Daily Dose of Optimism

Blog of the Week: Mark Klein, MD on HBS

Mark Klein, MD, has been posting comments on the NYT DealBook blog. Here's a sample:

DealBook: the famously outspoken hedge-fund manager, will soon have something new to brag about. The New York Observer reports [he...] is gearing up to move to a $45 million penthouse he is buying on New York’s Central Park West.

Mark Klein, MD, posts a comment:

Mark Klein, MD: Having such wealth today is little consolation for even the very rich. Their chances to enjoy a stable family life are as low as everyone else’s. [As someone who was] raised in an America when divorce was very rare, and common sense, delay of gatification, and self restraint still had social currency, [I find] today’s cultural milieu very creepy.

This piqued my interest: why is this guy trying to rain on the envy parade? After all, when DealBook (or any business publication) writes something like this, it is about hero-worship, not hard thoughts about social implications.

I had to investigate, and a Google search for Mark Klein, MD led me to (I assume) Dr. Klein's blog, Calling 'Em as I See 'Em. He looks a little like Dick Cheney, and he is running for president. Maybe he could run as Richard Harbert Wulker Cheyney, and get elected through the same mechanism that put President Bush the Second in office (ie: name recognition).

As far as relevant content for DDO readers goes, this post caught my attention:

HBS tuition and living expenses have more than doubled over the past decade while the buying power of graduates' starting salaries have more than halved when denominated in housing price dollars.

(Above chart--HBS median starting salaries for new grads.)

In practical terms a $100,000 salary before taxes in New York City, Boston, LA and the San Francisco would leave barely enough to rent a so-so 1 bedroom apartment.

This is why I'm skeptical high SAT and GRE scores measure anything about the capacity for critical thinking. I suspect they measure quite the reverse. High scorers are mostly those with finely honed skills to learn and identify with the received wisdom of the day.

Such folks end up staffing the grim dictatorship of the prevailing orthodoxy then get seriously bent out of shape by people like me.

Crazy, funny, and generally accurate? You decide. Can anyone confirm whether the MBA "starting salary" figure includes first year bonuses? I would guess that it does not, and thus skews the figure downward. - Ed

Some Friendly Advice for Jeff Skilling

To Jeff Skilling: When you appeal your guilty verdict in the Enron trial, try hiring Unfrozen Caveman Lawyer instead of Daniel Petrocelli. - Ed

 

Larry Ellison's Rising Sun, DDO Boat Porn, and Charlie Munger

I read an article this weekend about Larry Ellison's new yacht, the Rising Sun. Never mind what the article said - check out this boat:

The Rising Sun is the longest yacht in the world - 452 feet, versus Paul Allen's measley 414 foot Octopus yacht. Some key stats:

• Four diesel engines with an output of 50,000 hp
• Cruising speed of 28 knots
• 82 rooms on five stories with a total living area >8,000 square meters

Why a 452 foot yacht, you ask?

Here's Charlie Munger, from an excellent lecture on 24 cognitive biases:

Envy and jealousy made, what, two out of the ten commandments? Those of you who have raised siblings you know about envy, or tried to run a law firm or investment bank or even a faculty? I've heard Warren say a half a dozen times, "It's not greed that drives the world, but envy."

Here again, you go through the psychology survey courses, and you go to the index: envy / jealousy, 1,000-page book, it's blank. There's some blind spots in academia, but envy is an enormously powerful thing, and it operates to a considerable extent on a subconscious level. Anybody who doesn't understand [envy] is taking on defects he shouldn't have.

For some boat porn of Paul Allen's Octopus, see this slideshow. - Ed

Japanese Interest Rates and US Equity Market Volatility

For those of you wondering why US and global markets experienced such rapid declines over the past month or two, let me draw your attention to some information you may have missed. Basically, the Bank of Japan indicated back in March that it planned to end its zero-interest rate policy.

How do low bond yields overseas affect international markets? Via the mechanism of the "carry trade":

“Carry trading” is not something the average reader is likely to run across in his spare time. What it amounted to was borrowing yen at low interest rates, converting them to dollars and re-investing the money at a higher rate of return. Simple enough in theory, but you need large amounts of money to do it. And it involves a fair amount of risk; while yen lending rates may be low, a rise in the value of the yen could wipe you out. [...] As the real cost of money rises in Japan [via higher interest rates], the yen carry trade stops working. It needs to be “unwound.”

To get a sense of how this works, see current Japanese government bond yields, and compare with US and Brazil. Imagine earning that spread with huge leverage. Here's the explanation of how Japanese liquidity impacted US market volatility (from May 30th):

“The Bank of Japan is signaling an end to its zero-interest-rate policy. Speculators who have been borrowing Japanese Yen are simply racing to the exits,” said Dan Amoss, a commodities expert and contributing editor to The Daily Reckoning.

Amoss believes that traders are dumping assets in hopes to eliminate credit balances in Japan before rising Yen value and spiking interest rates spoil profitable investments. “Speculators are relieving the pressure on their short Yen positions through the liquidation of whatever assets they had been buying.”

A serious depression scare in 1999 caused the Bank of Japan to cut interest rates to zero. Savvy U.S. speculators and hedge funds took out enormous loans from Japanese banks and invested in a variety of international bonds and commodities.

Interesting. A recent headline from Bloomberg (June 15) indicate that the Bank of Japan is backing away from any moves in the near term due to its impact on the Japanese equity markets:

The Bank of Japan kept its key interest rate near zero percent two days after the Nikkei 225 Stock Average sank to the lowest in almost seven months.         

The decision by Governor Toshihiko Fukui and his eight board colleagues, who have signaled since March they're preparing to increase rates, was unanimous, the bank said in Tokyo today.

Markets make big moves on the marginal liquidty created by hot money. For more global impact of this news, see my earlier post on the Saudi Arabian Stock Market Crash. - Ed

Weekend DDO: Pinky The Cat

 

Donald Trump & Robert Kiyosaki: Leaders of the American Cargo Cult

Excerpt from the Principles of the American Cargo Cult:

You can succeed by emulating the purported behavior of successful people: To enjoy the success of another, just mimic the rituals he claims to follow.

Here's a preview from an upcoming DDO post:

It's funny how once a someone succeeds - a person, a country - they tend to forget the ingredients of their own success.

It's sort of like listening to Donald Trump tell us that he succeeded as a developer because of "hard work," and not that his Dad's reputation, money and contacts allowed him to do deals that he would never have otherwise been allowed within 100 miles of. It does no one a favor to repeat such lies - not The Donald, who's likely to enter into yet another cockamamie business scheme driven by his inflated "self-made" ego, nor those listening to him, who will be lulled into complacency about the power of contacts for success in the business world.

Nonetheless: I now bring you a seminal event in financial publishing depravity:

Donald Trump, author of the best-selling "Think Like a Billionaire," is teaming up with "Rich Dad, Poor Dad" author Robert Kiyosaki to self-publish a financial advice book expected to hit stores in October.

The title of the new effort, which has been evolving almost daily, is now expected to be: "Why We Want to Make You Rich," with the subtitle, "Two Men, One Message."

This is why you read the NY Post. Who else breaks this kind of news? Surprisingly, this passage from the article actually rings of some truth:

"You can only choose between rich and poor," Kiyosaki told Media Ink. "The middle class is gone."

I would say "in danger of going," not "gone," but perhaps that's a distinction without difference. I also liked this bit:

Trump, a real estate deal-maker and star of "The Apprentice" on NBC, has also had a run of No. 1 best-selling books for Random House, including "Think Like a Billionaire"

Think like a billionaire - a subject Trump knows a lot about. If you can't actually be a billionaire, the next best thing is deluding yourself, right? - Ed

For my prior ramblings on Trump, see here.
For my prior citation on Kiyosaki's Rich Dad, Poor Dad, see here. - Ed

Is this at all a fair analogy?

Only time will tell, but it could be. The idea of a giant computer system sucking all the "alpha" out of the market sure ain't a pretty idea for flesh-based fund managers, but it's a possibility.

Renaissance Technologies was started by Jim Simons in 1982. Its $5 billion Medallion Fund has averaged 35% annual returns, after fees, since 1989, and is considered in the industry to be the most successful hedge fund, yielding returns ten percentage points higher than legendary investors Bruce Kovner, George Soros, or Paul Tudor Jones.  Extremely secretive, the company operates out of a mini-campus on Long Island, New York. Administrative functions are handled out of offices in Manhattan.

For over two decades, Renaissance has been at the forefront of research in mathematics and economic analysis. Renaissance employs more than 60 top scientific specialists, including mathematicians, physicists, astrophysicists and statisticians, who review market data to find statistical relationships that predict the price movements of commodities, currencies and stocks.

Renaissance uses computer-based models to predict price changes in easily-traded financial instruments. These models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions. Renaissance represents a validation of the quantitative trading model and trades with such high-frequency that it accounts for 10% of all the trades occurring on NASDAQ some days.

For more information about Jim Simons, see here. - Ed

Tadawul (Saudi Arabia) Stock Market Crashes; Saudi King Abdullah Plans "Risk-Free Fund"

The Saudi Arabian stock market has been through a spectacular boom-bust cycle driven by a speculative frenzy over the boom in oil prices along with government sanctioned mass participation in the market:

In the past three years, up to nine million Saudis, or half the population, have started playing the market in the conservative desert state, whose strict brand of Islam outlaws standard forms of gambling.

They were encouraged by a government which hoped the bourse would enable citizens to share in the economic boom that has come with a rise in world oil prices not seen since the 1970s. It hoped that would help to iron out some of the country's huge disparities of wealth.

This rosy scenario of shared wealth ended badly after the Saudi Arabian Capital Markets Authority ("CMA") engaged in a ham-handed attempt to regulate speculative excesses:

The March 14 plunge was a severe reaction by speculators when the CMA decided to impose a daily price movement band of 10 percent.

The April 11 crash was a response to the CMA suspending two dealers on suspicions of market manipulation.

The lack of corporate transparency, small-time and first-time investors’ ignorance of the fundamentals of investments, and the long-term phenomenon of unmonitored margin lending by banks were some of the other factors that aggravated the plunge.

The resulting 50% crash produced a pretty ugly looking chart for the Tadawul Market Index:

Market strategists have also theorized that the Saudi crash put pressure on the US markets:

A lot of the selling in the U.S. stock market over the past two weeks was sparked by hedge funds invested in Saudi Arabia, said Jeffrey Saut, market strategist for Raymond James & Associates in St. Petersburg. He said the funds needed to raise cash, but their Saudi positions were illiquid, so they sold U.S. stocks instead.

Saudi investors are understandably upset:

Saudis hit by a recent stock market crash are resorting to car stickers to vent their anger at the wealthy speculators who have been blamed for the decline. The English-language stickers reading "Big Thieves!" show a stock market ticker and the names of some popular listed firms. [...]

The stock market crash, which affected more than 3.5  million middle income investors, has delayed the marriages of many people this summer, Asharq Al-Awsat newspaper reported. Every summer, tens of thousand of Saudis get married but this year, the number is expected to drop by more than 50 percent.

Saudi King Abdullah has a surefire plan:

BBC: Saudi King Plans "Risk-Free Fund" - Saudi Arabia's King Abdullah plans to set up a risk-free investment fund in a bid to attract small investors to the country's flagging stock market.

Saudi citizens will be able to invest up to 500,000 riyals ($133,000; £70,600), in the bourse - buying and selling on the market for two years. The individuals can keep any gains but the state will absorb losses.

King Abdullah did not give a starting date for the scheme - which could attract up to 3 million investors. However he said he was "determined" to implement it.

"The fund will be for people of limited income, employees and others...this group matter most to me," he said. "If they win then this is their luck, with God's will, and if they lose, then their capital is preserved with us," the monarch said.

Ah, it's nice to know oil dollars go to such productive uses. The BBC was kind enough to also note that the mass disruption of a market crash could increase the possibility of repercussions both within and beyond Saudi borders:

"Poverty and unemployment affect terrorism and instability and the king knows the result of this decision, which has important political significance"

I find this all very interesting, and it's suprising how little coverage this got in the US press - so much for those "efficient markets for information" that the internet is supposed to create.  - Ed

Weekend Viewing: Glengarry Glen Ross

In the first ever DDO video clip, I've posted a short excerpt from one of the great business movies of all time, Glengarry Glen Ross.

Best known for the "ABC: Always Be Closing" scene with Alec Baldwin (a scene that was copied and modified for Boiler Room) Glengarry Glen Ross looks at real estate salesmen in high pressure situations, and the questionable tactics employed out of greed and desperation.

One of my favorite scenes from the movie (among many) is this clip of Al Pacino as the smooth talking Ricky Roma, selling a piece of property to Jonathan Pryce, as the timid James Link.

If you haven't seen the movie the whole way through, rent it today, or just go ahead and buy it on Amazon. You won't be disappointed. - Ed

Please note: if you are offended by crude language, don't watch this clip.

The complete opening phrase is cut off in this clip. Here's the text:

"All train compartments smell vaguely of sh*t. It gets so you don't mind it. That's the worst thing I can confess. You know how long it took me to get there? A long time."

Video enabled by a cool new blog tool, Videoegg.

My favorite quotes, which basically occur in sequence:

Ricky Roma: "Great meals fade in reflection. Everything else gains. You know why? 'Cause it's only food. Just shit we put in us." [...]

"The great f*cks you may have had, what do remember about them? I don't know. For me, I'm saying what it is, it's probably not the orgasm. Some broad's forearm on your neck, something her eyes did, there was this sound she made. Or it's me and the, uh, I'm telling you; I'm in bed the next day; she brought me cafe au lait, gives me a cigarette. My balls feel like con-crete." [...]

"What I'm saying, what is our life? It's looking forward or it's looking back. That's it. That's our life. Where's the moment? And what is it that we're afraid of? Loss. What else?  The bank closes, we get sick, my wife died on a plane, the stock market collapsed. What of these happen? None of 'em; we worry anyway, why?"

Ticker Garden: Watch Your Portfolio Grow

In the first-ever DDO beta-test of financial technology, I was recently asked by Hao-Hsiu Chiu, a  doctoral student at the Harvard Graduate School of Design, to take a look at the Ticker Garden, a stock market visualization tool. From the Digitectonics website:

Ticker Garden is a new kind of stock ticker with simplicity, usefulness, style and fun! It is an innovative data visualization application that monitors your stock portfolio. Different flowers represent the real-time performance of selected stocks via the color, height, & radian of animated blossoming flowers. A flower grows from the bottom (ground) & stops at the height reflecting its share price. The higher the stock price, the higher the 'flower stem'. As soon as it reaches the top, it begins to blossom fan-wise to the degree that reflects the percentage of price change. The color (green or red) & direction (upward or downward) of a blossom indicates a particular stock's status of ascent or descent in price compared to its previous trading day. A flying bee will show up around a flower if there is recent news of that particular stock.

 

I took a look at the tool and offered some feedback. Things I like about it:

• Simple and customizable market visualization
• Lite-install (simple executable file)
• Mountain range is great for major indices

Download it here. Feel free to give it a shot, and let Hao-Hsiu know what you think. - Ed