Daily Dose of Optimism

Thomas Friedman

Thomas Friedman is paid $65,000 per lecture. Now, when I think of Thomas Friedman, I think of this interview.  If you're pressed for time, start around 1:45.

Volker on a Potential Floor on the USD

(Well, not a specific floor, but a conceptual one: the self-interest of strangers.)

Since the economy seems resistant to participate in our ongoing attempt at a 2003-replay, the primary driver I can see of continued growth in the market is weakness in the USD. Open question: is our Federal Reserve, and national government, willing to allow the USD to set new record lows (<72 vs world currencies) in order to "stabilize" the system? If not, what will be the signal to stop?

Currencies aren't necessarily all that different from stocks. Currencies are claims on the performance of a nation's economy and its assets. Currency value stems from investor desire to purchase items in that country, whether the items are financial assets (stocks, corporate bonds), real assets (manufactured goods, services, real estate, commodities),  or incentives for government assets (eg, high interest rates in gov't securities that can only be purchased with the currency).

Who are the shareholders of the USD? US citizens, and countries with foreign treasury reserves.

What does a conference call with investors in the USD sound like? No idea what they say behind closed doors, but the closest thing to a public transcript is probably comments from a G-20 summit. Unlike stocks, I don't think there is the concept of Reg FD; that is, if a foreign government tells the US government that the deficit is much too large, I don't think there is a requirement to share that with us retail holders in the general public at the same time.

We can mostly guess at the actual pressure being levied. Hopefully the private conversations are much more colorful than the public statements. A sample sign of what might be said behind closed doors is alluded to in this comment from Paul Volcker:

Reuters: Answering a question from the audience, Volcker said he doubted China would embark on a major reduction of its U.S. dollar-denominated assets, partly because the alternatives to the dollar, including the euro and the Japanese yen, do not look that great either. China has "a great interest in the stability of the dollar," he said.

Bloomberg has the audio.

2003 vs 2009

A question I have had a note to research for myself was how economic conditions underlying the current rally compare with those of the last successful recovery rally (2003). Fortunately, my reading of other blogs has provided me with some insight (saving me the time).

Via Zero Hedge, via Contrary Investor, the table below shows a comparison between prior rallies and the current one.

The data points that suggest things are better than we think are ISM and P/E ratio. P/E seems to indicate that things could still rally further, as we're not quite as overvalued as people might think. I believe ISM is partly affected by inventory restocking, which could be susceptible to business manager overoptimism, or a very early sign of recovery. The negatives on all other data points do raise some obvious questions.

The dollar weakness is not to be overlooked. If you care about the value of your assets in the context of all available purchasers in the world, then the currency adjusted stock market is relevant.

The question is, how much more can the US allow the USD to be devalued? A rise in interest rates from the Fed could put an end to this game pretty easily. What are they looking for?

I mentioned last week that 76 was a 1-year support level. The most recent gains have seen the USD index ease below that level.  Next significant support is at 72. Are we going all the way there?

Monday Inspiration

"Every man takes the limits of his field of vision for the limits of the world."

- Schopenhauer

(courtesy of philosophers at the MTA)

A Picture of Capitalism

From Whole Foods:

US Dollar Index - Prices & Charting via Bloomberg

For free intraday quotes on the US Dollar Index, see this page on Bloomberg.com. For the visually oriented, the website also offers graphs with intraday to multi-year data. Those who already have a Bloomberg terminal should be able to access this via DXY IND.

Small break today below 76, but unconvincing move in stock market; keep an eye on this to determine whether we're looking at a "melt up" scenario.

 

Related: I highly recommend the Bloomberg.com website as a source for financial news. Bloomberg has clearly been investing in the site over the past few years. It's nice to have many of the same articles that professional money managers have at their fingertips, even if there is a time delay before release to the web. Depending on what your day job is, the delay beats $1,800/month you would otherwise need to pay for access, which I believe is the current monthly retail price of a Bloomberg terminal.

While we're on the subject, the WSJ Mobile Reader for Blackberry is also fantastic.  I have generally found this to be one of the handiest and most addictive news sources ever. This app is a great example of how the news business can adapt to changes in the business/tech landscape.

Public Sector Unions & Healthcare

Under the brilliant leadership of Dennis Rivera, [SEIU 1199, an east-coast healthcare worker's union,] built a top-notch political operation, and with the hospitals, which were barred from political activity, formed a partnership to maximize the flow of government revenue. The union-hospital alliance has been so successful in aligning itself with politicians, Democrat and Republican alike, that not only has 1199 been largely untouched by the downturn, but New York spends as much on Medicaid as California and Texas combined. [...]

The justification for public sector unionism is way weaker than that for private sector unionism. "[Government] workers are not extracting a share of the profits but rather a share of taxes," as former N.Y. Liberal Party leader Alex Rose puts it. And the right to strike, in the hands of key public unions, approaches a blackmail power.

via Kausfiles

USD-Adjusted Wealth Creation in Current US Stock Rally

The market is witnessing a spectacular rally. This rally is occurring in an environment of a weakening dollar. If you didn't live in the US, you would need to factor currency into the value of your US stock holdings. This is not something Americans find the need to do; we're goldfish in a USD fish bowl. However, it is also possible we are forgetting to question assumptions about the significance of a weak dollar given that it hasn't weakened substantially until very recently. The USD index has ranged between 90 and 120  for most the data I have readily available (20+ years).

Taking a look at the SPY ETF (S&P 500, multiply by 10 to get index value): when you adjust the SPY for changes in the USD index, the recent rally is pretty feeble.

 

Notes: I skewed the right y-axis values so that the USD values could be read cleanly at the bottom of the graph. The SPY Global Basket is calculated daily as (SPY price) / (100 / (USD Index Price)). Starting value in Sept 1993 was (conveniently) 99.

Currency adjustments made using back-adjusted historical values for the US Dollar Index futures contract.

Wikipedia: The US Dollar Index was launched in 1973 by the New York Board of Trade (NYBOT). At its inception, the US Dollar Index was set at a base value of 100. The US Dollar Index includes the exchange rates of the following six currencies: euro (EUR), Japenese yen (JPY), Pound sterling (GBP), Canadian dollar (CAN), Swedish krona (SEK), and Swiss franc (CHF).

The stock market rally in 2003 and beyond looks like it was sustained by an environment of a weakening dollar. If this is a point of commonality with the current rally, the USD resistance levels noted in the prior post seem relevant for helping gauge whether rally will continue or falter.  A USD break below 76 seems like an invitation to more gains in US equities.

Allowing the dollar to weaken in 2003 was probably not a politically difficult decision, given that the USD was still quite strong against global currencies (~100). The situation is different when the dollar is at 76. The one obvious upside of a weak dollar at this point is the potential for increased exports, but I believe we aren't the only country in the world with that idea.

USD Carry Trade Deathwatch?

Question: does USD index hold resistance at 76, or are we headed back to test ~20+ year lows, set in late 2008? (71-72 level). Next few days should be interesting.

New Zealand Interest Rate Futures

The 15 year correlation between 90-day futures on New Zealand bank bills, and 3-year New Zealand Government bond ("stock") futures is 99.8%. Over the past few months, the spread between these futures prices widened by the largest amount in fifteen years. The 3-year future (blue line) lags the 90-day future (red line); the green line is the statistical significance of the difference.

Potential Causes: The strength in 90-day futures may reflect the strong rally in the New Zealand dollar. Carry trades that involve short-USD (central bank rate 0.25%), long-NZD (central bank rate 2.5%) may be overly invested in short-dated New Zealand instruments, pushing up the price relative to historical norms. Note that this relationship first started to break down in a significant way around April - May 2009.

Potential Trades: (1) pair trade; long 3-year NZ government bond futures, short 90-day NZ bank futures; expectation is that historical relationship will close. (2) The historically unusual activity of the 90-day contract may indicate that the current leg of the carry trade is overdone, evidenced by the breakdown in historical relationships between short-term NZ futures. In this case, short either contract, bias towards 90-day. (3) Null hypothesis; no trade.

Disclaimer: Please note disclaimers. This post (like all others) is a learning exercise for the author. Feedback welcome.

New Zealand Futures

New Zealand Dollar

NZD vs USD

Herbert Hoover

"Hoover's corporatism - the notion that state, business, the unions, and other Big Brothers should work together in gentle, but persistent and continuous manipulation to make life better - was the received wisdom of the day, among enlightened capitalists, left wing Republicans and non-socialist intellectuals. [...] Hoover was its outstanding impresario and ideologue. [...]

Hence the general belief that Hoover, as President, would be a miracle worker. The Philadelphia Record called him 'easily the most commanding figure in the modern science of "engineering statesmanship." The Boston Globe said the nation knew they had at the White House one who believed in the "dynamics of mastery." He was the "Great Engineer." [...]

More major public works were started in Hoover's four years than in the previous thirty, including the San Francisco Bay Bridge, the Los Angeles Aqueduct, and the Hoover Dam."

- from Modern Times, by Paul Johnson (pg. 243-245)

Valueline Spring Cleaning

Having just completed a major spring cleaning, I thought a good way to do away with some of my back issues of Valueline would be to offer them to readers of this blog.

I have two complete sets of the ValueLine Investment Survey, and Small and Mid-Cap Edition.

The following cycles are available (approximate dates):

• May 07 to October 07
• November 07 to Jan 08

This contains all the issues (all covered companies) printed in this span. I figure this is a decent opportunity for a new investor (or new to Valueline) to amass a complete print collection that can be used as a reference over time.

Email me if interested. $10 each + ~$5 s/h (via USPS). Paypal only. - Ed

UPDATE 5/1/09: These back issues are no longer available.

On "market neutral" and other misnomers

“John Shad, a free market fundamentalist, was Regan’s choice to run the SEC [1981]. Shad’s idea was to turn the commission into a public-detective agency, ferreting out cases of individual cheating.

Meanwhile, he provided official benediction for a tidal wave of new securities – the offloaded fragments of public and private debt, stock options, and assorted other financial instruments dubbed “derivatives,” a term that neatly captured the aura of higher mathematics and pseudo-science enveloping the street.

Designed as prophylactics against risk, in the end they proved riskier than traditional forms of unprotected financial intercourse. Indeed, the Street’s new lingo was positively Orwellian: “risk arbitrage” was supposed to lower risk, but turned out to be a very high-risk business; “portfolio insurance” was designed to ward off disaster but actually helped trigger it; “hedge funds” didn’t so much hedge bets as inflate them.”

– “Every Man a Speculator: Wall Street in American Life,” Steve Fraser, 2005

I came across this passage last week, and I think it nicely sums up the sort of chaos we see in the markets today. Not to make light of what is happening, or could happen, to our collective investments, but I'd just like to point out that the S&P 500 is down just 6.5% from its recent record highs to Thursday's close.

None of this is to say that the market couldn't still fall 15% from here, in what could shape up to be a summer that rhymes with a repeat of 1998's summertime collapse during the "Asian Contagion."

However, it's worth remembering that for all the talk of the armageddon occurring "RIGHT NOW," we plebes invested in plain-vanilla S&P 500 index funds are still up 2.5% for the year through Thursday's close. The irony of "market neutral" hedge funds reporting significant declines in this environment is rich.

The way many "hedge" funds behave, it's enough to make you wonder whether the real "market neutral" position is simply owning anything ... without leverage.

Along these lines: Cramer's recent freak-out on CNBC is a must watch for anyone even remotely interested in the markets. Having watched this clip several times over the past few days, I'd sum up Cramer's performance as the personification of a market going through withdrawal from an addiction to easy money.

Although I've certainly written about brewing issues in the housing market in the past, I think the cause of today's problems was the Fed lowering rates in 2001-2002, so I'm very skeptical that the right thing for the economy at this very minute is to simply dose up the addict with more of the stuff that brought him to the hospital in the first place.

Is there an equivalent of methadone for the financial markets? I guess we'll soon see... - Ed

DDO Roundup - Gecko 2, Global Warming, Speeding, Detroit and Satellites

* The NY Times reports: a sequel to one of my favorite films, Wall Street, is in the works:

Or so those at 20th Century Fox hope. Even as their boss, Rupert Murdoch, pursued an uninvited takeover bid for Dow Jones this week, Fox movie executives quietly sealed a deal to revive Gordon Gekko, the suspender-loving financial prowler who made grabbing seem good in Oliver Stone’s 1987 film, “Wall Street.” [...]

Mr. Pressman declined to say more about the plot. But the title, he said, will be “Money Never Sleeps,” after one of Gekko’s guiding principles in the first film, written by Stanley Weiser and Mr. Stone.

The last Wall Street was released in December 1987, about two months after one of the worst periods in American investing history. I'll irresponsibly wager that equity markets continue to rally until this movie is ready for launch...

* An oldie but a goodie... a video that dramatizes changes in real estate prices over the last 150 years ... as a roller coaster ride. Video runs about four minutes, and I'd say it makes its point quite effectively.

* I watched an interesting documentary a few weeks back, The Great Global Warming Swindle. It's posted on Google Video. If you've watched Al Gore's Inconvenient Truth, you owe it to yourself to watch this response. Among other things: the movie debunks CO2 as a key factor in warming; links warming on earth with changes in solar radiation; and interviews the founder of Greenpeace on how the environmental movement's increasing radicalism was a by-product of Western Marxists having nothing to do after the fall of communism. (So, when you sense that the environmental movement sounds strangely anti-capitalist, well, now you can understand why.)

A sample claim from the movie is that many times more CO2 is generated by the ocean, decaying plant matter, animals, and volcanoes than by all human activity combined. Special bonus point: if indeed the sun is warming the earth, it is nothing we haven't seen before, and life on earth could actually get much better than it is today if temperatures were higher. As a result of watching this video, I will probably not spend another minute thinking about Global Warming, ever. Period. Go out and enjoy a campfire, drive your car, use some aerosol deodorant. Enjoy life. Save your worries for something that matters, and if you feel guilty about your godless, consumerist lifestyle, go to church, and stop taking it out on the rest of us!

* I wonder how John Corzine would feel about speeding ticket fines based on income, as they are in Finland:

Anssi Vanjoki [EVP at Nokia], 44, was ordered to pay a fine of 116,000 euros ($103,600) after being caught breaking the speed limit on his Harley Davidson motorbike in the capital, Helsinki, in October last year.

* Did you know that parts of Detroit are so overgrown and depopulated, that it is actually being reclaimed by nature? It's an amazing portrait of demographic decline. Here's the scoop from DetroitBlog:

• Wild Kingdom - http://www.detroitblog.org/?p=287
• Wrong Side of The Tracks - http://www.detroitblog.org/?p=405

* For a cool interactive Java-applet of every satellite orbiting the earth (courtesy of NASA), see this link. You can rotate the earth and see the names and orbit of each satellite out there. - Ed

Investment Roundup: Seykota, AMD-MU-LKX, Steinhardt, CBH, OXPS

* "Everyone ultimately gets what they want from the market. [...] The best measure of your intentions is the result you get." - Ed Seykota (How's that for a zen interpretation of your struggles? - Ed)

* Salacious Rumor: AMD, MU, LXK to go private? Based on a perusal of AMD's cash flows, I can't imagine it, but it's possible a private equity firm has aggressively hacked up their forecast. EE Times has the news:

Rumors are running rampant that AMD, Micron and Lexmark are separately mulling over plans to go the private-equity route, according to various reports. There were other rumors last week [...] but private equity dominated the rumor mills. According to the Idaho Statesman, Micron Technology Inc. is rumored to be a buy-out candidate amid wild activity with its stock late last week. CNBC late Friday (May 25) reported that private-equity giant Blackstone Capital Partners is interested in Micron (Boise, Ida.).

Last week, rumor had it that ''Lexmark, Micron and AMD were all on the verge of going private,'' according to a report from SG Cowen Securities. Micron lost money in its recent quarter amid a downturn in the DRAM and NAND flash markets. Advanced Micro Devices Inc. (AMD) is struggling and is seeing red ink. Freescale, NXP and others went the private-equity route last year.

* Aspiring professional investors take note:

Steinhardt doesn't think superior portfolio management can be taught. "The greatest teacher is experience," he says, noting that his own stock-trading days began at 13 when his father gave him more than $5,000 in shares of two companies. "By the time I graduated from Wharton at the age of 19, I had more trading experience than most people have at the age of 30 or 35," he says. "I made more mistakes by the age of 19 than most people make 10 or 20 years later into their lives."

It's important for a hedge-fund manager "to really feel miserable" for their mistakes and to be galvanized by "the sense that their own personal security is at risk. I felt that more than once," he adds, implying that these factors are missing in today's more comfortable and well-compensated hedge-fund world.

Ed's interpretation: you're mostly on your own as far as learning about investing, there is no substitute for real trading experience, and when you do figure things out, make sure you align your interests with any outside investors.

* I've started looking at unusual call activity as a means of humoring myself while I drink my coffee in the morning. Recently, two interesting names came to my screen, both with 15-20x the normal volume of calls: Commerce Bancorp (CBH) and OptionsXpress (OXPS). Commerce is rumored to have good news pending on an OCC investigation into related party transactions by executives, and OptionsXpress is rumored to be an acquisition target...by E*Trade.

Reuters: "Given the recent consolidation among online brokers, the rumor might have some merit," said Frederic Ruffy, analyst at options education firm Optionetics in Redwood City, California. OptionsXpress declined to comment. E*Trade Financial was not immediately available for comment.

Both of these are plausible outcomes, and I think that the news would lead to happy trading for both...so I'll be watching. Emails and comments welcome. - Ed

Note: all references to investments on this site should not be interpreted as endorsements or recommendations for you to take action. Any investment actions you take as a result of something written here are your responsibility, so do your own homework.

Daily Dose of Optimism - Birinyi & Associates "Most Accurate" Blog Forecaster

I have been a participant in the Weekly Blogger Sentiment Poll, run by Ticker Sense, the blog of Birinyi & Associates. The poll is a binary (bullish/bearish), short-term prediction of S&P 500 performance.

One of the participants in the poll, Fallond Stock Picks, recently compiled the results of this poll to determine which blog was the most accurate forecaster of market performance.

I was pleased to learn of the results: the Daily Dose of Optimism (your humble blogger) was the most accurate forecaster for the survey period (link to results):

I haven't put a whole lot of specific effort into my forecast, other than the effort I normally put into reading news and charts, but I guess I'm not too surprised by the result - I am bullish, which has been the winning position for the last few months, and most of these bloggers are bearish.

My early readers hopefully already knew that this blog wasn't completely useless as a source for information, and for newer readers, here's some proof that I am more clued into the market than other finance bloggers. I realize that isn't saying much, but it should count for something as far as how you allocate the time you spend reading finance blogs.

While we're on the subject of studly paper trading, I will also refer you to my Motley Fool CAPS watchlist. Up until recently, I was using CAPS to track my stock watchlist, and the performance was mostly respectable. Here's the summary:

I really like CAPS for paper trading efforts and sharing ideas, better than anything else I've tried, and I still look a the site about once a day. However, I haven't been actively managing my stocks on the site in some time. If DDO readers care, or provide additional feedback based on what I share on CAPS, I'll continue to maintain the CAPS list with comments. The future is in your hands. Thanks for reading! - Ed

The First Ever DDO Investment Roundup (TFSM, FCSX, AMD, SRSL, Chinese ADRs/GDRs)

I've said many times that I wanted to increase content around individual companies on this site, but I've had a hard time following through. Generally, that's because my model is the kind of write-up I did for TSCM and CMG, which took days to complete, and if that's the bar, then this blog can't get written. So as the year proceeds, I'm going to try a few different options, one which is the "investment roundup," where I will run through things I'm seeing and hearing on a variety of investments. I'll leave comments open on these posts so readers can provide feedback. Emails are also welcome.

• First off, I want to share the website of Jason Raznick, who has been writing about some interesting ideas lately. Recent coups for Jason were his calls on 24/7 Real Media (TFSM) and aQuantive (AQNT). Both of these companies were acquired shortly after the Google-Doubleclick acquisition. The trend here was that both major technology companies (Microsoft) and old-school advertising agencies (WPP) realized they were either hopelessly behind the game in web advertising, or in danger of getting locked out of the market by the 900-pound gorilla in this space, Google. Other recent stocks include Iowa-based commodity broker FC Stone, which has the unique distinction of being the only market maker in ethanol futures.

• I like the look of AMD right now. The company has been absolutely clobbered leading up to, and through, the announcement of the company's worst quarter ever, and the stock has dropped from around $42/share to a recent low of $12.60. However, all is not lost: the company completed a $3bn financing, and AMD has a new chip coming out, the Barcelona series, raising the bar in the endless one-upmanship in the commercial server space. Even Fred Hickey, the ultimate bear, had guardedly positive things to say about Barcelona:

May 2007: Barcelona is expected to be significantly faster than Intel's quad-core offerings ... Barcelona will help AMD regain share at the higher-margin, high-end, putting Intel's forecast of improving gross margins in great jeopardy. If the economy's outlook wasn't so bad and if there wasn't such a tremendous excess of capacity at both Intel and AMD, I'd once again buy AMD's stock for a rebound.

• Another company I'm looking at is SRS Labs (SRSL), a company that makes surround sound audio technology for use in flat panels, set top boxes, automotive and other home audio equipment. A sample product would be SRS WOW, which is used to improve the performance of compressed audio. For a more complete list of products that currently use SRS technology, see here. The price/sales multiple is ludicrous, but the company is profitable, has huge profit margins (~30%) and is showing good growth. Micro-cap (~$200mm).

• After using Yahoo Finance for about six years, I am being won over by Google Finance. The number one differentiator in my experience is the ability to search on either a ticker symbol or the company name in the same search box and get the results you are looking for. Yahoo finance feels stale, and the beta charts function doesn't do much for me at all. Yahoo's constant admonishments of "ticker not found" also make the website feel ridiculous over time. Google's annotated flash price graphs with news, plus easy time scrolling ability are fantastic.

• I'm trying to compile a list of the most promising Chinese ADRs and GDRs out there. If you have any suggestions, drop me an email or post a comment. The best list I've seen so far is Fortune's China 100 list. Unfortunately, about 50% of the companies on the list are ORDs listed in Hong Kong or Shanghai. I'm thinking smaller/micro-cap stocks if you've got them.

Note: all references to investments on this site should not be interpreted as endorsements or recommendations for you to take action. Any investment actions you take as a result of something written here are your responsibility, so do your own homework.

DDO Roundup - Calvin Klein, Chess, Paul Graham, RSS, NYC Bonuses, Google Maps

* Calvin Klein plans to introduce a new fragrance, "in2u." Here's a quick writeup:

Last year, Calvin Klein went so far as to trademark "technosexual," anticipating it could become a buzzword for marketing to millennials, the roughly 80 million Americans born from 1982 to 1995.

A typical line from the press materials for CK in2u goes like this: "She likes how he blogs, her texts turn him on. It's intense. For right now."

There are two potential conclusions for me to draw here, either: one, that blogging really is a hot phenomenon (in a new sense of the word); or, two, that Calvin Klein has completely had it as a brand. Although the idea that blogging can turn a woman on is appealing, I can tell you from experience, that if it ranks anywhere, it would be last in line amongst hundreds of alternatives. Calvin Klein, far from the hot brand it once was, is now a reliable cash cow for Philips-Van Heusen (PVH), whose stock has been performing phenomenally over the past year.

* "It often happens that a player carries out a deep and complicated calculation, but fails to spot something elementary right at the first move." - Alexander Kotov

* Longtime readers know I respect Paul Graham as one of the finest writers on business and technology out there. This latest piece, his introduction to the book, "Learning from Founders" has many of his great ideas in a short piece. I'm a real believer in the ideas from these paragraphs on productive work places, although I haven't yet put them into practice in my life:

The effort that goes into looking productive is not merely wasted, but actually makes organizations less productive. Suits, for example.  Suits do not help people to think better. I bet most executives at big companies do their best thinking when they wake up on Sunday morning and go downstairs in their bathrobe to make a cup of coffee. That's when you have ideas.  Just imagine what a company would be like if people could think that well at work. [...]

Ditto for most of the other differences between startups and what passes for productivity in big companies.  And yet conventional ideas of "professionalism" have such an iron grip on our minds that even startup founders are affected by them.  In our startup, when outsiders came to visit we tried hard to seem "professional." We'd clean up our offices, wear better clothes, try to arrange that a lot of people were there during conventional office hours.  In fact, programming didn't get done by well-dressed people at clean desks during office hours.  It got done by badly dressed people (I was notorious for programmming wearing just a towel) in offices strewn with junk at 2 in the morning.  But no visitor would understand that.  Not even investors, who are supposed to be able to recognize real productivity when they see it. [...]

In the car world, there are at least some people who know that a high performance car looks like a Formula 1 racecar, not a sedan with giant rims and a fake spoiler bolted to the trunk.  Why not in business?  Probably because startups are so small.  The really dramatic growth happens when a startup only has three or four people, so only three or four people see that, whereas tens of thousands see business as it's practiced by Boeing or Philip Morris.

For some more great work from Paul Graham, check out his archives. I'd also recommend a personal favorite of mine, "What Business Can Learn from Open Source". Classic quote: "Meetings are like an opiate with a network effect. So is email, on a smaller scale."

* Barron's adds RSS feeds; Ed realizes he is a nerd. Barron's just started offering RSS feeds of their content, along with content from the WSJ. I'm speechless, as Barron's was the last major financial publication to not offer feeds. Check it out here. These feeds need work, but they're better than nothing, and they're better than what the WSJ used to offer.

* City Journal is one of the more insightful publications on politics with a pragmatic perspective, even if the material is often uneven in quality and insight. Nonetheless, their perception of NYC's dependency on the uber-elite finance community is an important voice, and Nicole Gelinas' latest piece, "Bonus Boom, But..." is a great example of themes the magazine has published for quite a while:

While [NYC] bonuses are up 23 percent since the boom year of 2000, jobs are actually down 10 percent. Six years ago, Wall Street employed 200,000 New Yorkers. Today, it employs fewer than 180,000, the same number that it employed in 1997.

True, since 9/11, employment in the securities industry has grown robustly—indeed, at triple the employment growth rate in other sectors of the city’s economy. But New York can’t rely on Wall Street to generate a broad base of good middle-class jobs. Each Wall Street position may “create” two additional city jobs and another one regionally, but the employment tends to be in not particularly well-paying restaurants and retail (all those traders and bankers going out to eat and buying stuff). And the high taxes that New York is accustomed to levying on its Wall Streeters deter new investment in other job-creating industries in the city and the state. [...]

The words of one once-and-future mayoral candidate shouldn’t give New Yorkers much confidence that the next mayor will understand how perilously dependent New York is on Wall Street. At a December conference on the city’s taxes, Brooklyn congressman Anthony Weiner, told that 1 percent of city taxpayers pay a full third of income taxes, cracked: “They can afford to pay more.”

* You always knew Google's global map products could be a problem, you just never heard any examples of it. I wonder if Google feels that they adhere to the "don't be evil" mantra when they continue to offer detailed satellite maps of a war zone with US lives at risk. Perhaps Google's "don't be evil" concept is meant in the same sense as it did while I was in university, as in, "don't support the evil American imperialists." I can hardly imagine a company recruiting heavily from top American universities would interpret evil any other way. All this commentary is, of course, inspired by the now very old news that terrorists have used Google maps to hit UK troops.

* I used to be a big fan of Malcolm Gladwell, but critical reviews of his recent work have caused me to reconsider. Check out this Richard Posner review of the book "Blink" from January 2005. Here's an excerpt:

There is irony in the book's blizzard of anecdotal details. One of Gladwell's themes is that clear thinking can be overwhelmed by irrelevant information, but he revels in the irrelevant. An anecdote about food tasters begins: "One bright summer day, I had lunch with two women who run a company in New Jersey called Sensory Spectrum." The weather, the season, and the state are all irrelevant. And likewise that hospital chairman Brendan Reilly "is a tall man with a runner's slender build."

* And, in a perfect example of the dangers of web surfing to the best attempts at time management, check out some fascinating reading on the 2002 Millennium War Games, put on by the Pentagon to demonstrate the superiority of electronic, information-driven war systems. These systems were put to shame by General Paul Van Riper, who outwitted the systems with a variety of low-tech solutions. Van Riper's success pointed to the devastating danger of low-tech determination against high-tech weapons, ending in controversy. Nova has an interesting interview with Van Riper.

As a taxpayer, you should be very concerned that the $300 billion dollars we spend on military equipment each year is probably close to wasted. For example: for all the hubbub about the joint strike fighter, 50% of US casualties in Iraq were the product of the RPG-7, a shoulder-fired grenade launcher developed by the Soviets in 1961. Effective responses to this now primitive weapon: zilch.

For the most compulsively readable interpretation of this exercise, check out the War Nerd. Here's an excerpt from the War Nerd's interpretation:

What van Ripen did to the US fleet...that's something very different. He was given nothing but small planes and ships-fishing boats, patrol boats, that kind of thing. He kept them circling around the edges of the Persian Gulf aimlessly, driving the Navy crazy trying to keep track of them. When the Admirals finally lost patience and ordered all planes and ships to leave, van Ripen had them all attack at once. And they sank two-thirds of the US fleet.

That should scare the hell out of everybody who cares about how well the US is prepared to fight its next war. It means that a bunch of Cessnas, fishing boats and assorted private craft, crewed by good soldiers and armed with anti-ship missiles, can destroy a US aircraft carrier. That means that the hundreds of trillions (yeah, trillions) of dollars we've invested in shipbuilding is wasted, worthless.

60 Minutes on Coal Safety in Harlan County, Kentucky

60 Minutes ran a piece on coal mine safety this Sunday. The piece looked at the spate of recent deaths in Harlan County, and focused on the efforts to improve mine safety by wives of men who were killed in recent accidents. I found the piece interesting, but lacking in substance.

I think the deaths we have seen in mines recently were driven by record coal prices over the past few years, a large amount of formerly dormant capacity being brought online in a short period of time to take advantage of pricing, and greed, by both mine workers and operators, to haul as much tonnage as possible. Everyone in a mine makes more money based on the amount they can take out of the ground, so while owners are generally most culpable, everyone potentially shares some of the blame.

Take a look at the graph below, and notice that the price of anthracite coal (the good stuff) is about as high as it ever has been (non-inflation adjusted) in the past few years.

Source: CRB, through 2004 (sorry, free historical data ain't always up to date)

Looking at current data (last three years) notice that among all the coal regions in the US today, that Central Appalacian Coal (where Harlan County is located) commanded an astronomical price, at least through the middle of 2006. Central Appalachia is also where the accidents have occured:

International Coal (ICO), which owned one of the mines (Sago) that had the worst single accident, was formed just a few years back from a bunch of bankrupt mine operators. The Sago accident exemplifies the challenges the industry is facing right now: upstart firms bringing dormant capacity online to take advantage of record pricing. Harlan County is about a five hour drive from Sago, and both have the priciest variety of coal.

The miner's wives are right to push for mine safety, and I hope they are successful in doing so. My only gripe with the episode of 60 Minutes is the application of Occam's Butterknife to trying to understand why mining deaths have increased lately. With a multi-million dollar production budget, understanding and explaining issues should not be out of the question.

The answer, in short, is that we're in the middle of a bull market in commodities.

Of course, don't expect 60 Minutes to actually interpret the world for you (that's what the DDO is for). With a bunch of touch-feely septuagenarians at the helm, 60 Minutes basically reveals that it is painful to lose a husband in the mines, that mine owners are greedy and camera shy, and that a lawyer fighting this very issue in court will not admit to sh*t.

One plaudit for 60 Minutes is this interesting video from the same segment on how miners actually get the coal out of the ground. Scary, and fascinating. - Ed

Is the world really about to end? or...

Putting market moves in perspective:

Typically, the gap between 2% down days is less than 100 to 300 days.

According to Birinyi & Associates, who tracks this sort of thing, for period ended this past week, the S&P 500 has not had a single day where the index was down more than 2% in about 950 days.

Said another way: we've been in an exceptional stretch of calm. Looking at data back through 1928, the next longest period without a 2% down day ended around 1970, and there have only been five other periods greater than 700 days in about 80 years.

(Check out TickerSense for more info. Data as of Jan 27, 2007.)

Perhaps this week merely reminds us that the market has down days sometimes, too. As a result, I interpret the fear I see all around as a good sign.

Jim Cramer talked about the need to rotate into defensive stocks. The formerly invincible brokers took a mighty beating. China, the country that was supposed to make us all rich, is now the country whose markets will send us to the poor house.

Electronic trading, once viewed as a sign of progress, is now considered a suspect in the decline. Dow Jones revealed that its computers miscalculated the DJIA for 70 minutes. The SEC is taking a look at the performance of the NYSE's Hybrid Trading system. This suspicion about electronic trading comes on the eve of the implementation of the most significant regulatory embrace of electronic trading in a decade, if not ever.

The old saw is that fear of a pullback is the sign of a bull market with room to run. When people view pullbacks as an buying opportunities, that's considered a sign of bear markets to come.

Based on the response to this decline, I still think this market will end the year higher than it is today. - Ed