Tag: financial markets

The markets are not robust

Yesterday the US equity markets took a dive. The second largest one-day point drop in history is now being attributed to trader error.

From Merriam-Webster

Main Entry: ro·bust
Pronunciation: \rō-ˈbəst, ˈrō-(ˌ)bəst\
Function: adjective
Etymology: Latin robustus oaken, strong, from robor-, robur oak, strength
Date: 1533

1 a : having or exhibiting strength or vigorous health b : having or showing vigor, strength, or firmness c : strongly formed or constructed : sturdy d : capable of performing without failure under a wide range of conditions

With all the fail-safes in place…for that matter all the potential buyers in place, it happened.

Buy or sell, you’d like a robust market. Do you really think this one fits the definition?

Around the world in nine paragraphs flat – 03/30/09

World MapTechnology

– Jeff Bezos spent a week working in one of his own warehouses. When I first heard about it, I thought he was making a shift from strategic to operational, with an eye to cutting some costs. I was right. But I admire the man and the company enough that I can only believe those that were cut were treated right. If they weren’t, I’m assuming those cut couldn’t cut it themselves. I have a couple of friends working their, and have, on occasion, wished I could join the fun.

– Google layed off some sales folks in the past few weeks, and I imagine it’s all for the better. Their top dog of sales, Tim Armstrong, is gone. New blood replaces, and cohesion will be key to Google’s finding their next growth spurt. Will the next chapter in Google’s story be charging full steam into the enterprise? They don’t want to suffer the curse of eBay, but I hope they don’t listen to BusinessWeek either – those guys suggest they first buy Twitter and then get better at acquisitions.

– On that note, Twitter and Facebook are capturing so gosh darn much attention I’d usually be willing to bet that they’ll fizzle out in the blink of an info tech eye. But I don’t actually think that’s going to be the case.

twitsearch

I’m bullish on Twitter and Facebook – just wholeheartedly bearish on all the media who can’t find another story.

facesearch

And, I’m feeling sorry for the folks on the job hunt after they get their master’s degrees in social networking, as well as those businesses that try hitching a ride based solely on advertising. This is one godawful hype brawl, and plenty of folks are going to get knocked out.

Finance

– The S&P has been on a tear the last few weeks, but now it has the Quadruple Confirmed Evil Knievel Formation to contend with. If that technical analysis wizardry isn’t enough for you, there’s another economic bubble about to rear it’s ugly head. It’s called the budget deficit.

– In the luxury goods department, modern art prices are getting slashed and burned as collectors run to the masters. I’m not surprised – tossing a couple of cans of paint on a 20′ X 20′ canvas and calling it a million bucks was bound to fizzle on the business model front. The art world is certainly not without it’s scammers. Top shelf wine lovers are getting a bit more cautious now too – cult wine lists, space on which once sold to the highest bidder (yes, before you got your first bottle), are now looking for the last sucker too. Once the lists start including grape juice in a box, I’m in.

– This morning’s Asian markets were closing on an ugly note, with the Nikkei and Hang Seng off over 4.5%. Meanwhile, some commodities prices are on the skid as well. US markets have been on a tear as of late, but Nouriel Roubini was also saying a few weeks back to expect a bear market rally. I thought he might just be a little tired from all the media attention, and yet things are shaping up for him to be right. Again.

Fly Fishing

– There’s a recession in fly fishing – interest is down and nobody seems to have a solution yet. Still, there are a few folks keen on catching a big trout on the fly – my only suggestion is that instead of putting that goal on a list of things to do before dying, why not try making a habit of it. Easier said than done, and probably a significant part of the reason fly fishing is taking a hit – it’s less instant gratification than constant aggravation. Neverthless, I am, and shall remain, a glutton for punishment.

– Thomas McGuane wrote what is easily my favorite book on fly fishing, The Longest Silence: A Life in Fishing. And this last weekend he took aim at shotguns, dogs, and dinner. I’m all for dogs and dinner, as long as the dogs aren’t begging for mine. As for the shooting, I’m pretty sure I’ll be spending more time at the clays course this summer, and I’ll credit the story as well. As for my dog, he’s a herder. Anyone have some spare sheep?

And finally…

– Speaking of the Wall Street Journal, there’s been a lot of hype about ‘brownlining’ over the past few weeks, and with Denver’s urban South Platte on center stage. Fly fishing history is being rewritten, and there’s even a new ‘nation’ for those who’ve been busted scratching rocks with their cleats and are now banished from the clear stuff. Even wholly unprofessional (at fly fishing) jokers such as myself have been fielding inquiries as to how it’s done, as well as a few more that say “great going Gracie…now the the joint is going to be packed all summer.” I don’t know how it’s done (I’m just lucky), and as for the crowds, well the flows looked docile in that WSJ video, but said water level won’t be a crowd pleaser for much longer…

South Platte Flow

MG signing off (to get some more coffee)

Who’s the sucker at the table?

It’s been said that if you look around the table and can’t figure out who the sucker is, you’re it.  Mike Masnick thinks changes to the system – actually a “radical” shift towards complete transparency in the financial markets – will cure what ails it.

The premise is correct – there will always be a “last sucker”. But to assume that by overhauling the processes information intermediaries (primarily accountants and ratings agencies) employ in informing the investing public is likely to reduce the number of suckers could be wishful thinking.

The desire to be the hero, the portfolio (or in the case of bureaucracies, budget) savior, is ego-driven. Produce great returns by buying this or that product, watch it fly, and then a pat on the back (or a bonus) from the boss. In order for 100% transparency to affect positive decision making, there must also be incentives in place to do the homework.

And harsh punishment for failing to.

Roubini Says ‘Panic’ May Force Market Shutdown

Via Bloomberg:

“We’ve reached a situation of sheer panic,” Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. “There will be massive dumping of assets” and “hundreds of hedge funds are going to go bust,” he said.

Of course, hundreds of hedge funds are already going bust, and those that aren’t are still seeing massive withdrawals that are forcing them to liquidate positions.

We are also witnessing a “stampede for the exit” – it’s just that some are slipping back in when the door is ajar.

Surprise, Surprise: What’s Ahead?

Paul Kedrosky:

What surprises lie ahead, whether positive or negative? And to be more explicit, let’s try not to get hung up in each case whether each thing really is good or bad news, but whether it’s seen that way.

Add your surprises here.

Bailout Bill Fails in House (UPDATED)

Wall Street Journal:

The House of Representatives delivered a stunning defeat to legislation designed to rescue the nation’s troubled financial system, sweeping aside a call from President Bush to “send a strong signal” of confidence to markets at home and abroad.

The 228-205 vote Monday exposed deep unease among rank-and-file lawmakers in both parties with what would be an unprecedented intervention in the private sector.

The financial markets reacted with disaccord…

sp-500-september-29-2008

Tallies for the day: Dow -777.68 (-6.98%); Nasdaq -199.61 (-9.14%); S&P 500 (above) -106.59 (-8.79%).

Side note: Barron’s added that the Nasdaq was headed for one of it’s top ten worst days. Today’s result wound up ranking #3. Paul Kedrosky says watch out for rolling boulders.

UPDATE: Today’s market result was also the biggest one day point drop for the DJIA.

Midday Monday Bailout Negotiations Briefing

A chronology

  • Thursday, September 25th, 1:10PM – Chris Dodd and Company say an agreement has been reached. Must have been Dodd’s Plan.
  • Thursday, September 25th, 4:32PM – We’re now hearing about ‘wreckage’ and ‘climbing’. Those dramatic terms probably got a lot of web hits.
  • Thursday, September 25th, 6:17PM – Unraveling because John McCain wants private markets involved?
  • Thursday, September 25th, 11:37PM – Deal breaks down and Paulson goes home. Who’s plan was this again?
  • Friday, September 26th, 9:02AM – Republicans to blame. Yep, Dodd’s Plan.
  • Friday, September 26th, 11:54AM – Barack Obama sees progress. I’ll bet Dodd handed over his plan.
  • Friday, September 26th, 11:58AM – It’s all Newt Gingrich’s fault?
  • Friday, September 26th, 12:36PM – Must be Barack’s Plan now – he’s blaming John McCain too.
  • Friday, September 26th, 2:40PM – All sides negotiating.
  • Friday, September 26th, 7:54PM – Barney Franks says “we’ll have a deal by Sunday” (the same Barney Frank that said nothing was wrong with Fannie or Freddie – video 01:18).
  • Saturday, September 27th, 9:05AM – Everyone is hung over; good thing the markets don’t open tomorrow.
  • Saturday, September 27th, 2:31PM – No doubt a bailout is necessary. And no doubt ‘taxpayers will get hosed‘.
  • Sunday, September 28th, 10:15AM – A comparison of Paulson’s Plan to Chris Dodd’sBarack Obama’s … Barney Frank’s Plan.
  • Sunday, September 28th, 11:46AM – The financial system needs more than Botox.
  • Sunday, September 28th, sometime in the afternoon – Tentative deal reached, but will it hold? You’ll have to wait until next Wednesday to find out.
  • Sunday, September 28th, 12:15PM – A summary of the agreement. [Full text here]
  • Sunday, September 28th, 6:15PM – The private sector Barney Frank got us into this mess. His plan will get us out?
  • Monday, September 29th, 7:14AM – Quit targeting asset prices, Messrs. Treasury and Federal Reserve.
  • Monday, September 29th, 12:00PM – The plan is imminent, but markets are tumbling anyway. And that is despite the Fed pumping a third of a trillion dollars into the system.
  • I wonder who will take credit for the plan next.

    We’re talking hundreds of billions

    “We’re” is an understatement, and hundreds of billions might be too…

    “We’re talking hundreds of billions,” Treasury Secretary Henry Paulson said in a press conference. “This needs to be big enough to make a real difference and get to the heart of the problem.”

    Paulson and Fed Chairman Ben S. Bernanke’s plans, which include the removal of illiquid mortgage securities from companies’ balance sheets, sent stocks from the U.K. to China soaring. The dollar gained, while two-year Treasury notes fell the most in 23 years, sending the yield up from the lowest level since mid-March.

    “We’re” doesn’t mean the Treasury Secretary and the Chairman of the Fed personally (although some will inevitably debate whether it includes the mice in their pockets). And as Forbes notes, the price tag will almost assuredly wind up being much more than originally estimated.

    Don’t Blame the Shorts. Blame the Longs.

    This choice excerpt brought to you by Deal Journal:

    Oliver: When the stock collapsed from the high to the low, the public started to blame “the shorts” for that. Is that not a fact?

    Whitney: I think from a hindside point of view, they blamed “the shorts.”

    Oliver: They blamed the “shorts,” whereas, as a matter of fact, if the prices were inflated, they should have blamed the “longs” for having inflated them?

    Whitney: And themselves.

    Oliver: But instead of being logical about it, and blaming those who inflated prices, they blamed those who might have deflated them had they the power at that time–that is, the “shorts”?

    Whitney: Yes.

    Sound familiar?

    What Facebook’s backoffice valuation may have cost the social network sector

    A what-if, as in what if this was now April of 2000

    Company valuations are what the market says they, until the market says otherwise. People learned their lesson (at least with internet investing) in 2000, and there has been a dearth of big internet IPOs since – with that lack of offerings comes a dearth of information. What back in the last internet bubble could be gleaned from checking your brokerage account now comes via private investment extrapolation and backchannel chatter. Internet companies (and in particular the social network crowd) are presently illiquid private investments whose valuations are prone to ambiguity.

    Take Facebook for example. The website received a $250MM investment from Microsoft late last year, and several monied individual investors (and a few institutional types) quickly followed-on at purportedly similar price tags. This investment pegged Facebook’s worth at a cool $15 billion, and social networks and related “applications” have been nipping at their heels ever since. However, there has been little information to judge the true value of the company – Microsoft also has an exclusive advertising deal with Facebook and many agree that there must be some strategic value associated with that. Still more debate whether that Microsoft investment was the true sign of “bubbledom” number two.

    A few weeks back, Mike Arrington of the TechCrunch blog took a stab at valuing a number of social networks, based on an advertising expenditure survey and ComScore statistics, and a few recent transactions in the space…including Facebook. Silicon Alley Insider gave the work a general thumbs up, and then proceeded to pick apart some of the advertising assumptions (as well as the real value of Facebook and some others). I enjoyed the number tumbling too, but noticed something different was missing. Time.

    Time is a cure all (although it also puts you in the grave). Time is also a critical component of valuation. When time races by in the public markets, valuation comes instantly. But when it is accompanied by fits and starts, like in the private investment markets, valuation is harder to come by. With those prospects in mind, I decided to revisit Mr. Arrington’s data to see if it still jived just weeks later. I had some more of that “backchannel” information to work with too – some rumors about brokered sales of Facebook stock – via Arrington himself.

    The original valuation results via TechCrunch came about like this: Arrington first developed a “raw score” for each site, based on advertising expenditures across the internet, applying per user averages (using ComScore data) to each social network, and then factoring in the latest transaction data for three of the sites, Bebo (March ’08), LinkedIn (June ’08), and Facebook (October ’07). Valuation based on those transactions is depicted below:

    social-network-valuations

    Subsequent to this analysis, it was revealed that insiders at Facebook might be trying to sell their shares. The rumored asking price was putting Facebook’s valuation at somewhere between $3 billion and $4 billion. There’s now new information, and we won’t bother going into what could be gleaned from knowing insiders are attempting to sell at a discount – that’s a story for another time. Nevertheless, taking this new data (with optimism, at $4 bil) and inputing it into Arrington’s model, the mean values of the 25 internet companies listed would look more like this:

    adjusted-valuations-1

    In addition to reducing composite mean value by almost $15 billion, there’s another adjustment that might be worth making. After Arrington created the “points” system, recent deal values were applied to create a dollar value per point – Bebo, LinkedIn, and Facebook received $240.78, $1,325.00, and $1,467.16 per point, respectively. Bebo seemed the bargain. But based on the latest data regarding Facebook, it would now get $391.24 per point. Now LinkedIn looks like the outlier – furthermore, their deal was completed while the Facebook valuation was still firmly on investors’ minds. If we tossed in the New Data Discount Factor (copyright, me…wink, wink AP), LinkedIn falls in line: $391.24 / $1,467.16 = 26.67%. Then $1,325.00 * 26.67% = $353.33. Some will argue that LinkedIn’s professional userbase should be more valuable than the playgrounds – my contention is the “kiddie sites” have turf encroachment in mind; as well, I know plenty of people who still use LinkedIn’s free offering – LinkedIn is surely chock full of smart, saavy internet users that know how to ignore ads, meaning they are subject to the whims of the ad industry and its market prices like everyone else. Failing that, the numbers simply look more reasonable side by side.

    Recalculating with the latest $/point for LinkedIn and we get:

    adjusted-valuations-2

    Total downward revision under this simplistic analysis – roughly $28.4 billion.

    None of this is mathematically perfect – nor are its assumptions. But I believe it sheds some light on what investors might be thinking about if there was a public marketplace full of these social networking sites, consistent with the last. One of free flow of financial information, instantly recognizable and actionable (and most assuredly so on rumor and innuendo). One that wound up looking like this:

    nasdaq-1999-to-2002

    (more…)