The Journal recently covered the beginnings of a lawsuit being filed against basically everyone who has money (Bain Capital, Blackstone, the Carlyle Group, Goldman, JP Morgan, KKR, Mother Merrill....the list goes on), claiming the way PE groups and I Banks buy out firms and take them private is illegal.
Well, LBOs can be pretty shady, and probably relatively unethical, but I'm not so sure about it being actually illegal. Either way, the article does a good job of explaining how these buyouts work, including this awesome graph explaining the process. Essentially, there are a couple key issues: PE groups form 'illegal' bidding clubs in order to rig the bids and fix prices. I won't go into too much detail here, because everything is explained beautifully in that graph.
There is certainly a lot of cloak-and-daggers behind these big bids, though. Barbarians at the Gate is an awesome example. Back in the late '80s there was a huge LBO craze, and the deal behind taking RJR Nabisco private became infamous. Ross Johnson, the CEO of RJR Nabisco gets together with the rest of the C-suite to try to buy back all of RJR Nabisco, whose profits they had been severely deflating through accounting trickery (tricks that are essentially impossible to do post-SoX) and poor performance after black monday. KKR (a private equity group) smells a deal, and things turn into a bid war. As the prices climbed, KKR stared to get nervous, but John Greeniaus, the President and CEO of the Nabisco part of RJR-Nabisco, explained how he could boost profits with essentially no work (like I said, Nabisco's profits were being hidden with sneaky accounting) and KKR dives in.
The price soars from $42 a share to $109 a share, and KKR wins it, EVEN THOUGH they offered a lower bid in the end than Ross Johnson. Apparently, KKR's win was largely due to the fact that their bid was guaranteed, while management's wasn't. Also, Johnson apparently had a ridiculous golden parachute.
The Journal doesn't expect the lawsuit to go very far: "The lawsuit is full of accusations of bid rigging, collusion and other supposedly illegal conflicts. But aside from some circumstantial asides, there is precious little in the way of evidence backing it all up."
Had Romney not dropped out, we would have been hearing a lot more of these kinds of articles - simply as a Liberal interest group attack to hurt Romney's credibility - and a rich PE mogul (Romney founded Bain Capital - one of the firms being sued) is pretty easy to slander.
Just ask poor 'ol Stevie Schwartzman... all he wanted was a multi-million dollar birthday party! Is that so wrong? Oh, I guess it is. Well, at least Steve paid for his.
Wednesday, February 27, 2008
Tuesday, February 26, 2008
Sub Prime Mortgage Mess Made Easy
Here is a Powerpoint presentation that makes the whole sub-prime mortgage mess easy to understand. It discusses how so many unqualified people got mortgages and how the big financial institutions packaged them together and sold them as AAA quality securities. You'll get a good laugh out of the high quality graphics.
*When on the netfiles website, click "Sub_Prime_Expl.pps" to access the powerpoint*
*When on the netfiles website, click "Sub_Prime_Expl.pps" to access the powerpoint*
Accounting... a winning solution
This is essentially a comment on Fraser's post but it got long and I wanted to put a hyperlink on.
US vs IFRS accounting standards is exactly the topic that PWC's xACT case competition (the one that Wenhold and I did well in the last 2 years) has covered. Fraser summed up the differences between the 2 systems in a beautifully succinct way.
A key thing to remember is that US GAAP started as a principles based system and evolved into what is essentially a rules based systems with statements from oversight bodies, judicial decisions, etc. So essentially we are hitting the reset button (like you do when you're getting your butt kicked in a video game).
There are many big challenges that we will face when this transition starts. PROBABLY, companies will provide reconciliations (comparisons) so that investors can compare the old and the new. This will be hard and time consuming. Most companies will only go back 3 years, making it virtually impossible for investors to have sufficient information to go off of.
For a better solution, the one we proposed in the case competition to be specific, I just put up the executive summary as well as our PowerPoint slides here. For your reference should you want to look at this, it is based upon a fictional country called Slobia which has virtually identical demographics to that of the US but is significantly smaller. Personally, I think it's a very good 2 page word doc summary of the problems facing US GAAP and a creative approach to transition to IFRS.
US vs IFRS accounting standards is exactly the topic that PWC's xACT case competition (the one that Wenhold and I did well in the last 2 years) has covered. Fraser summed up the differences between the 2 systems in a beautifully succinct way.
A key thing to remember is that US GAAP started as a principles based system and evolved into what is essentially a rules based systems with statements from oversight bodies, judicial decisions, etc. So essentially we are hitting the reset button (like you do when you're getting your butt kicked in a video game).
There are many big challenges that we will face when this transition starts. PROBABLY, companies will provide reconciliations (comparisons) so that investors can compare the old and the new. This will be hard and time consuming. Most companies will only go back 3 years, making it virtually impossible for investors to have sufficient information to go off of.
For a better solution, the one we proposed in the case competition to be specific, I just put up the executive summary as well as our PowerPoint slides here. For your reference should you want to look at this, it is based upon a fictional country called Slobia which has virtually identical demographics to that of the US but is significantly smaller. Personally, I think it's a very good 2 page word doc summary of the problems facing US GAAP and a creative approach to transition to IFRS.
Market Summary: Tues. Feb. 26, 2008
If you just look at the numbers, it appeared to be a very good day, but I’m skeptical about this rally. The PPI number was reported this morning, and it came in at 1.0%, more than double what economists had predicted. The PPI is now up 7.4% over the last 12 months. The Core PPI was up 0.4% in January and the year-over-year increase is at 2.3%. Also, the Consumer Confidence number dropped to 75.0, which was well below expectations. Just last month, the Consumer Confidence number was 87.3 (Source: Bloomberg.com). Commodities also rallied today. Oil, gold, silver, copper, and wheat were all up significantly. Surprisingly, the market didn’t react too negatively to all this news, especially because it lowers the possibility the Fed will cut rates at their next meeting. I’m not sure what investors were looking at today, except for the fact that expectations might have been so low (the CPI number last week was also higher than expected) the only place to go is up from here.
The big news that turned the market around came at 9:45 am when announced a $15B stock repurchase plan and boosted their earnings forecast to $8.25 from $8.20. IBM has spent $94B buying back stock since 1995 (Source: Bloomberg.com). This was very good news for the market because it is a sign that not every company is getting squeezed by the slowing economy. IBM, along with HPQ and MSFT, is one of the few big-cap tech companies that posted impressive earnings, and this repurchase program is a sign that the company is healthy and generating enough cash to support operations and the buy-back. Even though this is very positive news, I’m not so sure it warranted a complete market reversal and subsequent rally.
MBIA was back in the news today. Moody’s reaffirmed MBIA’s AAA credit rating (just like S&P did yesterday). Also, MBIA announced they will “stop writing guarantees on asset-backed securities for six months and will separate that business from its municipal unit within five years” (Source: Bloomberg.com). MBIA will also eliminate their quarterly dividend, saving itself $174M per year (Source: CNBC.com).
Google made headlines today after an analyst announced paid clicks declined by 12% from the previous quarter. Paid clicks are the number of times users clicked on an ad-supported link. An analyst from BMO Capital Markets cut Google’s price target to $590 from $690 (Sources: CNNMoney.com, Bloomberg.com). Nielsen Online announced that Google’s January search ranking was 4.22 billion queries, which is 56.9% of the market for online searches. Yahoo! was second with 1.41 billion searches, which is 19% of the market (Source:
The Fed also auctioned $30B using their Term Auction Facility. This was the sixth auction and a total of $160B has been added to the banking system. Funds were auctioned at 3.080% (Source: CNNMoney.com).
In earnings news, Office Depot was down after its Q4 profit declined 85%, more than analysts expected. Macy’s, Nordstrom, Target, Auto Zone, and RadioShack were up after beating earnings estimates. Home Depot missed estimates, but the stock was not down too much (Source: finance.yahoo.com).
The dollar was down big, back to its all-time lows. This decline in the dollar also helped oil prices reach $101.
Tomorrow, the only major earnings reports are from McDermott and Toll Brothers. On the economic front, durable orders and new home sales data will be reported.
DJIA 12,684.92 +114.70 (+0.91%)
Nasdaq 2,344.99 +17.51 (+0.75%)
S&P 500 1,381.29 +9.49 (+0.69%)
NYSE Volume 4,039,788,000
2-Yr Bond 2.00% -0.12
10-Yr Bond 3.86% -0.04
30-Yr Bond 4.66% unch
Crude Oil (Apr) 100.88 +1.65
Gold (Apr) 948.90 +8.40
A post about Accounting?
What? Accounting? But this is a sexy finance/economics blog! We don't want to hear about dusty old accounting jibber jabber!
Or do we?
Considering one of accounting's primary purposes is to make everything understandable and consistent for financiers to make educated decisions, big changes in accounting are pretty important for everyone. And it just so happens that there are some pretty drastic changes occuring in the US.
Back in November, the SEC announced that foreign companies posting in US exchanges don't have to reconcile to US GAAP (for you finance majors, and Miles, here's a wiki def). Then, a few weeks ago, Chris Cox announced that the US will be dropping US GAAP, and completely switching to IFRS GAAP.
What's the difference? Why the change? Your accounting classes will tell you IFRS is "principles based" accounting, while US GAAP is "rules based." Your accounting classes will probably also tell you that the rules in the US are long, complicated, and very inefficient in their attempt to create consistency in reporting standards. All of the trouble people go to figuring out how to account for complicated leases and such costs a lot - and can be very difficult and timely to properly figure out, as well as adjust for when the SEC tells you you've done it all wrong.
This change means different reporting standards - and thus different market multiples and valuations for NPV, PV of cash flows, etc. Don't worry about the big financial institutions - I'm pretty sure Citadel will figure themselves out. The concern is amongst all you noise traders not understanding the new statements. You will need to learn how things have changed, and take them into account in your investment research in the coming years.
So read up. More to come...
Or do we?
Considering one of accounting's primary purposes is to make everything understandable and consistent for financiers to make educated decisions, big changes in accounting are pretty important for everyone. And it just so happens that there are some pretty drastic changes occuring in the US.
Back in November, the SEC announced that foreign companies posting in US exchanges don't have to reconcile to US GAAP (for you finance majors, and Miles, here's a wiki def). Then, a few weeks ago, Chris Cox announced that the US will be dropping US GAAP, and completely switching to IFRS GAAP.
What's the difference? Why the change? Your accounting classes will tell you IFRS is "principles based" accounting, while US GAAP is "rules based." Your accounting classes will probably also tell you that the rules in the US are long, complicated, and very inefficient in their attempt to create consistency in reporting standards. All of the trouble people go to figuring out how to account for complicated leases and such costs a lot - and can be very difficult and timely to properly figure out, as well as adjust for when the SEC tells you you've done it all wrong.
This change means different reporting standards - and thus different market multiples and valuations for NPV, PV of cash flows, etc. Don't worry about the big financial institutions - I'm pretty sure Citadel will figure themselves out. The concern is amongst all you noise traders not understanding the new statements. You will need to learn how things have changed, and take them into account in your investment research in the coming years.
So read up. More to come...
Market Summary: Mon. Feb. 25, 2008
We had another good day on Wall Street thanks to a better than expected home sales number and positive news regarding Ambac and MBIA. At 9am, the markets got a boost because the existing home sales number came in at 4.89M when the market was looking for 4.80M (numbers declined less than expected). “Sales of existing homes fell to the lowest level in nearly a decade in January while the median price for a home dropped for the fifth straight month” (Source: CNBC.com). Even though this wasn’t the best news, everyone on CNBC TV was talking about a potential bottom in the housing market because there are signs of price stabilization. I’m not buying this “hope” that this is the beginning of a bottom. There’s still a lot of room to go lower and I don’t expect things to begin looking better until at least the end of this year. Here’s an in-depth Bloomberg.com article describing the housing market.
The markets traded modestly higher for most of the afternoon until news broke at 1:30 pm regarding the financial health of Ambac and MBIA. S&P affirmed MBIA’s AAA credit rating and removed it from its negative watch list. S&P also affirmed Ambac’s AAA credit rating, but the company remained on the negative watch list because of uncertainty involved with their recapitalization plan (Source: CNBC TV, Bloomberg.com). Stock prices jumped immediately when this news broke, most likely people were covering their short positions (bets that stock prices will decline), and the major indices finished the day up over 1%. The financial stocks also rallied on this news. Remember, these two bond insurers protect over $1T worth of securities and now that they have maintained their AAA rating, banks will not have to write-down assets on their balance sheet in order to reflect the true value of their securities.
In other news, Visa announced they will sell $406M shares between $37 and $42 (totaling more than $17B = the biggest initial public offering). The world is moving from paper to plastic (cash to credit cards) and this extra cash will allow Visa to better meet its customers’ needs (Source: Bloomberg.com). Shares of MasterCard, Visa’s biggest competitor, were down big on the day.
In earnings news, Lowe’s reported a 33% decline in Q4 earnings and gave guidance of $1.50-1.58, well below analysts’ estimates of $1.73. Surprisingly, the stock was beaten up that badly. This report is just another sign that the housing market is bad, but most of the bad news was already priced in the stock (Source CNBC TV).
In the financial sector, Goldman Sachs downgraded Freddie Mac and Fannie Mae because of “potential credit losses…stemming from a 'severe' housing market.” Goldman also downgraded Washington Mutual. According to Bloomberg.com, “Citibank may post a loss of $1.6 billion, or 28 cents a share, for the first quarter, compared with a profit of about $5 billion, or $1.01, a year earlier…shares may fall below $16 as Citigroup is forced to sell $100 billion of assets.” Here are two great articles discussing the Goldman downgrades: Marketwatch.com and CNBC.com.
Take-Two (software game designer of Grand Theft Auto) was up 55% on the day after Electronic Arts announced a $2B take-over bid. “Take-Two rejected a cash offer of $26 a share on Feb. 22, prompting Electronic Arts to take its bid directly to investors. The offer is 64 percent higher than the Feb. 15 closing price, the last day of trading before the announcement was made” (Source Bloomberg.com).
Today’s rally was broad-based, meaning almost every sector was positive. Energy stocks were strong as oil was up, and biotech stocks were also strong thanks to the good news from Genentech the other day. Bond yields continue to move higher (prices going down) and are way off their lows from the beginning of this month. Bonds led the market lower the second half of ’07 and if this upward trend continues, I expect stocks to follow.
Tomorrow’s tone will be set before the market opens when the PPI and Consumer Confidence numbers are released. Foster Wheeler, Home Depot, Macy’s, and Target report earnings tomorrow.
DJIA 12,570.22 +189.20 (+1.53%)
Nasdaq 2,327.48 +24.13 (+1.05%)
S&P 500 1,371.80 +18.69 (+1.38%)
NYSE Volume 3,772,926,000
2-Yr Bond 2.12% +0.10
10-Yr Bond 3.90% +0.10
30-Yr Bond 4.66% +0.09
Crude Oil 99.41 +0.50
Gold 940.25 -4.35
Sunday, February 24, 2008
Bull Stocks- Ring Ring
Continuing my random tour de industries in my bull stocks series, I'm stopping at the cell phone providers. Perhaps the most important characteristic a stock can have in a scary environment like this is a nice big fat SAFE dividend (for a definition of such a dividend, see Altria- MO). There are two gems with just such a dividend in the cell phone space- Verizon (VZ) and AT&T (T). Verizon sports a sexy 4.9% yield. These dividends protect a stock from their price getting hammered because as the price goes down the yield goes up, encouraging people to buy the stock just for the yield, pushing the price right back up. VZ has become somewhat stagnant but looks to revive that with their FiOs internet system (fiber optic super fast internet) that is stimulating growth. VZ is the cheapest of the wireless providers on the last 12 months earnings and the second cheapest on forward earnings.
AT&T has an almost as attractive 4.6% yield. AT&T, in my opinion is a little more bogged down, just from being a bigger company with more avenues of work, but that also makes it safer than Verizon. Trading at less than 10x forward (2009) earnings, T is downright cheap. It is also better than VZ at translating revenues into earnings, sporting higher margins that are improving. However, there is a lot of growth priced into those forward earnings, exposing the stock to downward revisions by analysts, but with a great dividend, it's hard for the stock to get hit too much.
If you like some international flavor in your life I give you American Movil. If you have a cell phone in or south of Mexico, these guys are probably your provider. The growth is awesome, the company has been growing sales at 25-30% and translating that into 28-30% growth in operating income. Analysts have the stock priced from 28-29% growth each of the next 2 years (2008, 2009), and I think that's conservative. The dividend and, hence, the protection, aren't there however. If you think I'm crazy, I refer you to Carlos Slim, the richest man in the world, owns well over 20% of this company.
Why do I think the time is right for these 3 providers? There was a lot of talk over the last month and even last week about how all these guys are in trouble because competition is getting a lot more severe. Competition amongst cell phone providers severe?!? No kidding, it's been that way for 5 years. These guys are integrating their operations and signing their customers up for more of their products at once (i.e. Cell + internet service), additionally more people are getting data and internet over their phones, offering more revenue and higher margins. It's not like new cell providers are entering the market, if anything consolidation will happen in the US market going forward, the sector is beat down unfairly.
If you're looking for a zero-equity/long-short play, I suggest creating a portfolio of 1 or more of the names above on the long side, and short Sprint. Sprint is the clear laggard in the sector in just about every aspect. Because of Sprint's stock price being so low(<$10), there will be some days where this will move against you because of the high % moves S makes, however over a shorter period (1-2 months) this should pay off very nicely, unless Sprint gets bought out, which is the only reason I don't endorse this as a long term strategy. I currently am long T and AMX and short S on my investopedia portfolio.
AT&T has an almost as attractive 4.6% yield. AT&T, in my opinion is a little more bogged down, just from being a bigger company with more avenues of work, but that also makes it safer than Verizon. Trading at less than 10x forward (2009) earnings, T is downright cheap. It is also better than VZ at translating revenues into earnings, sporting higher margins that are improving. However, there is a lot of growth priced into those forward earnings, exposing the stock to downward revisions by analysts, but with a great dividend, it's hard for the stock to get hit too much.
If you like some international flavor in your life I give you American Movil. If you have a cell phone in or south of Mexico, these guys are probably your provider. The growth is awesome, the company has been growing sales at 25-30% and translating that into 28-30% growth in operating income. Analysts have the stock priced from 28-29% growth each of the next 2 years (2008, 2009), and I think that's conservative. The dividend and, hence, the protection, aren't there however. If you think I'm crazy, I refer you to Carlos Slim, the richest man in the world, owns well over 20% of this company.
Why do I think the time is right for these 3 providers? There was a lot of talk over the last month and even last week about how all these guys are in trouble because competition is getting a lot more severe. Competition amongst cell phone providers severe?!? No kidding, it's been that way for 5 years. These guys are integrating their operations and signing their customers up for more of their products at once (i.e. Cell + internet service), additionally more people are getting data and internet over their phones, offering more revenue and higher margins. It's not like new cell providers are entering the market, if anything consolidation will happen in the US market going forward, the sector is beat down unfairly.
If you're looking for a zero-equity/long-short play, I suggest creating a portfolio of 1 or more of the names above on the long side, and short Sprint. Sprint is the clear laggard in the sector in just about every aspect. Because of Sprint's stock price being so low(<$10), there will be some days where this will move against you because of the high % moves S makes, however over a shorter period (1-2 months) this should pay off very nicely, unless Sprint gets bought out, which is the only reason I don't endorse this as a long term strategy. I currently am long T and AMX and short S on my investopedia portfolio.
What to Watch for This Week
Economic Data:
Monday
January Existing Home Sales
Tuesday
January PPI and Core PPI
February Consumer Confidence
Wednesday
Durable Goods Orders
New Home Sales
Crude Inventories
Ben Bernanke Speech to Congress
Thursday
Q4 GDP (Prelimary; Advanced number was 0.6%)
Initial Jobless Claims
Ben Bernanke Speech to Congress, pt.2
Friday
Core PCE Inflation Data
Personal Income and Spending
Regional Manufacturing Data
Monday
January Existing Home Sales
Tuesday
January PPI and Core PPI
February Consumer Confidence
Wednesday
Durable Goods Orders
New Home Sales
Crude Inventories
Ben Bernanke Speech to Congress
Thursday
Q4 GDP (Prelimary; Advanced number was 0.6%)
Initial Jobless Claims
Ben Bernanke Speech to Congress, pt.2
Friday
Core PCE Inflation Data
Personal Income and Spending
Regional Manufacturing Data
Market Summary: Fri. Feb. 22, 2008
Friday was supposed to be a very quiet day for economic and earnings news, but that was not the case. There was a very negative feel in the markets on Thursday afternoon and I expected that to continue into Friday morning, which it did. Stocks opened slightly higher after news that November’s and December’s Producer Price Index (PPI) were revised lower (Nov: +2.6% from +3.2%; Dec: -0.3% from -0.1%). Bonds also rallied on this news. Even with this good economic news, stocks continued their decline. The Dow remained down about 100 points all afternoon. The Nasdaq was the relative laggard because Intuit gave guidance that was below analysts’ expectations. INTU was down over 9% on the day. Other big tech names were also dragging the Nasdaq down, including Apple, Microsoft, IBM, and EMC.
Many of the big financial names were also weak. Freddie Mac and Fannie Mae were downgraded to “sell” by Merrill Lynch because of “weakening macro-economic financial market and credit trends.”
Goldman Sachs, Lehman Brothers, and Bear Sterns had Q1 estimates cut 40% by Sanford C. Bernstein. The analyst said “Market conditions remained challenging through February as troubles spread through a variety of areas within the fixed income market.”
The analyst cut profit estimates at Goldman Sachs by 45% to $3.03, at Morgan Stanley by 12% to $1.49, at Bear Stearns by 41% to $1.59, and at Lehman by 42% to $1.15 (Source: Bloomberg.com).
An analyst at Oppenheimer said Citigroup “will need to raise more capital and may cut its dividend again” (Source: Briefing.com).
MBIA was also in the news today. There was talk on CNBC that a downgrade may be coming for MBIA sometime next week. If they get downgraded, there will be no way they could compete with Buffet (and other AAA bond insurers) in the municipal bond business. Moody’s also downgraded Channel Reinsurance Ltd., a re-insurer that supports MBIA. The downgrade took place because “Channel Re’s capital position has been weakened by its exposure to the
Getting away from financials, the treasury market sold-off around noon after a speech by Federal Reserve Bank of Dallas President Richard Fisher. He said the
Going into the close, the markets looked very bad for Monday’s open. However, everything changed at about 2:30 when Charlie Gasparino, CNBC’s financial on-air editor, reported that plans for an Ambac bail out were underway and as early as Monday or Tuesday something would be announced. This news sparked at 230 point reversal in the Dow. Gasparino said bankers have made “significant progress” in their recapitalization plan to preserve Ambac’s AAA rating. The banks involved are Citi, Wachovia, UBS, Royal Bank of Scotland, Barclays, BNP Paribas, Dresdner Bank, and Societe Generale. According to Bloomberg.com, Ambac may receive $3B in new capital. The preservation of Ambac’s AAA rating (as well as MBIA’s and FGIC’s AAA rating) would save banks $70B in additional write-downs. The bond insurers back over $2.4T in securities. There is also talk of splitting the municipal bond business from the CDO business.
Because of this news, the financial stocks rallied in the last 30 minutes and the major indices all closed in positive territory. There is now a very optimistic outlook for the beginning of next week assuming some sort of bail out plan for Ambac is conceived. Look for a higher open Monday morning, especially in the financials.
I expect next week to be very volatile with high volume as lots of inflation data is reported.
Here’s a Bloomberg.com market summary for Friday.
Here’s a Briefing.com weekly market wrap up. It’s a pretty good summary of what happened this week.
Some other news…..
Nissan’s CEO said the
“Traders place 100 percent odds that the Fed will cut the benchmark rate by at least half a point by the end of the next meeting on March 18, futures prices show” (Source: Bloomberg.com).
Standard & Poor’s cut GMAC’s credit rating to B+ and Residential Capital’s rating to B. According to CNBC.com, “Both companies face difficult funding environments.”
According to Bloomberg.com, Genentech (DNA) won FDA approval on its drug Avastin for breast cancer treatment. The stock is up 8% in after hours trading.
DJIA 12,381.02 +96.72 (+0.79%)
Nasdaq 2,303.35 +3.57 (+0.16%)
S&P 500 1,353.11 +10.58 (+0.79%)
NYSE Volume 3,560,735,000
2-Yr Bond 2.02% +0.05
10-Yr Bond 3.80% +0.03
30-Yr Bond 4.57% +0.04
Crude Oil 98.91 +0.52
Gold 944.60 -1.11
Saturday, February 23, 2008
Deutsche Bank Scams Poor Idiots
To break my silence, I thought I'd put up a marginally interesting read about Deutsche Bank (the future employer of Mr. David "Biff" Light and Mr. Daniel Morrison Wenhold). The jist of it is this, Deutsche Bank has been fairly successful in avoiding the whole sub-prime mess, but they're getting hit by lawsuits for selling overly complicated derivatives to corporations and local-government authorities. More or less, they suckered people into undertaking dangerous interest rate swaps (you learn about these in FIN 300 ... maybe?) that made Deutsche shit tons of money at the other peoples expense. Anyways, it's good to know Biff and Danny will be providing their services to such a morally upstanding institution. An interesting read if you've got a minute, but a lot of it is probably over most people's - including mine - heads.
Deutsche Bank - Snakes and Ladders
Deutsche Bank - Snakes and Ladders
Friday, February 22, 2008
The Value of Information
I mentioned in my last post "The Long Tail," coined by editor-in-chief of WIRED magazine Chris Anderson. The article mentions:
What is even more interesting than these increased economies of scale is what companies are doing with the sales data they are accumulating. Amazon.com tracks your purchase and even browse history - and offers suggestions for what you might like to by (even packaging items together for you at discounts), Netflix and Tivo both offer suggested viewings based on what you have watched in the past, and countless music services like Rhapsody, Napster, and Last.fm offer similar services in music.
One needs to look no further than Facebook to understand the true projected value of this kind of smart advertising. Microsoft's (albeit controversial) $15 billion valuation stemmed from their expectations that Facebook will be able to leverage all of the information they have about people form their profiles.
A recent article in Fortune magazine, entitled "Walk Softly And Carry A Big Checkbook," had this to say:
The same article goes on to talk about where this is taking things - marketers understand that as digital television becomes the standard in 2009, and more people watch shows on their DVR, fewer people will be watching commercials. How will ad agencies respond? GroupM entertainment, a subsidiary of ad holding giant WPP Group (WPP), has decided the best means of doing this is to be part of the content creation of the shows themselves, a strategy they are experimenting with in the show October Road
What effect will this have on the actual content of our favorite shows? We'll have to see....
How much are these brick-and-mortar stores missing out on? Take book sales: "The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon's book sales come from outside its top 130,000 titles. " Or DVD sales: The average Blockbuster carries fewer than 3,000 DVDs. Yet a fifth of Netflix rentals are outside its top 3,000 titles."For too long we've been suffering the tyranny of lowest-common-denominator fare, subjected to brain-dead summer blockbusters and manufactured pop. Why? Economics. Many of our assumptions about popular taste are actually artifacts of poor supply-and-demand matching - a market response to inefficient distribution...
The first is the need to find local audiences. An average movie theater will not show a film unless it can attract at least 1,500 people over a two-week run; that's essentially the rent for a screen. An average record store needs to sell at least two copies of a CD per year to make it worth carrying; that's the rent for a half inch of shelf space. And so on for DVD rental shops, videogame stores, booksellers, and newsstands.
Wal-Mart must sell at least 100,000 copies of a CD to cover its retail overhead and make a sufficient profit; less than 1 percent of CDs do that kind of volume."
What is even more interesting than these increased economies of scale is what companies are doing with the sales data they are accumulating. Amazon.com tracks your purchase and even browse history - and offers suggestions for what you might like to by (even packaging items together for you at discounts), Netflix and Tivo both offer suggested viewings based on what you have watched in the past, and countless music services like Rhapsody, Napster, and Last.fm offer similar services in music.
One needs to look no further than Facebook to understand the true projected value of this kind of smart advertising. Microsoft's (albeit controversial) $15 billion valuation stemmed from their expectations that Facebook will be able to leverage all of the information they have about people form their profiles.
A recent article in Fortune magazine, entitled "Walk Softly And Carry A Big Checkbook," had this to say:
"Online marketers track actual behavior, so instead of buying a type of audience, they can buy a click, an inquiry, or even a sale. Every time consumers take such an action, it becomes part of their "clickstream," which follows them around the web. This information trail gives marketers an increasingly sophisticated idea about each of us, allowing htem to craft an ever more tailored online experience."The management and manipulation of information to build marketing information and create ad revenue is what has driven Google's real success as well.
The same article goes on to talk about where this is taking things - marketers understand that as digital television becomes the standard in 2009, and more people watch shows on their DVR, fewer people will be watching commercials. How will ad agencies respond? GroupM entertainment, a subsidiary of ad holding giant WPP Group (WPP), has decided the best means of doing this is to be part of the content creation of the shows themselves, a strategy they are experimenting with in the show October Road
What effect will this have on the actual content of our favorite shows? We'll have to see....
Thursday, February 21, 2008
Market Summary: Thurs. Feb. 21, 2008
We opened higher this morning, but selling pressures continued throughout the day to drive the major indexes down a little over 1%. This morning, there was a handful of neutral to good news that caused us to open higher. The Initial Jobless Claims number came in at 349K, just slightly higher than the expected 345K, Cisco was upgraded by Citigroup, Transocean was upgraded by Goldman Sachs, Terex, a construction and mining equipment maker, handily beat estimates and was up over 7%, and Research in Motion (RIMM) reaffirmed their Q4 guidance and said they expect “net subscriber account additions for the fourth quarter to be approximately 15% to 20% higher than the 1.82 million net subscriber account additions forecast by the company on Dec. 20, 2007” (Source Bloomberg.com).
At 9am, the market turned south on two pieces of data: the January Philadelphia Fed survey on regional manufacturing conditions and the crude inventories report/comments from Boone Pickens. The Phily Fed index came in at -24 when the market was looking for -10. Crude inventories rose to 4.2B barrels – higher than traders were expecting (Source: Bloomberg.com). Also, Boone Pickens, a legendary oil mogul, came on CNBC and said he was shorting oil and natural gas. Oil declined $2.36 on the day and energy stocks were down big.
Other news that weighed on the market included Starbucks announcing they will cut 600 jobs. JCPenney announced Q4 earnings that were in-line with analysts’ estimates, but their Q1 guidance was low. JCP opened up 5% and finished the day flat. Target was downgraded to sell by Citigroup (Source: Bloomberg.com)
Gold futures hit another all-time high on “inflation worries and a slowing economy.” Spot gold finished the day at $945.71 (Source: Bloomberg.com). The U.S. Dollar Index was also down big.
The new MBIA CEO came out and supported the idea of separating their municipal bond business from their CDO (collaterized debt obligations, also known as asset-backed securities) business (Source: Bloomberg.com). Whatever happens to MBIA and Ambac will drive the stock market. Whether they lose their AAA ratings, get capital infusions or government help, or split into multiple businesses, all eyes are on them.
Today’s sell-off was prompted by some poor economic data, but it seemed warranted given yesterday’s late afternoon rally on essentially no news. Bonds rallied big today, almost back to Tuesday’s level before they sold off on inflation concerns. There are no big earnings reports or economic data releases tomorrow, so expect the market to be lower at the open. Sentiment is very negative once again and the only thing really working now is stocks that benefit from rising inflation. All eyes will soon be on the Fed as their March meeting quickly approaches. If market conditions continue to deteriorate, don’t be surprised if the Fed steps in and does an inter-meeting cut like last time.
DJIA 12,284.30 -142.96 (-1.15%)
Nasdaq 2,299.78 -27.32 (-1.17%)
S&P 500 1,342.53 -17.50 (-1.29%)
NYSE Volume 3,592,700.75
2-Yr Bond 1.97% -0.160
10-Yr Bond 3.77% -0.125
30-Yr Bond 4.54% -0.067
Dollar Index 75.60 -0.515
Crude Oil 98.39 -2.36
Gold 945.71 +1.97
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