypnotically comfortable, so I can't get quite the right combination of irritation and haste when I post. Also, the Internet situation is just awkward enough to get in the way of checking my RSS feeds and uploading my posts).

It's Always About the Little Guy

2006-11-18T13:59:00.000-05:00

James Cramer notes that hedge fund disasters only happen because middle-class investors are allowed to invest (indirectly) in hedge funds. This is a striking departure from the populist tone of his first book, in which he argued that regulators were depriving investors of access to the best managers by setting onerous net-worth requirements for hedge fund investors. What's changed? The charitable answer is that Amaranth's collapse convinced him of what Long-Term Capital Management's didn't: That hedge funds are too risky for all but the most sophisticated investors (and that sophistication is directly correlated with wealth; Paris Hilton being a more qualified hedge fund analyst than your average finance professor). The uncharitable answer is that now that he's out of the hedge fund business, he wants to distance himself from the riskier, seedier side -- it's one thing to be associated with an industry that deprived a millionaire of a few spare millions, and another entirely to be the spokesman for the freewheeling traders who accidentally liquidated Grandpa's pension by betting the wrong way on a financial contract that Grandpa didn't even know existed.

Does Social Networking Destroy Quality Journalism?

2006-11-18T13:15:00.000-05:00

This Quality Journalist sure thinks so. He notes that popularity is 1) Gratifying, and 2) Thanks to the rise of link-sharing sites, really easy to measure. He's worried that once writers are allowed to know how popular they are, they'll write just to be popular.

Let's hope this trend doesn't spread to other industries: I'd cower in fear if I knew that restaurants only served food they thought people would like, or if programmers only wrote software their customers would use, or if artists only painted works that they thought people would like to look at. It's a null criticism: Social networking sites homogenize on a superficial level, but they also let users track the individual preferences of a select group of users -- if I find someone who I know is good at ferreting out interesting stories, I'd rather read their list of bookmarked sites than rely on the collective wisdom of any random collective. This isn't new, and it isn't a problem: Popular works have a certain minimum appeal, which usually constrains them from maximum appeal to a single group. This reduces risks and rewards (if I want to completely tune thought out on a long trip, I can grab pretty much any top-20 bestseller and expect to be entertained, but I'd hate to impose my individual literary taste on anyone, even though I prefer my favorites to King, Grisham, and Brown).

This story needs a coup de grâce, so here it is: I found this clever, articulate anti-Digg screed on Digg.

Are High Share Prices Good or Bad? Answer: Yes.

2006-11-18T12:54:00.000-05:00

The Tradesports Maven (just added to my blogroll, along with Midas Oracle, because I'm on a politics-and-gambling binge today) asks: What affect does not splitting a stock have on a company's brand equity?

I suspect there isn't a quantitative change in perceived value; it's mostly qualitative. Companies like Google, Berkshire Hathaway and The Washington Post are necessarily seen as better, but they're certainly seen as 1) Permanent, and 2) Leaders in quality, if not volume. Those qualities can certainly be assets, especially during a flight to quality, but during a garbage-stock runup (à la E-Future's recent post-IPO move from $7 to $48 in about two weeks), they'll get left in the dust. In the long run, it's probably better to have better stock performance (and thus more access to capital) when everyone else doesn't, but that means that a high share price pays off over a decade or more, not quarter-to-quarter. Which, perhaps, is why $500-plus stock prices are so rare and deserve so much attention.

The Money Shaman

2006-11-18T01:25:00.000-05:00

TheStreet.com is running a ten-year Jim Cramer retrospective -- seven pages worth of what was up-to-the-minute a decade ago. I definitely haven't read all of it (or much of it, really -- just auditing to see if his columns match his book). But one column reminded me of a few other Cramerisms, and probably said way more than it meant to: "Red Hots are Candy". Read it!

And then ask yourself: How seriously does he take his whole "The market will hate you if you do the wrong thing" shtick? It comes up in a few other books and columns -- he'll mention selling off his best positions to get back a winning streak -- but I'm not sure if it's meant to be quaint trader lore or an accurate description of his thought process. Perhaps I'm thinking more like an economist than like a trader, but when he says, essentially, "Any one of these stocks will do well, but owning a lot of them will make them go down," he's espousing a view of the market that's best described as Shaman worshiping the rain god or the tree god or the rock god: "Accept the gift of portfolio-saving growth stocks, but don't be greedy or you'll irritate the Bubble God!"

This doesn't make him a bad investor, just worse than he could be. You can accumulate lots of mostly accurate half-truths even operating with a bad model (there's a reason they call a Shaman "Witch Doctor"), but that attitude is still confusing to me and probably harmful to some of his readers. So seriously, Jim: Whether you're joking or just crazy, you really need to stop this Shamanist Trading.

Chinese Math, Redux

2006-11-18T00:42:00.000-05:00

Remember Chinese Math? "If the market is $X billion, and we get just Y%, we'll be rich!" It's happening again. In China, of all places: 24/7 Wall St. notes that Toyota, Ford, and GM have all decided that they're going to beat the competition by raising market share. They'll have to deal with an interesting government stopgap and a local idiosyncrasy if they're going to get too far: Chinese cities aren't really designed for heavy auto traffic. They're mostly built to be an order of magnitude smaller, and full of pedestrians. Rather than build new roads (expensive -- especially since the real estate they'd be built on is incredibly valuable), the government has reduced the number of cars on the road through license plate auctions. But the chance to bid on specific license numbers means that plates can reach ridiculous values -- as high as $34,000 (official exchange rate -- something like $60-70,000 at a more realistic value). If foreign auto companies are going to succeed with Chinese consumers, they'll need to deal with the regulators first.

I'm not sure I'm with them on this one...

2006-11-18T00:11:00.000-05:00

Red Hat, the edgy open-source software maker, is moving to the New York Stock Exchange. According to the expensive, detailed WSJ version of the story:

"It's a very efficient market," said Mr. Peters. He added that he supported NYSE CEO John Thain's move to more electronic trading. "He's a very clever guy," Mr. Peters said.

Some industry experts pointed out that Red Hat, as a proponent of open software like Linux, could use the change in stock listing to help distinguish itself from larger rival Microsoft Corp., which has long been a bellwether Nasdaq stock.

Bad move. It's certainly 'better' for their reputation if a bank or a manufacturer moves to the NYSE, but software -- especially Linux -- is supposed to be a hip, trendy, decentralized sort of business. Having their stock traded by the stodgiest firm possible isn't going to do anything but define them as has-beens.

And if the NYSE really was gunning for Microsoft and got Red Hat instead, they're admitting that they accomplished (by market cap) about 1% of what they intended to. It's a remarkably lose-lose deal.

Collaboration Meets its Match?

2006-11-16T01:20:00.000-05:00

This Wall Street Journal article ($) is a few days behind the curve on the new collaborative book being published by Pearson, MIT, and Wharton. You can join in on their site, but don't expect it to be any good: It's been 395 years since a book written by committee turned out well. It's a noble experiment, but the results are unlikely to be inspiring, though they might be enlightening.

Enforcing Kyoto

2006-11-15T20:22:00.000-05:00

Kyoto signatories have a problem: If everyone signed the treaty, they'd all suffer roughly equally -- but if there are holdouts, those holdouts have an automatic incentive to engage in the same high-pollution activities the treaty tries to prevent. France has a solution: Slap a tariff on goods from non-Kyoto countries. Sounds like a good idea, until you realize that it suffers from more or less the same problem: Now, Kyoto signatories who don't go along with France's policy will get cheaper high-polluting imports. The French government may feel righteous, but this mostly makes them poor.

Pot, Kettle, Youtube

2006-11-15T15:32:00.000-05:00

Google has set aside $200 million to deal with copyright complaints about YouTube. The same day, they sent a cease-and-desist order to a site allowing users to pilfer Youtube videos that Youtube users had pilfered from legitimate sources. They need to make up their minds. Since they started, Google has been in the business of using slices of other people's content -- it's been legally and economically acceptable because it's considered 'fair use' and it's been mutually beneficial, but as Google becomes an easier target, small content providers may try to take a stand and make a name for themselves by suing Google for stealing content. And then Google's previous legal cases will be embarrassing, indeed.

So Much for the LSE Threat

2006-11-15T02:00:00.000-05:00

Not only is the LSE too small to present a serious threat to the NYSE, but seven firms, all traded on the NYSE, are forming a trading platform to compete with it and the other European exchanges. I guess the years of skyrocketing share prices for the exchanges finally convinced people outside the business that there's money to be made. I've held Nasdaq stock for years, but if this trend continues it might finally be time to leave it behind.

News You Shouldn't Use

2006-11-15T00:21:00.000-05:00

Please, please give a big "So, what?" to the news that George Soros' managers are adding lots of equity positions. Look at the roster of stocks they've added -- alternating between bellwethers and stalwarts without a single original idea or outsize position among them. These guys are closet indexers who are finally coming out of the closet. Hopefully the market won't react to the Soros brand name -- it's the same name, but the brand has moved decidedly downmarket.

Icahn Lurking Around Take Two

2006-11-14T23:19:00.000-05:00

Carl Icahn (who according to the book is actually a pretty interesting guy) has raised his stake in Take Two Entertainment (makers of the once-controversial Grand Theft Auto series and the freshly-controversial Bully).

This should be interesting. Icahn is proud to admit that he's "no Robin Hood," and Take Two is so desperate for negative attention that they hid porn in a game about shooting police and selling drugs. So the usual dirt-digging and dirt-dishing phase of the proxy fight (if any) will be great fun to watch. Icahn's stake is just 4%, but growing fast. Keep watching.

Russia: New Deals, Same Old Problems

2006-11-14T18:29:00.000-05:00

Bill Cara sees good things in Russia's future -- they're going to join the WTO, which gives them a little more export leverage. But if you think China's habit of censoring economic disagreement is bad, just take a look at Russia. Investing in a country where bad business is fatal just doesn't sound prudent to me.

Daniel Drezner is Sanguine About the NYSE

2006-11-14T17:22:00.000-05:00

Maybe paranoia isn't the best reaction to the LSE. Daniel Drezner links to a list of possible NYSE competitors, and the reasons they aren't a serious threat. Phew.

WisdomTree is Still a Bad Deal

2006-11-14T17:16:00.000-05:00

Yesterday, their assets under management topped $1 billion. Today, they rolled out another 31 funds. I still think WisdomTree Investments is a terrible deal. Right now, for every $1 you spend on the stock, you get $2.23 in assets under management. Compare that to better-known and better-established companies like T. Rowe Price, where every $1 in market value represents (as of their last quarter, $21.39 in assets under management. Whatever big names are on WisdomTree's board or payroll, I don't think they're worth the 1000% premium.

Inexplicable

2006-11-14T16:36:00.000-05:00

Microsoft's rollout of the new Zune player is not exactly getting a boost from their decision to create an alternative, non-transferable, Microsoft-issued currency to 1) Helpfully disguise the fact that Zune songs cost just 1/4 of a penny less than iTunes songs, and 2) Keep customers from getting their money's worth unless they buy music in increments of exactly $395.

I'm all for alternative currencies -- they're a great way to keep central banks from abusing their quasi-monopoly by manipulating inflation rates -- but I've just found one company I don't want to lead that particular revolution.

"How to Kill a Brand"

2006-11-14T16:26:00.000-05:00

I used to think I was a lone nut, but this 24/7 Wall St. article on 'how to kill a brand' agrees:

Advertising is viewed by most shareholders as an expense. In my view, it is a capital expenditure, not terribly different than building a factory or buying equipment to build revenues, but with a very special bonus attribute...a 100% write-off in year one! Rather than a prolonged schedule of depreciation, Uncle Sam participates in the deduction, all in that first year.

Thank you. It's true: Even in highly volatile markets, the value of advertising doesn't just dissipate -- it accumulates. Witness Coca-Cola. They've been buying brand recognition in every medium they can think of for over a century, and they're paid off. But the fact that these values persist over time doesn't mean that they persist without maintenance. Let's hope, for the sake of their shareholders, that Adidas turns around their ad spending before they fall hopelessly behind.

The Rockstar CEO is Back!

2006-11-14T16:20:00.000-05:00

I just found the excellent Information Arbitrage blog, which has an exciting article on the Web 2.0 Summit. The term "Rock Star" shows up three times, all in reference to .com CEOs.

Of course, this time everything's different: Instead of just a business plan, a dropout, and a dream, we have business plans, MBAs, and proof that (some) dreams come true.

Google is Web 2.0 is Google?

2006-11-14T16:04:00.000-05:00

A while ago, Paul Kedrosky was looking for good Web 2.0 companies to short in the event of a bubble. The first company listed was Google, and I definitely had my doubts: Google is in the very 1.0 business of search-and-ads, and is exploring other businesses. But those other businesses are all more or less venture-stage: Advertising is still 99% of Google's revenue.

Apparently, I was wrong, and Web 2.0 is "All About Google". Now, that column is all speculation, analogy, and froth -- the usual "The Revolution is at hand!" declarations you see whenever a tech company's stock price, financial statements, and brand recognition are all rocketing up the same breathtaking exponential curve. But here's some more convincing evidence: Google has just bought out an online spreadsheet company entirely to make them stop offering online spreadsheets. That's not the behavior of just-another-company in a huge market. That's only economically viable for a near-monopolist. Maybe Google really is Web 2.0 after all.