Mind Over Money
This video from PBS explores the idea of rational markets in an irrational world.
High Yield Bonds Trading At Par
For the first time since 2007, U.S. high-yield bonds are trading at par, suggesting that investors are confident of getting their money back.
Tough Choices for Bernanke
Two major questions facing the Fed are whether the weak recovery will continue into 2011 and whether pouring money into the economy would be worth the risk.
India pension fund will consider buying stocks for the first time
India's Employees' Provident Fund Organization, which manages pension savings for 50 million private-sector and government workers, has always been barred from investing any of its $106 billion in stocks, but there is a possibility that will change.
Vote Moves Turkey Closer to EU Membership
Broken Investment Banking Model
Lehman Bros. collapsed two years ago, and investors are still concerned about whether such an investment-banking model can be repaired. Few banks with large divisions in capital-market business are trading close to prices traded before Lehman filed for bankruptcy.
SEC Expands Circuit Breaker Program to Include ETFs
The Securities and Exchange Commission has approved rules amid fallout of the May 6 "flash crash." The watchdog has expanded its circuit-breaker program to include some exchange-traded funds and stocks in the Russell 1000 Index.
Morgan Stanley Global Economics
Deflation: Will America and Europe Follow Japan?
The Big Boys Discover Options
Quants: The Alchemists of Wall Street
'The cult of equity is dead'
This decade's investment: the agriculture play
Can an ETF collapse?
Obama Promotes Goolsbee to Top Economic Post
Chris Blackwell on Island Records' Legacy
Sunday, September 19, 2010
Week in Review
The week that was:
US stocks closed higher for the third straight week and gold closed Friday at a record high of $1277.50 an ounce, with silver ending the session at a 30-year high.
While the stock market has performed well over the last few weeks, it still seems to be in a state of flux. We have crossed the 10,600 mark on the Dow a number of times in the last 12 months only to retreat again. My bet is that we will see 10,000 before long this time as well. The mediocre economic news of the last month wasn’t bad enough to push below Dow 10,000, and is not good enough to push us above current levels. Investors seem to be waiting for the upcoming earnings season to provide greater clarity. The double dip talk has subsided somewhat for now, but most of the major economic variables are still below levels prevailing 33 months ago (the official start of the recession). In a typical recovery, you would want to see these economic variables making new highs which leads me to be slightly bearish at the present time.
Stocks:
The S&P 500 rose 16.04 points this week, or 1.45%, to 1125.59. The Nasdaq Composite rose 73.13 points, or 3.26%, to 2315.61. The Dow Industrials rose 145.08 points, or 1.39%, to 10607.85. Tech stocks have led the charge of late as the Nasdaq is up 7.52% over the last three weeks.
- On Tuesday, Best Buy (BBY) reported a 2nd quarter earnings increase of 61%, though same-store sales declined 0.1%. Management updated the full-year outlook. The stock rose 7.4% on the news.
Bonds:
| End of week bond yields: |
| 2 Year yield = 0.46%, down 11 bps from last week. |
| 3 Year yield = 0.74%, down 14 bps from last week. |
| 5 Year yield = 1.44%, down 14 bps from last week. |
| 10 Year yield = 2.74%, down 5 bps from last week. |
| 30 Year yield = 3.90%, up 3 bps from last week. |
What to look for next week:
7:30 AM Tuesday Housing Starts
1:15 PM Tuesday FOMC Meeting Announcement
9:00 AM Thursday Existing Home Sales
7:30 AM Friday Durable Goods Orders
Friday, September 10, 2010
Corporate Culture
How important is corporate culture? Extremely important, in my opinion. We should care about culture to a great extent because organizational success directly depends on it. Organizational culture affects and implicitly regulates the way members of the organization think, feel, and act within the framework of that organization. Culture can be interwoven with strategy in order to create a structure and environment that empowers employees to want to succeed. Also, a strong corporate culture can remove a lot of ambiguity for employees. If an employee has a question about how to proceed in a wide variety of unclear circumstances, a strong culture can often inherently provide the answers.
Without a doubt, it is tough to implement a new corporate culture, but once it is in place, it is accepted and not often questioned. Culture can be a very subtle, but effective method of delivering messages to employees. A culture where the leaders at the top are dictating and communicating new rules and policies is much less effective than a culture that enables certain strategic peers to deliver that same message.
I think having a clear and consistent corporate culture might matter more at organizations that are experiencing a great deal of change, or in organizations that have fairly new leaders. In both of these instances, employees can lean on the culture to tell them what to do and how to act in uncertain times. This will at least provide a certain level of stability for employees in the face of uncertainty.
BP’s corporate culture has been on display in recent months due to the oil spill in the gulf. As more facts come to surface, it’s easier to see BP’s true culture. It seems to me that management was very much driven by financial goals and may have pressed field managers to take too much risk at the operational level. If this were a stronger culture, lower-level safety personnel would have been encouraged to push back on upper management in times like this. But it doesn’t seem that the culture fostered this type of activity.
A corporate culture that I respect and admire currently is Threadless (the company my wife works for). Threadless is an online t-shirt company that does an excellent job of creating a collaborative and open work environment. The physical space is very open which encourages employees to talk and share ideas and every department is given a budget to create their workspace. The physical work space also includes a central area with all sorts of games and music and opportunities for employees to interact. Also, employees are encouraged to IM with each other throughout the day. From my interactions with the employees, it is obvious that everyone is excited about coming to work and putting out a quality product. I don't think the company would be nearly as successful as they are without the continued emphasis on culture. For more on Threadless, check out this video:
Without a doubt, it is tough to implement a new corporate culture, but once it is in place, it is accepted and not often questioned. Culture can be a very subtle, but effective method of delivering messages to employees. A culture where the leaders at the top are dictating and communicating new rules and policies is much less effective than a culture that enables certain strategic peers to deliver that same message.
I think having a clear and consistent corporate culture might matter more at organizations that are experiencing a great deal of change, or in organizations that have fairly new leaders. In both of these instances, employees can lean on the culture to tell them what to do and how to act in uncertain times. This will at least provide a certain level of stability for employees in the face of uncertainty.
BP’s corporate culture has been on display in recent months due to the oil spill in the gulf. As more facts come to surface, it’s easier to see BP’s true culture. It seems to me that management was very much driven by financial goals and may have pressed field managers to take too much risk at the operational level. If this were a stronger culture, lower-level safety personnel would have been encouraged to push back on upper management in times like this. But it doesn’t seem that the culture fostered this type of activity.
A corporate culture that I respect and admire currently is Threadless (the company my wife works for). Threadless is an online t-shirt company that does an excellent job of creating a collaborative and open work environment. The physical space is very open which encourages employees to talk and share ideas and every department is given a budget to create their workspace. The physical work space also includes a central area with all sorts of games and music and opportunities for employees to interact. Also, employees are encouraged to IM with each other throughout the day. From my interactions with the employees, it is obvious that everyone is excited about coming to work and putting out a quality product. I don't think the company would be nearly as successful as they are without the continued emphasis on culture. For more on Threadless, check out this video:
Thirteen Days
I am currently reading Thirteen Days by Robert F. Kennedy. This book is a memoir of the Cuban missile crisis and provides many key lessons in understanding how groups make decisions. In the case of the Bay of Pigs, the group was an all-star team of characters who were able to put their heads together to make a colossal blunder.
Numerous errors in seeking and receiving information are prevalent throughout the Bay of Pigs decision process. Negativity dominance was apparent during their discussions as they typically focused only on worst-case scenarios and allowed fear to play a major role in the final decision. This impacted the decision-making process by not allowing the group to think about all possible outcomes of their actions and not encouraging the group to think about a more creative, less destructive solution. Confirmation bias was also found in this process as the decision makers typically were only interested in hearing arguments that supported their point of view. This influenced the group decision-making process by not allowing valid arguments to be heard and taken seriously. Groupthink also reinforces the power of the situation. Many of the wisest individuals can be brought together as one collective “dream team” to tackle a tough situation. Unfortunately, due to the forces at work in the group dynamic, these individuals often make a suboptimal decision in the end.
Numerous errors in seeking and receiving information are prevalent throughout the Bay of Pigs decision process. Negativity dominance was apparent during their discussions as they typically focused only on worst-case scenarios and allowed fear to play a major role in the final decision. This impacted the decision-making process by not allowing the group to think about all possible outcomes of their actions and not encouraging the group to think about a more creative, less destructive solution. Confirmation bias was also found in this process as the decision makers typically were only interested in hearing arguments that supported their point of view. This influenced the group decision-making process by not allowing valid arguments to be heard and taken seriously. Groupthink also reinforces the power of the situation. Many of the wisest individuals can be brought together as one collective “dream team” to tackle a tough situation. Unfortunately, due to the forces at work in the group dynamic, these individuals often make a suboptimal decision in the end.
Self-fulfilling prophecies
I took Professor Nick Epley's class this summer. The class is titled Managing in Organizations but I think a more appropriate title might be The Psychology of Business, because it was essentially a psychology class. We spent a great deal of time thinking about the various factors at play when managing people. In order to successfully manage others, whether they are competitors or co-workers, you must be able to understand thoughts, feelings, attitudes, motivations, and determinants of behavior. Unfortunately, this isn't so easy because our human intuition is often misguided.
I was able to take away many key learnings from each class session and was able to immediately apply some of these lessons after a recent discussion I had with my father.
In 2003, my father founded a private elementary school in East St Louis, Illinois. The city is well-known in the area to have sky-high crime rates and many residents live below the poverty line. 100% of his students and six of seven teachers are African-American. A recent discussion with my dad revealed some interesting examples of bias and potential self-fulfilling prophecies within the school.
During a faculty meeting last month, they were discussing the students’ performance on the standardized tests that had been administered. The students had performed on par with regard to the other test takers across the nation. One of the teachers commented that “this is great news considering that our students are below-average!” She was implying that, because many of these students came from broken homes and were very poor, they were below average in comparison to the average student in the U.S. My dad was quick to correct her by reminding her that the students in their school were just as capable of learning and performing well as other students in the US regardless of their background. It seems that this teacher’s internal biases may have briefly surfaced during the meeting.
Another example arose a few weeks later. In an effort to impress upon the students the importance of these standardized tests, the teachers in the higher grades were to go over a college admission application with the students to show them that these tests matter because someday they would be required to report SAT scores. When my dad followed up with one of the teachers to see how the college application discussion went, she said: “Well, I decided to go a different route. I thought it would be more realistic to go over a QuikTrip (the local gas station) application.” My dad was shocked and explained to her that this was potentially creating a self-fulfilling prophecy for the kids. In addition to creating a self-fulfilling prophecy, this teacher’s internal biases and expectations for the students also surfaced.
I was able to take away many key learnings from each class session and was able to immediately apply some of these lessons after a recent discussion I had with my father.
In 2003, my father founded a private elementary school in East St Louis, Illinois. The city is well-known in the area to have sky-high crime rates and many residents live below the poverty line. 100% of his students and six of seven teachers are African-American. A recent discussion with my dad revealed some interesting examples of bias and potential self-fulfilling prophecies within the school.
During a faculty meeting last month, they were discussing the students’ performance on the standardized tests that had been administered. The students had performed on par with regard to the other test takers across the nation. One of the teachers commented that “this is great news considering that our students are below-average!” She was implying that, because many of these students came from broken homes and were very poor, they were below average in comparison to the average student in the U.S. My dad was quick to correct her by reminding her that the students in their school were just as capable of learning and performing well as other students in the US regardless of their background. It seems that this teacher’s internal biases may have briefly surfaced during the meeting.
Another example arose a few weeks later. In an effort to impress upon the students the importance of these standardized tests, the teachers in the higher grades were to go over a college admission application with the students to show them that these tests matter because someday they would be required to report SAT scores. When my dad followed up with one of the teachers to see how the college application discussion went, she said: “Well, I decided to go a different route. I thought it would be more realistic to go over a QuikTrip (the local gas station) application.” My dad was shocked and explained to her that this was potentially creating a self-fulfilling prophecy for the kids. In addition to creating a self-fulfilling prophecy, this teacher’s internal biases and expectations for the students also surfaced.
Monday, September 6, 2010
Best Links for the Last Seven Days
Here are links to the best articles I've read in the last week:
WSJ Deal Journal - Burger King Is No Value Meal
Clusterstock - Gary Townsend: Obama Forced Goldman's Hand To Disband Prop Trading
The Economist - The odd decouple
Theories about why some rich-world economies are doing better than America's don't stand up.
"America's economy may have some unique troubles, but its fortunes are still strongly tied to the rest of the world," The Economist writes.
The Economist/Free exchange - Nowhere to go
Politics will decide whether a U.S. double-dip recession comes.
Bloomberg - Bernanke Says He Wasn't 'Straightforward' on Lehman
Bernanke told the US Financial Crisis Inquiry Commission that the Fed did not have authority to save Lehman Bros. and that he regrets not saying that in a congressional hearing at the time.
Reuters - Analysis: Warnings mount as retail ETF surge gathers pace
"It is important that the industry does not overreach when innovating in the ETF arena," said the Bank of England in its Financial Stability Report.
Reuters - Congressmen warn SEC on blaming high-frequency traders
Republican congressmen, Bachus and Hensarling, wrote that "turning back the clock" on market innovation "could do more harm than good."
New York Times/Economix blog - Young Firms, Not Small Ones, Are the Engines of Job Growth
The Economist/Free exchange - How to fix unemployment
To create jobs, America must build companies.
Research suggests that the best thing the U.S. can do to create jobs and reduce unemployment is to support the formation of businesses, according the The Economist.
Reuters - Bidding wars, scrapped holidays herald M&A pickup
August is normally a quiet month for M&A, but there was an explosion of activity last month.
Bloomberg - Sell Signal on 36% Profit Increase Has Analysts in Math Denial
Stock analysts are turning pessimistic despite recently raising earnings-growth forecasts for the S&P 500 by 36%.
Bloomberg - Deficit Cost Declines Give Obama Stimulus Clinton Couldn't Get
The Economist/Free exchange - Clearing the air
JPMorgan Asset Management - Non-normality of Market Returns
Seeking Alpha - Just One ETF: Emerging Market Debt for Lower-Volatility Diversification
Morningstar - Indexing and ETFs
Summarizing the major equity index providers and the ways to gain access to them through ETFs
Bloomberg - Bernanke Says Fed Will Do 'All It Can' to Ensure U.S. Recovery
Inc. - You Know What Your Company Does. Can You Explain It in 30 Seconds?
ETFdb - Friday's ETF To Watch: Inflation Protected Bond (TIP)
GMO White Paper - A Man from a Different Time
James Montier on dividends
Financial Times - Why ETF Expense Ratios Can Be Misleading
Random Roger's Big Picture - The Big Picture for the Week of September 5, 2010
WSJ Deal Journal - Burger King Is No Value Meal
Clusterstock - Gary Townsend: Obama Forced Goldman's Hand To Disband Prop Trading
The Economist - The odd decouple
Theories about why some rich-world economies are doing better than America's don't stand up.
"America's economy may have some unique troubles, but its fortunes are still strongly tied to the rest of the world," The Economist writes.
The Economist/Free exchange - Nowhere to go
Politics will decide whether a U.S. double-dip recession comes.
Bloomberg - Bernanke Says He Wasn't 'Straightforward' on Lehman
Bernanke told the US Financial Crisis Inquiry Commission that the Fed did not have authority to save Lehman Bros. and that he regrets not saying that in a congressional hearing at the time.
Reuters - Analysis: Warnings mount as retail ETF surge gathers pace
"It is important that the industry does not overreach when innovating in the ETF arena," said the Bank of England in its Financial Stability Report.
Reuters - Congressmen warn SEC on blaming high-frequency traders
Republican congressmen, Bachus and Hensarling, wrote that "turning back the clock" on market innovation "could do more harm than good."
New York Times/Economix blog - Young Firms, Not Small Ones, Are the Engines of Job Growth
The Economist/Free exchange - How to fix unemployment
To create jobs, America must build companies.
Research suggests that the best thing the U.S. can do to create jobs and reduce unemployment is to support the formation of businesses, according the The Economist.
Reuters - Bidding wars, scrapped holidays herald M&A pickup
August is normally a quiet month for M&A, but there was an explosion of activity last month.
Bloomberg - Sell Signal on 36% Profit Increase Has Analysts in Math Denial
Stock analysts are turning pessimistic despite recently raising earnings-growth forecasts for the S&P 500 by 36%.
Bloomberg - Deficit Cost Declines Give Obama Stimulus Clinton Couldn't Get
The Economist/Free exchange - Clearing the air
JPMorgan Asset Management - Non-normality of Market Returns
Seeking Alpha - Just One ETF: Emerging Market Debt for Lower-Volatility Diversification
Morningstar - Indexing and ETFs
Summarizing the major equity index providers and the ways to gain access to them through ETFs
Bloomberg - Bernanke Says Fed Will Do 'All It Can' to Ensure U.S. Recovery
Inc. - You Know What Your Company Does. Can You Explain It in 30 Seconds?
ETFdb - Friday's ETF To Watch: Inflation Protected Bond (TIP)
GMO White Paper - A Man from a Different Time
James Montier on dividends
Financial Times - Why ETF Expense Ratios Can Be Misleading
Random Roger's Big Picture - The Big Picture for the Week of September 5, 2010
Week in Review: Labor Day Edition
The week that was:
The US markets ended last week on a four-session winning streak. If you’re looking for some positivity from the markets, this was the best pre-Labor week in two decades, in terms of market performance!! However, the economic data was very mixed.
On the positive side:
• Consumer confidence data for August increased to 53.5 from 51.
• The August ISM revealed a surprise rebound in the manufacturing sector.
• The labor department reported on Friday that 54,000 nonfarm jobs were lost in August. This is a much slower decline than anticipated. Unemployment now stands at 9.6%.
• The Case-Shiller home-price index showed that U.S. home prices rose 4.4% during the 2nd quarter compared with the 1st quarter.
On the negative side:
• Sales of previously owned homes fell sharply by 27% in July.
• The Chicago PMI (gauge of business expansion) declined to 56.7 from 62.3 in July.
• Jobs data was also not favorable as ADP’s employment change report surprised the market with news that private-sector employment dropped by 10,000 jobs in August. This is the first decrease in six months. Economists had predicted that 17,000 jobs would be gained.
Stocks:
The S&P 500 rose 39.92 points this week, or 3.75%, to 1104.51. The Nasdaq Composite rose 80.12 points, or 3.72%, to 2233.75. The Dow Industrials rose 297.28 points, or 2.93%, to 10447.93. This represents the largest weekly gain for the S&P since the week ended July 9th.
• Hewlett-Packard (HPQ) appears to have defeated Dell (DELL) in the bidding war over 3Par. HPQ raised its bid for the data-storage company to $33/share. This has created a $2.1 billion windfall for 3Par insiders and investors. $800 million will go to three VC firms who are collectively the company’s biggest shareholders. Almost $100 million will go to 3Par’s CEO, David Scott, who left HP to become 3Par’s CEO in 2001.
• Sources say that Goldman Sachs (GS) has decided to shutter its principal strategies unit, which does its proprietary trading, in the wake of regulation passed by Congress. JPMorgan Chase also announced a few days ago that it is also working toward ending all proprietary trading. Analysts at Barclays estimate that the Volcker rule may cost JPM as much as $1.4 billion in annual profit.
• Burger King (BKC) accepted a $4 billion buyout offer from 3G Capital, a group backed by Brazilian investors. 3G Capital intends to expand Burger King’s presence in Asia and Latin America. BKC stock rose almost 41% from Tuesday to Thursday of last week.
Bonds:
End of week bond yields:
3 Month yield = 0.10%, down 2 bps from last week.
2 Year yield = 0.51%, down 5 bps from last week.
3 Year yield = 0.79%, down 3 bps from last week.
10 Year yield = 2.70%, up 6 bps from last week.
30 Year yield = 3.78%, up 9 bps from last week.
What to look for next week:
7:30 AM Thursday International Trade
• The trade deficit jumped in June to $49.9 billion from $42 billion in May, its widest point since October 2008. The consensus forecast is that the figure should decline slightly in July.
The US markets ended last week on a four-session winning streak. If you’re looking for some positivity from the markets, this was the best pre-Labor week in two decades, in terms of market performance!! However, the economic data was very mixed.
On the positive side:
• Consumer confidence data for August increased to 53.5 from 51.
• The August ISM revealed a surprise rebound in the manufacturing sector.
• The labor department reported on Friday that 54,000 nonfarm jobs were lost in August. This is a much slower decline than anticipated. Unemployment now stands at 9.6%.
• The Case-Shiller home-price index showed that U.S. home prices rose 4.4% during the 2nd quarter compared with the 1st quarter.
On the negative side:
• Sales of previously owned homes fell sharply by 27% in July.
• The Chicago PMI (gauge of business expansion) declined to 56.7 from 62.3 in July.
• Jobs data was also not favorable as ADP’s employment change report surprised the market with news that private-sector employment dropped by 10,000 jobs in August. This is the first decrease in six months. Economists had predicted that 17,000 jobs would be gained.
Stocks:
The S&P 500 rose 39.92 points this week, or 3.75%, to 1104.51. The Nasdaq Composite rose 80.12 points, or 3.72%, to 2233.75. The Dow Industrials rose 297.28 points, or 2.93%, to 10447.93. This represents the largest weekly gain for the S&P since the week ended July 9th.
• Hewlett-Packard (HPQ) appears to have defeated Dell (DELL) in the bidding war over 3Par. HPQ raised its bid for the data-storage company to $33/share. This has created a $2.1 billion windfall for 3Par insiders and investors. $800 million will go to three VC firms who are collectively the company’s biggest shareholders. Almost $100 million will go to 3Par’s CEO, David Scott, who left HP to become 3Par’s CEO in 2001.
• Sources say that Goldman Sachs (GS) has decided to shutter its principal strategies unit, which does its proprietary trading, in the wake of regulation passed by Congress. JPMorgan Chase also announced a few days ago that it is also working toward ending all proprietary trading. Analysts at Barclays estimate that the Volcker rule may cost JPM as much as $1.4 billion in annual profit.
• Burger King (BKC) accepted a $4 billion buyout offer from 3G Capital, a group backed by Brazilian investors. 3G Capital intends to expand Burger King’s presence in Asia and Latin America. BKC stock rose almost 41% from Tuesday to Thursday of last week.
Bonds:
End of week bond yields:
3 Month yield = 0.10%, down 2 bps from last week.
2 Year yield = 0.51%, down 5 bps from last week.
3 Year yield = 0.79%, down 3 bps from last week.
10 Year yield = 2.70%, up 6 bps from last week.
30 Year yield = 3.78%, up 9 bps from last week.
What to look for next week:
7:30 AM Thursday International Trade
• The trade deficit jumped in June to $49.9 billion from $42 billion in May, its widest point since October 2008. The consensus forecast is that the figure should decline slightly in July.
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