Thursday, November 30, 2006

Pity the Poor Corporation

Are corporates really that poor off? They are complaining that regulation hurts them. Is that true or is it poor management. It certainly was not an unbiased group.
Most observers recognized the fact that the panel was self serving even if Glen Hubbard did not. The argument that the US share of IPO's is falling due to regulation ignores many other factors.

Economic Wars

Economists agree about more things than it seems when you read the NYT and WSJ.

Graduate Engineer Race

One often hears that India and China graduate x times the numbers of engineers than the US. While it is correct that American higher education can be improved it is important to realize that numbers are not everything.

Monday, November 27, 2006

Meds for Kids

Sometimes the letters are better than the articles. A good look at both sides of psychiatric medicines for kids.

Rich Man poor Man

I often told my staff, don't do anything that you would not want to see on the front page of the New York Times. Well some didn't get it. They want to be on the cover. Two others from my prior organizations showed the same lack of foresight. Robert Glassman made me ashamed to be Class of '83 Harvard. If that was not bad enough the second braggart was from Morgan Stanley. If you are going to talk about being rich on the cover of the Times you had better have a couple of jets and a 100 foot yacht. If not just shut up and read page 18 about the poor trying to survive at Burger King.

Death and taxes

Only one is not avoidable if you have a good accountant. One of the best ways to clean up corporate accounting and collect more taxes would be to unify reporting for shareholders and the IRS. Because corporations despise transparency this will not happen.

Private Equity

Which gets worse media publicity these days, private equity or hedge funds? Is this just a case of media envy or are both ills of society. There will be lots of articles debating both sides. Practitioners will of course defend their livelihood.

Hedge Funds

Mass media is increasing its focus on hedge funds. Hedge Funds for Dummies hits the bookstore. Is there any evidence that Dummies books predict market tops? However it is often said that hedge funds are not an asset class but a compensation scheme. Therefore there is no way to burst a bubble. There will always be a market for intermediaries who can manage money. One clue to how hedge funds gain an edge is by doing lots of research with boutique shops. Analysts can use what is called the mosaic method to put together lots of pieces of evidence to create proprietary information. Does this fall into the realm of insider trading? Mostly not, but as in any endeavor, people will find a way to cloak illegal activity in normal routines if there is a way to profit.
Oh, and by the way, according to Kat you can cheaply replicate hedge fund performance without the fees.

Sunday, November 26, 2006

Casino Royal

The construction site scene might go down as one of the best chases in movie history. Yes it is that good. Fights, jumps, fires and death are combined. The criminal La Chiffre reminds me of any one of the hedge fund managers that I know; mathematical smart and good at short selling and poker.

Artists Deals

Many artists are getting below market rates on land to develop in China if they promise to build a museum. Will this result in many under-used museums?

Adam's Fallacy

A couple of years ago there was an Atlantic article "The Market as God" which parodied the similarity between theological treatises and the comments about the movement of the bond market. And David Stockman once said that he wanted to come back as the bond market. Duncan Foley's book warns that economics is neither good nor bad. It just is. If there are value-laden decisions to be made, we must find other sources to make choices. Economics will not tell you.


The book review is better that the biography of highly regarded Colin Powell. He gave up his reputation because he forgot that he was no longer a soldier.

Education Gap

I saw a recent post that said for all of the complaints about the Bell Curve, none of the arguments were ever proved incorrect. The argument of the KIPP program is that minorities start from behind because of culture so that they must be given an even better education that cultures which stress achievement at home. There still are too many theories of education and no scale to the successes. As long as education is the responsibilities of localities with all of their strengths and weaknesses, American education will not be able to excel. Failure of education is that outcome that we have chosen because of the structure that we accept.

Tommorrow Square

James Fallows has moved to Shanghai as he did to Japan twenty years ago. His most interesting point is the impact that the tribe of returnee Chinese will have on the economy of China. I think that he might overrate them because they are the people he is most likely to meet and to speak with. They are fluent in English and not shy about dealing with Americans. He also overrates the dislike of the Japanese. Japan and China are major economic partners and Japanese companies are major employers.
The leadership has shown its skill in developing the economy while keeping dissent in check. To ask what is the Chinese dream is like asking what is the american dream. And the answers might not be that much different.

Monday, November 20, 2006

The Intelligent Investor

Ben Graham's Intelligent Investor should be read every few years. Rising valuations tempt even the most conservative investors to stray from sound practices.
He takes investment much more seriously than the television gurus. All things excellent are as difficult as they are rare. The aggressive investor must view security investment as a business enterprise. Investors need time, determination and mental training and capacity. There are only three guaranteed methods: unpopular large company, undervalued stocks, and special situations concerning mergers or workouts.

Behavioral finance seeks to explain investment errors. If something happens two or three times in a row the mind reflexively expects it to keep going. Success releases dopamine. Failure stirs up fight or flight response.

The five elements for picking companies are simply put.
- Understand the companies long term prospects
is there a moat of brand identity, monopoly, intangible asset, resistance to substitution.
- Know the quality of management
CEO pay, managers or promoters
- What is the financial strength and capital structure
Owner earnings: net income plus amortization and depreciation.
- What is the dividend record
- What is the current dividend rate.

Really understanding a balance sheet and income statement is difficult even for a trained securities analyst. Stock valuations are dependable only in exceptional circumstances.

Thursday, November 16, 2006

Chinese Art

The modern art scene continues to defy gravity. Why don't all those hedge fund guys sponsor schools in Laos?

Sunday, November 05, 2006


I think that Fiasco might be the last Iraq book that I read for a couple of months. It is too depressing to think that even with all of this information, current policy makers do not think to reconsider strategy. The next two days might prove me wrong, but I do not think that the American people believe that there should be accountability for the level of errors made. It seems likely that control of the House will shift by a small margin and control of the Senate might even remain in Republican control.

The political reasons given for the war were a sham. The real reason was to transform the Middle East. The CPA was not there to rebuild. It was to change the politics, economy and culture of Iraq.

Much of the book is not about politics however. It is about military strategy and tactics and what defines the two. Strategy is understanding what kind of war you are fighting. Then there is movement of large units. Finally there is tactics. The most contentious point from this prospective is that the military plan was bad. What seemed obvious at the time that a light and quick strike was best for all occasions proved wrong. Afghanistan taught the wrong lesson. It is more important to secure the country with boots on the ground. Astonishingly there were only 247 tanks in the initial invasion.

Like many military books it is full of management advice. Part of the issue was psychological. W's feelings about his father will be analyzed forever. Less prominent are Rumsfeld's feelings about Powell. He was determined to discredit the "Powell Doctrine" of overwhelming force. Other management critics are throughout the book. Rumsfeld erred by giving a management job to a thinker.

But the story of Iraq is a summary of how not to win an insurgency. The hallmarks of failure:
- primacy of military direction of counter insurgency
- priority to kill-capture the enemy
- battalion size operations the norm
- military units concentrated on large bases for protection
- Special forces focused on raiding
- adviser effort a low priority

Friday, November 03, 2006

The Fog of War

The Fog of War might be used in its entirety by Donald Rumsfeld when he makes his own movie at age of 85. History is not cycles but it rhymes. It did not take even a generation to forget the lessons of Vietnam. How many of the same mistakes were made in Iraq where it seems all eleven of the rules were violated.

1. Empathize with your enemy.
2. Rationality will not save us.
3. There's something beyond one's self.
4. Maximize efficiency.
5. Proportionality should be a guideline in war.
6. Get the data.
7. Belief and seeing are both often wrong.
8. Be prepared to reexamine your reasoning.
9. In order to do good, you may have to engage in evil.
10. Never say never.
11. You can't change human nature.

Economic Wars II

Morgan's constant battle of economists mirror the broader debate about the direction of the economy. How hard will the housing decline hit consumption is the crux of the debate. Is consumer spending more linked to income or to wealth? Since the disparate views cannot even agree looking in the rear view mirror they obviously have different forecasts for the future.

Thursday, November 02, 2006

Why backdate options?

It was not entirely clear to me why companies backdated options. They could give more options or lower the strike price of options at a given date if they wanted to pay executives more. Jame Surowieki offers the suggestion that in the money options were recorded as expenses but at the money were not.

Pre-election hubris or How can you vote Republican?

The Talk of the town in the New Yorker gives a good summary of the state of the nation. It is probably too negative on the economy. The deficient is relatively not that high. But as Larry Summers wrote earlier in the week, the middle class if not losing is winning less than the rural poor of developing nations and the rich.

The problems in foreign affairs are less nuanced. It is hard to see how things could be worse in Iraq.

Can hedge fund returns be replicated?

The more important debate is whether hedge funds are an asset class or a compensation scheme. But Andrew Lo has a new paper on the subject.

Wednesday, November 01, 2006

Economic Wars

JPMorgan investment management is in the business of keeping the money not making the money. They are worried about a lot of things; geopolitical risk, energy prices, de-leveraging and the end of the carry trade, a housing collapse, the end of the US consumer, inflation, and the wrath of nature. But evidence shows that none of these are "the end of the world". Wars cause dips, energy prices fluctuate, the carry trade might never have been, and the consumer never dies. Nature's wrath is localized.

He gave a nice summary of the Greenspan thesis: the fall of the Berlin Wall brings capitalism to the masses (more Marxists on the Harvard faculty than the rest of the world combined). Agrarian markets with high savings rates grow and continue to save. The savings flow to the US.

Is it true that there is prosperity but no security? Was there any security except for a brief period of time post World War II?

He joins the other speaker I saw this week going gaga about China. Take current growth rates of China and the United States. Draw a straight line. Predict the year that the Chinese economy will be larger than the U.S. I think that the year that Japan was 2005.