physiological constants and constraints

I wonder how much discontinuity is created by physical, in particular physiological, constraints?  And I wonder how much those discontinuities are exploited in investment decisions and forecasts.  I'm thinking about things such as body sizes, minimum sleep periods, and elimination functions and their relationship with economies of scale and extrapolation of product sizes and uses.  For example, cars have a hard time getting smaller than a certain limit because people generally fit within a certain band (and so you get oddly proportioned vehicles such as a Smart).

oxymorons and Apple results

This headline isn't unique to Apple but it is especially conspicuous given Apple's prominence: "Apple second-quarter earnings expected to top expectations".  I'm not quite sure how something can be expected to top its expectations...

Apple and high defensibility

There are lots of reasonable questions about iPad's growth and future.  Nevertheless, this article makes a nice argument that Apple has enough of a lead in the space and, more importantly, a sustainable advantage in processors, to continue to earn profits and improve the product without obvious near-term risks or competition in its high end space.  This is a direct result of Apple's vertical integration and, as a corollary, having a proprietary source of supply for chips.  Whether or not there is some enormous use case of the iPad is still somewhat unknown (to be clear, it is a big business even if people have difficulty articulating exactly why it is better than alternative formats), at least there is time for Apple, its customers, and its developers to figure it out.

Even more interestingly, the article notes that this processor independence makes a strong case for AppleTV and AppleWatch.  In brief, as Apple works to bring general computing to different places, it can stake out a high and differentiated ground using hardware (processor) and software (OSX/iOS) advantages unlike anyone else.  It is not the idea of vertical integration as a defensive strategy that is interesting; it is the fact that no one else seems to be trying this (at least successfully).

bond yields

What if people are using bond proceeds to buy bonds (leveraged bond purchases)?  Would it be possible for the demand side of this to result in lower overall rates?  And so reinforce a low rate environment?

HP problem

As a sharp illustration of the problems with HP, I discovered that Amazon does not carry any photosmart printers.  There are plenty for sale through third-parties on the site but none that are eligible for amazon prime.  That is disturbing and odd.

japan-style deflation

Was deflation the cause or the symptom of the weak economy?  I suspect it was more a reinforcing symptom but that, even without deflation, the economy would still have been moribund.  Just thinking about QE2 and its purported goal of avoiding deflation (rather than pumping up asset prices, especially housing and equities).

google bet

I made a (modest) bet this week that google does not want to be a search company.  Rather, Page and Brin have very large goals that they are using search to finance.  And, eventually, from all of the different efforts the company makes, it will come up with another disruptive leading product.  That could only have been financed from the outsized profits from search.  The efforts on self-driving cars, space elevators, and machine translation all point towards using the freedom that comes from improbable amounts of money to break rapidly through barriers to next generation technologies.

I'm pretty sure I've heard this story

Gold, stocks, etc. have been rising recently.  Isn't most of this simply a function of a declining dollar?  In other words, inflation?  An asset bubble?  Much of the government's stimulus efforts seem to have been translated into increased holdings of financial assets rather than increased spending.  Which isn't great for TIPS (CPI flat, asset prices way up).

Oh well.

Standstills

I don't get it.  What is the basis for an agreement where an investor agrees to limit future share purchases in exchange for representation on the board of directors?  Is it a bad thing for someone to acquire a large block?  Even if it is, isn't there a conflict of interest in the group making the deal (the current board, I assume).  In fact, can a board even strike a binding agreement on who will be on the board of directors?  Perhaps votes are such a fiction that nomination (perhaps this can be agreed) are sufficient?  I'm really very confused by the conflicts and the message.

Galleon and relative value

The New York Times writes: "One bad trade, in the shares of the chip maker Advanced Micro Devices, cost his hedge fund, the Galleon Group, $30 million. That loss more than wiped out the profits that prosecutors claim Mr. Rajaratnam and his accomplices reaped with their scheme."  I wonder if this is true.  The loss was mostly due to a decline in shares overall (in the late 2008 meltdown).  If AMD lost less than the market decline and if the fund had puts or similar to hedge out broader market moves, then couldn't they still have made money off the relative value difference?  I don't know whether those trades can work but I thought there were ways to be macro market neutral and still take advantage of price moves.

PE in the crosshairs

Clearly, the NYT has decided that driving while texting and private equity are ripe targets.

Although I found the reporting a little one-sided on the private equity story, they did manage to find one of the more awkward series of deals (mattresses).  Of course, the story does not present the basic underlying principle of whom the funds work for and why (their investors and to maximize their returns, respectively) to balance the story and its presentation of the workers and bondholders' situations.  It's not clear that the results would have been different in the hands of any other owners (i.e., regardless of the identity of the owner (except, perhaps for an ESOP or the government), the same thing could very well have happened).

I think the more interesting story (especially if the NYT really wanted to undercut the basic principle part I note above) is that there were a series of fund-to-fund sales with overlapping investor bases.  It would make the story far more forceful (if complicated) and allow the finger to be pointed solely at the sponsors (if unfairly).

Graphs confuse?

I wonder if stock charting inherently misleads (or at least confuses) the reader because we reflexively treat lines as representing physical motion (and thus see momentum (and its corollary, inertia) where there is none). It might be more useful to identify useful graphical representations of similar motion (using physical metaphors is probably a bad place to start but helps to highlight the problem) to avoid seeing patterns (another reflexive trait) where there are none.

The great (but one time) unlocking

How much of US economic growth over the past few decades has been from one-time unlocking of previously frozen assets? I'm thinking home equity loans, unsecured borrowing, etc. And how much of Wall Street's income has been from finding this untrapped value and monetizing it? If we are largely unlocked (and we seem to be - we've borrowed against every asset I can think of, including future personal income all the way from the federal level to the personal by federal debt through credit cards), then growth from spending and growth from financial services income would seem to be over. Yikes.

Is it clear something went wrong?

The leader in the Economist this week is "What Went Wrong With Economics". The alliteration notwithstanding, is it really clear that something went wrong? I thought there were many calls for pricking the asset bubble over the prior years (including from the Economist). Also, doesn't standard economic theory predict that where incentives are not properly designed (for example, mortgage originators are seeking one-time initial fees rather than a reliable stream of income payments; bond raters are paid by the issuer rather than the purchaser; etc.) that you will have poor results?

fund management and alternatives

This week's Economist has an editorial regarding funds that says:

"A survey by Watson Wyatt, a consulting firm, found that the cost of running a pension scheme increased by around half between 2003 and 2008. That was because schemes allocated more of their portfolios to hedge funds and private-equity managers, which charge much higher fees. Chasing performance by paying higher fees might work for individual investors, but in aggregate it is doomed to fail. The return to the average investor is the market return minus costs; if costs rise, returns must fall."

I don't think this is quite right if hedge funds and private-equity managers are investing in under-represented parts of the market. In that case, although the statement "The return to the average investor is the market return minus costs" is true, it unfairly treats the "market" as being the entire market even where it is not.

Freddie - what is going on here?

Something must be horribly wrong at Freddie.

How do bond funds work?

Or, more accurately, how do bond funds manage to avoid depressing their returns when investors stream in (invariably at the peak, rather than at the bottom)? When new money comes in, the funds need to purchase more bonds - but if money comes in when bonds are expensive, won't that hurt historic investors?

AIG CDS scandal

Again, when will the counterparties to AIG's CDS contracts be named? I believe they were paid out at face with the bailout money. We should know to whom this direct transfer of taxpayer money was sent.

It would have been fair for those counterparties to be stuck (they could sue, there would have been some compensation) or, to cut to the chase, they could have agreed to a negotiated amount equal to their expected litigation proceeds. And, perhaps if there truly was systemic risk, the government could have funded some of that negotiated amount as an advance to AIG.

For the government to have bailed out the counterparties (I'm guess GS for a lot of it) at FACE is wrong wrong wrong.

Madoff Shmadoff

World's biggest ponzi scheme? Not even close - social security is obviously the biggest. And unusual for two reasons:

1) The promoters do not (generally) lie. Rather, they simply don't go out of their way to let investors know that current contributions funding distributions to historic participants.

2) To some extent, the promoters are actually trying to make the system somewhat legit (actuarially feasible) - rare to unique in ponzi world.

Just teasing. Sort of.

PE Secondaries

Have been thinking about PE secondary sales (Harvard, UVA, etc.). And have a thought - assuming PE returns are largely a function of vintage, and assuming now is the right time to begin putting money to work, could it be that the sellers are actually not exiting PE but rather freeing up capital to invest at the right time? For a public stock, future beliefs about the industry or asset class determine whether to hold or sell a position, regardless of prior losses. For PE limited partnership interests, different years and funds are not fungible and so investors need to make a new purchase to get exposure (can't simply hold on to old investments and ride out the volatility). So, although there may be some increase in value for 2006 vintage funds, better to get in the 2009-10 funds even at the cost of writing off a large part of the value of recent investments. Just a thought.