Archive for September, 2007

• Leading Negative Indicator: Robert Reich
  Eddy Elfenbein, September 5th, 2007 at 3:20 pm

  Poor Robert Reich. Ronald Bailey at Reason has the goods:

  Former Clinton labor secretary and perennial industrial policy hustler, Robert Reich, is a leading negative indicator. Whatever he predicts, the exact opposite occurs. In the 1980s, Reich declared that the U.S. economic growth rates were in a permanent slump and that we needed to adopt the economic model represented by the once famed Japanese Ministry of International Trade and Industry. In 1982, Reich co-authored Minding America’s Business with Ira Magaziner which recommended that the federal government start directing the economy. A few excerpts below:
  “U.S. companies and the government [should] develop a coherent and coordinated industrial policy whose aim is to raise the real income of our citizens by improving the pattern of our investments.” According to the two the governments of Japan, France and West Germany “understand that the only real alternative to developing a rational industrial policy that seeks to improve the competitive performance of their economy in world markets is for the government to cede the formation of policy to the politically strongest or most active elements of industry. Industrial policies are necessary to ease society’s adjustment to structural changes in a growing economy.”

  The United States was failing because it had “an irrational and uncoordinated industrial policy,” resulting in a “process of economic policy formation [that] remains decentralized and chaotic.” They added: “Perhaps the most striking feature of the U.S. industrial policy apparatus is the absence of a single agency or office with overall responsibility for monitoring changes in world markets or in the competitiveness of American industry, or for easing the adjustment of the domestic economy to these changes.”
  They concluded: “The failure of U.S. industrial policy is not simply a failure of organization, of course. It is a failure of substantive strategy. The industrial policies of Japan, West Germany and France have been more successful than U.S. policies because they have explicitly and consciously aimed at improving the international competitiveness of their businesses.”

  Total unmitigated flapdoodle.

  Ouch. This reminds me of the old saying that economists have predicted 13 of the last five recessions.
  My personal favorite goes to John Kenneth Galbraith writing in the New Yorker: “That the Soviet system has made great material progress in recent years is evident both from the statistics and from the general urban scene…One sees it in the appearance of solid well-being of the people on the streets…and the general aspect of restaurants, theaters, and shops…Partly, the Russian system succeeds because, in contrast with the Western industrial economies, it makes full use of its manpower.”

• Biomet Shareholders Approve Merger
  Eddy Elfenbein, September 5th, 2007 at 12:42 pm

  It’s official. Over 91% of Biomet (BMET) shareholders approved the merger agreement with LVB Acquisition, Inc., which is the consortium of Blackstone, Goldman, KKR and TPG. The deal is for $46 a share in cash.
  When the initial deal came out at $44 a share, the Internet went crazy. Actually, it was just me. But five months after my first post complaining that the offer was too low, Institutional Shareholder Services agreed. So the consortium raised the bid by $2 a share, and now, it’s a done deal.

• Hedge-Fund Manager Invests Millions In Spouse’s Appearance
  Eddy Elfenbein, September 5th, 2007 at 12:01 pm

  The Onion Radio News is on the scene.

• September Is the Worst Month for the Dow
  Eddy Elfenbein, September 5th, 2007 at 11:15 am

  CNBC looks at the average monthly performance of the Dow from 1896 to 2007:
  Month………% Positive……..% Negative……..Avg % Return
  Dec………………71.6………………28.4 ………………1.4
  Jan………………64.9………………34.2……………….1.1
  Aug………………63.6………………36.4………………1.2
  Nov………………61.5………………38.5………………1.1
  Jul………………..60.7………………39.3………………1.3
  Mar………………60.4………………39.6………………0.7
  Oct………………59.1………………40.9………………0.3
  Apr………………55.9………………44.1………………1.1
  May………………51.4………………48.7………………0.1
  Feb………………50.5………………49.5………………-0.2
  Jun………………50.0………………50.0………………0.4
  Sep………………40.9………………59.1………………-1.2

• Scholars Link Success of Firms To Lives of CEOs
  Eddy Elfenbein, September 5th, 2007 at 11:06 am

  Give economists enough data and they’ll try to find links everywhere:

  Should shareholders in a company care if the chief executive’s child dies? What if the mother-in-law passes away?
  Such things don’t normally figure in investment decisions. But maybe they should, according to a recent study by three finance professors. Mining a trove of Danish government data on thousands of businesses, they were able to track links between CEO-family deaths and the companies’ profitability over a decade.
  It slid by about one-fifth, on average, in the two years after the death of a CEO’s child, and by about 15% after the death of a spouse. As for an executive’s mother-in-law, the old jokes seem to hold: The researchers found that profitability, on average, rose slightly after her demise.
  The study is part of an emerging — and controversial — area of financial research that delves into the lives and personalities of executives in search of links to stock prices and corporate performance. The trend is an outgrowth of the tendency to lionize CEOs as critical to the businesses they lead. If their performance is so vital, the researchers say, investors should want to know anything that could affect it.

• Donaldson Reports 18th Straight Record Year
  Eddy Elfenbein, September 4th, 2007 at 4:44 pm

  Donaldson (DCI) just reported a great fiscal fourth quarter. Earnings came in at 53 cents a share, five cents more than estimates. This is the company’s 18th straight record year. Donaldson expects a 19th straight record year with EPS between $1.92 and $2.01.
  Here’s the streak:
  Year………….Sales……………..EPS
  1990…………$422.9……………$0.19
  1991…………$457.7……………$0.21
  1992…………$482.1……………$0.23
  1993…………$533.3……………$0.26
  1994…………$593.5……………$0.30
  1995…………$704.0……………$0.37
  1996…………$758.6……………$0.42
  1997…………$833.3……………$0.50
  1998…………$940.4……………$0.57
  1999…………$944.1……………$0.66
  2000…………$1,092.3…………$0.76
  2001…………$1,137.0…………$0.83
  2002…………$1,126.0…………$0.95
  2003…………$1,218.3…………$1.05
  2004…………$1,415.0…………$1.18
  2005…………$1,595.7…………$1.27
  2006…………$1,694.3…………$1.55
  2007…………$1,918.8…………$1.83
  2008…………$2,100.0…………$1.92 to $2.01 (est)

• A Demon of Our Own Design
  Eddy Elfenbein, September 4th, 2007 at 3:27 pm

  
  Barry Ritholtz was able to get Wiley’s permission to post the first chapter of Richard Bookstaber’s A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.
  It’s a fascinating account of one man’s experience in the convoluted world of high-stakes derivatives trading. Here are the opening two paragraphs:

  While it is not strictly true that I caused the two great financial crises of the late twentieth century—the 1987 stock market crash and the Long-Term Capital Management (LTCM) hedge fund debacle 11 years later—let’s just say I was in the vicinity. If Wall Street is the economy’s powerhouse, I was definitely one of the guys fiddling with the controls. My actions seemed insignificant at the time, and certainly the consequences were unintended. You don’t deliberately obliterate hundreds of billions of dollars of investor money. And that is at the heart of this book—it is going to happen again. The financial markets that we have constructed are now so complex, and the speed of transactions so fast, that apparently isolated actions and even minor events can have catastrophic consequences.
  My path to these disasters was more or less happenstance. Shortly after I completed my doctorate in economics at the Massachusetts Institute of Technology and quietly nestled into the academic world, my area of interest—option theory—became the center of a Wall Street revolution. The Street became enamored of quants, people who can build financial products and trading models by combining brainiac-level mathematics with -massive computing power. In 1984 I was persuaded to join what would turn out to be an unending stream of academics who headed to New York City to quench the thirst for quantitative talent. On Wall Street, too, my initial focus was research, but with the emergence of derivatives, a financial construct of infinite variations, I got my nose out of the data and started developing and trading these new products, which are designed to offset risk. Later, I managed firmwide risk at Morgan Stanley and then at Salomon Brothers. It was at Morgan that I participated in knocking the legs out from under the market in October 1987 and at Solly that I helped to start things rolling in the LTCM crisis in 1998.

  You can read the entire first chapter at Barry’s site. Also, here’s the Amazon link.

• What to Name Your Tech Startup
  Eddy Elfenbein, September 4th, 2007 at 10:04 am

  It’s harder than you think:

  Even if you could say Abazab or Eefoof without snickering, would you want to do business with them?
  Would you feel OK owning Wakoopa shares in your 401(k)? Telling potential in-laws you met on Frengo? Relying on Ooma to call Grandma?
  Silicon Valley is in the midst of a great corporate baby boom. Venture capitalists have pumped $2.5 billion into 400 young Internet companies since the beginning of 2006, compared with $1.3 billion into 236 companies during the previous two years, according to research firm Dow Jones VentureOne.
  These entrepreneurial brainchildren have short life expectancies, destined to fight for revenue with the likes of Google, Yahoo and eBay. But still they are being born — and they need names.
  Naming a company is far more difficult than naming a child. The name needs to sound snappy, separate its young company from the pack and provide a unique Web address.
  Having two Ethans and three Madisons in a kindergarten class can create confusion, even embarrassment, but giving your startup a name that’s already taken guarantees a legal fight you can’t win.

  Blogs aren’t any easier. I spent days trying to come up with this one. I was THIS close to going with Fiscal Graffiti, but I figured the Led Zep reference might not be a good idea.
  Still, I snagged the URL. (See.)

• Feldstein Warns of Recession
  Eddy Elfenbein, September 4th, 2007 at 9:50 am

  I’m back! I hope everyone had a great Labor Day weekend. Since I’m labor too, I enjoyed my nice long three-day break.
  Anyway, I wanted to share with you this article I noticed on Harvard economist Martin Feldstein’s rather dire view of the economy. At the Fed’s annual Jackson Hole shindig, Feldstein said the Fed should cut rates by a full 1%.

  Lowering interest rates may result in a “stronger economy with higher inflation than the Fed desires,” a situation that Feldstein described as the “lesser of two evils.”
  “If that happens, the Fed would have to engineer a longer period of slow growth to bring the inflation rate back to the desired level,” said Feldstein, 67, president of the National Bureau of Economic Research. Some investors speculated that Feldstein was a candidate for Fed chairman before Bernanke was picked to succeed Alan Greenspan.
  Bernanke wasn’t in the room for Feldstein’s speech, though most other Fed officials were, along with central bankers and economists from around the world who traveled to the annual mountainside conference hosted by the Kansas City Fed bank.

  In other words, this isn’t just Trump and Cramer talking about cutting rates.