Wednesday, April 30, 2008

Random Thoughts for the Day -- "Tickets Please"

Here are some random thoughts for the day.

1. Eagles had a mediocre draft. DeSean Jackson was a feature story on the NFL network, where he apparently works out with Jerry Rice, so this is a nice pick. Hopefully he can adjust to the speed in the NFL.

2. The FOMC meeting ends today. The Feds Funds futures predict another 25 point cut, but its unclear whether the market will move higher in meaningful form. Most are now trying to determine if the market is discounting all the bad news, or if more lies ahead. The beauty of calling the chance for "recession" publicly then allows investors to expect, vs. be surprised by, the missed or lower earnings guidance that has come out in 1Q 2008. The market will no doubt move higher, but sometimes a head fake is just that. Take a look at the charts below that show the put/call ratio (thanks to and the VIX index vs. the S&P500 time series data (the . Simply, the Put/Call ratio >0.80 is a bearish sentiment. The VIX is a volatility index that shows market sentiment as well, and often this index moves inversely with the S&P500.
3. Does anybody else think that someone in the Clinton camp is paying the pastor that is sabotaging Obama's chances in November? Or maybe it's just an egomaniac with his 15 minutes.

4. Ironic: The collapse of Bear Stearns' 2 hedge funds last July was the beginning of the market dislocation we've watched unfold, but it may be way too early to call the government's bailout of Bear (vis-a-vis JP Morgan) and the bailout of the consumer (the stimulus checks) the bottom.

5. Credit Default Swaps are contracts between two parties where the buyer is buying protection on a corporate debt security ("corporate bond") in the event that a corporation goes bankrupt. If I own a bond issued by Bear Stearns, I can also buy protection on that bond in the form of a CDS. The seller pockets the price I pay him for the CDS, and if nothing happens, he walks away with my money. But if Bear goes bankrupt, and can't make it's coupon payments to me on their bond I own, then the seller of the CDS agrees to pay me for the value of the bond. It's insurance, plain and simple. The price of that protection moves with demand; the price for these CDS on Bear (or any other corporation) will change, and as the risk of default goes up, so too goes the price. The seller is now taking on the risk, and must be compensated for this risk via a higher CDS price.

If you had monitored Credit Default Swaps for Bear leading up the government's bailout, you may have known something was up, it's why the press and media picked up on the rumor. Below is a snapshot posted on Hussman's Weekly Commentary that shows the price of a CDS contract for Bear leading up to and following the announcement of the bailout.

5. Speaking of the Eagles, where is Freddie Mitchell, and his "perfect hands" these days, anyway? He's supposedly taken on the noble profession of substitute teacher in Indiana.

6. CNN can be a great barometer of what the world wants to read about from a quasi-news sense. There is an absolutely horrible story about what is unfolding in Austria. It is hard to imagine the monsters that walk this earth. If anyone ever hurt my child, I know I go off like the Samuel L. Jackson character in John Grisham's "Time to Kill", trust me.

7. The Dallas Mavericks and the Phoenix Suns proved that team chemistry and the team concept is more important than any one player in basketball. From a trade perspective, sometimes doing nothing is better than doing something, just look at value creation in mergers & acquisitions in the business world as an example....Both teams got bounced from the 1st round playoffs, and both traded the future for now to get Jason Kidd and Shaq respectively.

Final Random Thought: I ride the train every evening, and after grabbing a seat, I email Erin to let her know what train I'm on, and then settle in with some reading for work, etc. Most nights the train conductor is fairly quick to get to our car to check for our tickets. But, like all of my fellow train passengers who are creatures of habit, we wonder where the conductor is when they don't show up in a normal amount of time, pretty Pavlovian. Since I always sit in an aisle seat, last night it occurred to me that waiting for the conductor is like sitting at a wedding waiting for a bride. It was funny, cause I looked up and down the aisle, and we were all looking back to see where the conductor was. "Tickets Please," is like the commuters version of wedding music. It was damn funny, but I guess you had to be there.

Monday, April 28, 2008

$4 Gas

I was at a dinner last week for work, and Tony Blair the former Prime Minister was the featured speaker. Tony Blair made an interesting case for why the West may need to go in to Iran and take out that problem before it starts. But what was interesting is that no mention was made about "never having found the WMDs." It was a curious oversight.

Nevertheless, oil hit $120 today (the chart below shows Friday's closing price for oil futures on the NYMEX), and that's with the current demand and the current instability in the Mideast region. Everyone seems very quick to notice the rising price of gas at the pump, but most folks believe that the demand for oil will not diminish anytime soon. There are plenty of fancy theories like "Peak Oil", etc. but it's really as simple as this graphic again: while we used to be the worlds largest consumer, the rest of the world is going through the equivalent of our Industrial Revolution, and demand for oil along with other commodities is not just about the developed Western world.

If you've traveled to Europe, or anywhere but the US, you might notice the lack of large, gas guzzling cars. Yesterday I saw a Hummer headed down the road, and I was so glad this guy had it because who knows when you're going have to traverse a hill pitched 45 degrees on the way to picking up your kids from piano lessons.

Tom Toles is one of my favorite political cartoonists at the Washington Post. His cartoon is priceless. We cry about those gas prices, but to some extent, it's self-generated.

Get out there and spend America!!!

The stimulus checks are getting out to the American public early, thank god the government pushed this across the line early. In a separate but unrelated note, Treasury Secretary Paulson said 'no' to a second stimulus package.

I've posted some great toons below that say it better than I could ever say it.

Link to Early Rebate Checks Article

Link to Article "Paulson says 'no' to 2nd stimulus package"

The War on "Drugs"

For those who have read this blog, you know that I drove cross country to go to grad school back in 1995. I drove out on Route 80 from Lansdale, PA to Salt Lake City, where I turned northwest on Route 84 (post upcoming...) One of the places I stayed was Omaha, Nebraska, which was one of the strangest places I've ever been. While Omaha is known for the Air Force base that used to house the Strategic Air Commands B-52s and Warren Buffett, Omaha's most famous resident by far, what I remember most about my stay in Omaha was the evening news cast.

I arrived at my motel around 6:00pm after about 10 hours on the road, and then headed out to a bar to relax. Upon going to the local watering hole, the news was on, and I swear, ever other story was about gang violence. Not the run of the mill stories, but really grim stuff. So I casually asked the bartender what the deal was. It turns out that Omaha had a tremendous gang problem because of the drug traffic that goes through the city. If you look at a map, Omaha is a major hub, where supposedly lots of drugs move East-West and North-South through the country. The bartender stated that "if you control Omaha, you control the drug traffic." Probably the last place you'd expect a "gang" turf war, but back in 1995, it was a huge problem.

So I was Stumbling ( recently, and saw this post that instantly reminded me of my night in Omaha. This is an amazing set of pictures that shows the sophistication that some go to grow marijuana. In fact, farmers in Texas were apparently growing drug crops because it was a more profitable than the crops typically planted. The market for drugs is no different than any other viable market, where "buyers and sellers" come together because buyers demand a product, and sellers are willing to sell the product to these buyers for a fair price.

Link to Pothouse of all Pothouses

Monday, April 21, 2008

Michelle who?

Much of the accolades in the golf world go to Tiger, but over on the LPGA tour, there is a woman by the name of Lorena Ochoa that you may have never heard of. That's because all you ever hear about is Annika Sorenstam (who deserves it) or Michelle Wie (who does not). Annika dominated her Tour for a long time, and was the modern day Tiger. She was thrust into the spotlight when she competed against the men at Jack's tournament, Colonial, in 2003, and actually had the game to back it up. While it was extremely debatable whether she deserved a sponsors exemption that week, no doubt the tournament officials decided that the benefits outweighed the risks to ratings, etc. because Annika, unlike Michelle Wie, had game, and 10 LPGA majors to back up her resume.

So, while Michelle Wie used to get all the hype, it is Lorena that deserves it. She just won her 4th tournament in 4 weeks, impressive on either Tour, and she is winning by large margins. What's best, she's about 5' 4" and you never hear a peep out of her. All she does is goes and and gets it done. This past Sunday she won the Ginn open. A year ago, she was leading the same tournament and basically had it won on the tee box at 17, but then had to go to a playoff after faltering on 17 and 18. In the playoff, she then had to face Annika, her "Tour's" current Tiger. She basically blew up in the playoff, blocking her tee shot badly, but was gracious in defeat.

The short of it is, rather than wilt this year at the same tournament, she actually meant it when she told Judy Rankin last year, "I will just use this as a learning experience to get better." Lots of us say that, but few do it. (You hearing me McNabb?) Oh, as a sidenote, Annika finished 44th, with a tournament score of -1, while Ochoa finished as the winner, at -19 under at the Ginn Open. When asked about her current play, Ochoa responded by saying "I know the bad stuff will come, so I am trying to enjoy this as much as possible (paraphrase)". You could hear the rest of her competitors wince, because Ochoa actually knows that you never own golf, you just borrow good play, and knowing this, she believes she can still get better.

BTW, in case you are wondering, take a look at Lorena's stats. You don't need to be the longest driver on the Tour. What always seems to bear out with the best players is that they hit greens in regulation and have the lowest putting average per round amongst their peers.

Lorena's 2008 Stats

Congratulations Ms. Ochoa. At your next tournament, make sure you let Ms. Wie, her agent and her entourage know that there is a wonderful tour that holds tournaments where she can earn money, rankings, and most importantly, the respect of her peers.

Thursday, April 17, 2008

Emerging Economies - A Simple Graphic

Here's a great graphic I grabbed from a site called Visualizing Economics. It's another, really simple way to think about where capital is currently chasing returns. Investors are seeking outsized returns in the "Emerging economies"because the "developed" world is currently reverting back to its long-run mean return. The long-run average return from 1926 - 2006 was about 6% in the U.S., so the end of the most recent and protracted "bull cycle" has implied very low returns going forward. The S&P 500 is down about 10% for the year so far.

As the graph clearly shows, the economies growing the fastest are pretty well correlated to population growth in those areas. Correlation is not necessarily causation, but sometimes, it's more than enough. Where there's smoke, there's often fire.

Chasing returns in emerging markets is no different than when companies search for growing markets to sell its products in. It's simple, as this graph shows, and makes sense. The bigger question is whether "decoupling" is real. Many believe globalization has led to a world that has "decoupled" from a U.S. Emerging markets will therefore still expand despite a US led economic slowdown, so the theory goes. But if we are buying more of China's goods and services than we sell them, then who is replacing our purchases? Maybe the better question is, if decoupling doesn't play out, then what do all of these people do when their standard of living doesn't rise due to stalled growth?

Decoupling may just be wishful thinking. Only time will tell.

1 Year Chart, S&P500 vs. iShares Chinese (FXI) and Indian (IFN) Market ETFs

6 Month Chart, S&P500 vs. iShares Chinese (FXI) and Indian (IFN) Market ETFs

Renting isn't such a bad thing?

Here's an interesting graphic from BusinessWeek that shows debt as a % of disposable income for renters vs. home owners. Not doubt, the stats include hard hit areas like California, Arizona, Florida, but the takeaway is more subtle than the title...

According to the graph, renters have supposedly seen their obligations as a % of disposable income decline over the past 7 year housing boom vs. while homeowners have seen the opposite effect. But on a relative basis, maybe homeowner's wages haven't expanded as fast as renters or renter's have controlled their costs better in an effort to save for the eventual house?

Either way, seems to me that the net effect is better a homeowner has a more favorable free cash flow (relatively speaking), since while homeowners have seen their %'s rise, the % is still lower than renters.

This chart seems simple, but it's not as obvious as you think, it's actually pretty subtle and makes you think.

Wednesday, April 16, 2008

The Hadron Collidor and Organized Religion

There has been a fair amount of talk about the impending "end of the world" due to the start-up of the Hadron particle accelerator. (Links here and here, to name a few.) It's a pretty daunting task that the particle physicists are trying to tackle, namely, trying to prove that there is one Grand Unified Theory that links the mechanic, physical laws of motion that you and I know about and the laws that govern the sub-atomic world. Einstein got close, but gravity gave him fits when trying to factor this known force into the way that space-time behaves. An even more troubling thought for these really smart scientists of the 1900's was whether light is a particle or a wave. Guess what? It behaves like both. Seems like a simple statement, but it has profound implications, think about it. Design an experiment to prove those two seemingly incongruent states. These guys did it before computers ever existed...

When the scientists power up the Hadron collidor, the world will hold its "collective breath". The hope is to use the accelerator to generate energies high enough to annihilate matter with its corresponding anti-matter. The fear is that if this collision occurs, the amount of energy released might destroy the world as we know it. While I don't buy it, I also must add that the folks who state this "end of the world" theory probably can't explain the nuclear weak force, a boson, or the spin of a quark, let alone explain why an electron's position around the nucleus of and atom at any given time cannot be precisely know if you can determine it's velocity at that time, and vice versa, ala de Broglie and Mr. Schrodinger...In the sub-atomic world, particles appear and disappear such that their position is modeled as a cloud that represents its probabilistic density function ("electron starts at point A, and is moving Z m/s on this vector, so we should be able to predict it's position after time Y, but in the subatomic world you can't, because the particle also behaves like a wave and not like a pendulum...")

So that's a nice segway given that the "Pope" has decided to come and visit us...(If truly altruistic, why not go to a third world country like in Africa?...Think about it) Organized religion's absolutism is a tremendous force over the weak minded. Those that succumb are the same people who wait in line at the toll booths because to get "EZ-Pass" might mean they are empowered to help themselves. In this post I've singled out those lost souls who sit in the pews on sunday, but the people who watch Oprah looking for life lessons are one in the same. Oprah doesn't care about you, you're an asset, a set of eyeballs that by watching, generates more ad revenue for the show that makes her money. Stop thinking it's anything else, or that Oprah cares.

This "de-motivational" poster is great, if I could make it into a T-shirt, I'd wear it at a local church on a Sunday just to remind myself why education, or simply having your own opinion is important:

Monday, April 14, 2008

Masters Odds -- Continued

Yeah Tiger, we feel real bad for you...
Trevor Immelman came through for the golfing world and put Tiger's "Grand Slam" plans on hold for another year. For those who have never heard of Trevor, his most notable mainstream exposure up to this point was a commercial for the FedEx Cup where he speaks into a hairbrush doing an imaginary winning speech, only to have Vijay Singh walk in on him. Immelman is a 28 year old South African golfer who most pegged as someone with immense talent. To put bluntly, he's the only modern day South African to have won the Masters, during a time when el Tigre is supposedly playing his best golf. Some notable South Africans....Ernie Els, whose most recent chance evaporated in 2004 when he put it in Rae's Creek on the 13...Retief Goosen, who made early bogey's to see his chances falter the same year, and Rory Sabbatini, who has about the loudest mouth on the Tour, and we're still waiting to see if his game will ever back up that mouth.

Gary Player, the greatest South African golfer to have ever played the game, has been a big fan of Trevor's since he was a little kid, and all Mr. Player did was win 9 Majors, 3 of which were the Masters. Congrats Trevor, you did what Sergio, Goosen, Els, and Mickleson couldn't do.

The most interesting stat of the week was that Immelman was -10 under on the Par 4's all week. For a course that was lengthened to "protect the integrity of the game" given technology, Tiger, etc. In 2007, Immelman ranked 39th in Driving distance (289 yds) and 64th in Driving Accuracy (69%), proving this year that the winner doesn't have to be the longest hitter to get it done at Augusta. I truly think the new strategy to win Majors takes place on days #1-3 of a Tournament. If you are ahead of Tiger after 3 rounds, it's your best chance at winning the Tournament.

Tiger's Wins when he doesn't lead after the 3rd round:

Congrats to Trevor Immelman. Well done, Robert Trent Jones was no doubt smiling down at you yesterday, even when he put your ball in a divot mark in the fairway on 18.

Final note about the Masters is the odds makers I went back to the odds for the Master's, and looked at the "payout" for the lines makers...Assuming that the lines represent efficient markets, where the odds didn't move due to late action, and all the bets were $1, the bookie's payout would be +$4. No doubt, they made a lot more if they got folks to bite on Tiger with bigger dollar amounts than others, but assuming every bet was a dollar, the net was +$4 to the House. House wins. Immelman wins. Tiger did not.

Masters Odds

Saturday, April 12, 2008

Disturbing Google Earth Images

Every once in a while, there's software that is just simply amazing. Google is one of those programs, and Google Earth, is as well. If you haven't explored Gooogle Earth, you are depriving yourself of a really neat experience. If you've used Google Maps, you've actually used the same code, but Google Earth lets you control where you "go" on the planet and zoom in on things like the Pyramids of Egypt, the Great Wall of China, or better yet, your house... The resolution is quite good, since the program licenses images from the military's KeyHole (KH) satellite constellation that orbits the earth. I've posted a link below to Google Earth download.

Google Earth Download
(Download "button" is on Upper Right Corner of Page)

People using Google Earth have found some crazy images, some cool, others really disturbing. In one case, the image of Denver International Airport (DIA) from space is particularly disturbing, as is the image of the Navy's barracks in San Diego from space. If you don't believe me, type in "Denver International Airport", or better yet, just click the links below.

The world is an interesting place.

Navy Barracks at San Diego

MSNBC Story on Barracks

Denver International Airport

Pyramids of Egypt

Friday, April 11, 2008

Robin Williams on Golf

Robin Williams did a special on HBO a number of years ago that was hilarious. I'm not the biggest fan, but this special was extremely funny. He did this bit on the game of golf, and it is spot on. Makes you wonder why we play the game...

If at work, or around kids, turn down the volume, there's a lot of f-bombs being dropped, like a dude that just got hit by a car.

Wednesday, April 9, 2008

Atari 2600

Nintendo's great grandfather, god rest its precious soul...This system was amazing.

Enjoy the walk down memory lane.

Link to Atari Catalog

Has the Market Reached the Bottom?

An interesting question these days since investors have either lost money since last September, or they're waiting on the sidelines to jump back in and find some bargains for the long run. I found an interesting chart in my internet travels, and its beauty is its simplicity. Thanks to the Float for posting originally (click to enlarge):

This chart shows the value of the S&P500 index from 1980 to current
at different price to earnings ratios, or P/Es. The S&P500 is considered the market, and the price of this market index can be analyzed. A P/E ratio is a simple way of representing how much investors are paying for a dollar's worth of earnings. It's a nice ratio that allows investors to compare stocks (or markets in this case) on a relative basis, whether you are comparing the "pricey-ness" of two stocks at a point in time, or comparing how expensive a particular stock currently is relative to its past or projected future. In this case, the "price" of the market is a composite of all stocks in the market, weighted by their market cap. The S&P500's price and index value are synonymous. The "earnings" is the composite earnings of all of these companies.

As a further illustration of how you can use P/E ratios using stocks. Suppose WMT trades at a P/E of 18.0 and TGT trades at a P/E of 10.0, which is more expensive stock? (Answer is WMT; investors are paying $18 for every dollar of earnings per share that the company delivers to shareholders. If earnings are $1, then the stock is trading at $18. The bigger question is are WMT and TGT the same, and if not, is either stock mispriced relative to the other based upon the earnings each company will generate in the future...)

Back to the Chart The black line is the current P/E that the S&P500 trades at. The blue line is the P/E of the S&P500 index at "fair value" based upon historical P/Es of the index, and the red and green lines are the "overvalued" and "undervalued" P/E price series of the index, respectively.

What's distinct on the chart are the 2 peaks, no matter what color line you use. These peaks correspond to the Tech bubble of 2000, where was worth more than GE (I'm joking of course) and the second peak represents the current market dislocation during which the housing bubble evolved and popped. This data was one piece of evidence that led many to think that the housing market was a bubble, despite "eluding" many in the media (FEd Chairman, etc.) To all who listened and got your money out, kudos. It's hard to sit on the sideline when everyone else is dancing. Staying on the sidelines while the herd made money took lots of moxie, and it probably felt like being the designated driver for your friends. My post on herd mentality and informational cascades is coming soon.

So this brings us back to the original question, is the market overvalued? Based upon this chart, the answer is "probably", and if you wanted to put some numbers to where the S&P500 support is (translation, "where will the S&P500 fall to before it turns and heads back up), then you could make the argument that the "Fair value" is where the index is around 1000. All of the talk you hear these days is that earnings season has started, and investors eagerly await to hear a company's management team speak about their outlook on the economy. Well Alcoa went first, and they downgraded their outlook after year over year profits were down 50%. UPS and FedEx both warned that sales will be lower this year. Many are even stating that we are in a recession, or have been. When companies report their earnings, these "sales and earnings" results have already happened, they are ex-post, where management's outlook on the next quarter and year are ex-ante, and more important to our question.

The point is, no one can predict the market, but corporate earnings seem to be collapsing. And they should if the consumer cannot continue to spend, and companies find it harder or more expensive to borrow money in the capital markets to invest in future growth projects that generate higher earnings in the future for shareholders.* So if the market is/was overvalued, then the denominator "E" in our P/E ratio is getting smaller, but prices must come down with it since the market isn't fairly valued. I would argue that support for the S&P500 is somewhere in between 1000 and 1200, but then again, this is a volatile market, so we could be in for a wild ride down to that support level.

*(Another aside about the market's run up during the past couple of years was also led higher by historic share repurchases by companies. Rather than deploy the cash earned back into the operations to fund new growth opportunities, these companies chose to return money to shareholders by buying back their stock.)

Tuesday, April 8, 2008

Random Thoughts about The Masters

If you are a golf fan, then you love the Masters. It's the number one tournament, followed by the US Open. There is always drama, and this year will undoubtedly deliver the same.

Betting Lines on the Winner Tiger is just about even money at 3/2 to win and a 5/1 bet vs. the field. Incidentally, the 5/1 bet vs. the field is better chances than the next best chance to win, which is Phil Mickleson at 8/1. (Odds at Bodog sports betting site.) That is insane, but a bet that isn't hard to take given recent history. The bookies have probably been tearing their hair out, trying to get folks to take the other side of the "trade", which requires setting favorable odds for the other 143 golfers at the tournament that week when Tiger is playing. The only thing Tiger "isn't" good at, if there is such a thing, is that he isn't a good at coming from behind. He's virtually undefeated when leading after 3 rounds, but when he has to come from behind, his record is less than stellar. My pick is Geoff Ogilvy, because he has the game to go deep at Augusta. If I were a betting man, Ogilvy would get me 40/1.

Tiger is human There have been some interesting articles about Tiger lately. Everyone seems to think he's this angelic, gracious figure, but he's a competitor. In his defense, he's the most public of figures, so to be fair, we'd all probably like to punch a photographer that takes a picture in the middle of the equivalent of our backswing.

Tiger doesn't need to practice The other interesting article was an interview with Casey Martin. For those not familiar, Casey Martin played collegiate golf with Tiger at Stanford, and has a debilitating circulatory ailment in one of his legs. The issue for Casey was that he took on the PGA, demanding to be able to ride a cart in professional tournaments because walking the courses left him in pain. The PGA ruled against him. The interesting thing Casey stated was that everyone thinks Tiger works on his swing for 20 hours a day. Casey claimed that Tiger, Phil, all these guys are so good at what they do, they don't have to practice.

One last random note. I was watching the Kansas - Memphis NCAA championship game monday night, and it occurred to me that Jim Nantz is living a truly blessed life. There he is, calling one of the all time great championship games with Billy Packer, then he gets to get on a plane and go be the lead commentator at the Masters. Some guys have all the luck.

Enjoy the Masters!

Tiger's Drops F-Bombs at Doral

Casey Martin's Article in Golf Digest

Official Masters Website -- Check out the Driving Range Live Video Stream

Reputational Risk

Alan Greenspan, the "Maestro." It's an interesting time for the man who is now on the lecture circuit for probably a $100K an appearance. However, given what's going on, his legacy might be in trouble. Again, as I've stated, he didn't create the securitized products that have created our current market dislocation. But he certainly led the Fed during the time that the system was primed.

Most agree, Mr. Greenspan defined his legacy after the Crash of 1987, but his recent talk reminds me of the former Arthur Andersen partner who "lectured" to us in b-school about ethics. The best part of this partners lecture was when they promoted their book. I actually remember thinking that they were in jail and trying to tell us about ethics, but turns out, they just cashed a check "lecturing" to us about their struggle making mad money while looking the other way. It was tremendous, and reminds me of the Maestro.

WSJ Article

How the Bubble "Eluded" the Genius by Robert Shiller -- Must read

Alan's Missing Ph.D Thesis