Behavioral Economics
Posted by Eddy Elfenbein on June 30th, 2008 at 11:53 am

If you want to read a long (and I mean looong) article on behavioral economics, then I suggest this 10,000-word opus by Alan Wolfe for The New Republic. The article is a look at two books, Happiness: A Revolution in Economics and Predictably Irrational: The Hidden Forces that Shape Our Decisions, but it will tell you a lot of the emergence of behavioral economics. I disagree with some parts and I think he frames the issues in an oversimplified way. Still, it’s an interesting read.
Here’s a sample:

Ariely and his colleagues set up a stand and offer Lindt truffles for 15 cents and Hershey’s Kisses for a penny: 73 percent of their customers choose the former, 27 percent the latter. Then they lower the price of the truffle to 14 cents and offer the Hershey Kiss for free, and now 69 percent choose the Kiss and only 31 percent the truffle. Calculating utility cannot explain this result. In both cases, the cost difference is identical. So it seems that we attach an almost mystical meaning to the idea of getting something for nothing. Zero is not just another number. It plays tricks with our rational minds.

Feed Update
Posted by Eddy Elfenbein on June 30th, 2008 at 11:21 am

Notice: Crossing Wall Street is a-switching over to FeedBurner. Please update your Interweb machines accordingly.
The new RSS feed address is http://feeds.feedburner.com/Crossingwallstreet

How Darwin won the evolution race
Posted by Eddy Elfenbein on June 27th, 2008 at 11:09 pm

Robin McKie writing in the Observer:

In early 1858, on Ternate in Malaysia, a young specimen collector was tracking the island’s elusive birds of paradise when he was struck by malaria. ‘Every day, during the cold and succeeding hot fits, I had to lie down during which time I had nothing to do but to think over any subjects then particularly interesting me,’ he later recalled.
Thoughts of money or women might have filled lesser heads. Alfred Russel Wallace was made of different stuff, however. He began thinking about disease and famine; about how they kept human populations in check; and about recent discoveries indicating that the earth’s age was vast. How might these waves of death, repeated over aeons, influence the make-up of different species, he wondered?
Then the fever subsided – and inspiration struck. Fittest variations will survive longest and will eventually evolve into new species, he realised. Thus the theory of natural selection appeared, fever-like, in the mind of one of our greatest naturalists. Wallace wrote up his ideas and sent them to Charles Darwin, already a naturalist of some reputation. His paper arrived on 18 June, 1858 – 150 years ago last week – at Darwin’s estate in Downe, in Kent.
Darwin, in his own words, was ‘smashed’. For two decades he had been working on the same idea and now someone else might get the credit for what was later to be described, by palaeontologist Stephen Jay Gould, as ‘the greatest ideological revolution in the history of science’ or in the words of Richard Dawkins, ‘the most important idea to occur to a human mind.’ In anguish Darwin wrote to his friends, the botanist Joseph Hooker and the geologist Charles Lyell. What followed has become the stuff of scientific legend.

Toward a Transparent Financial System
Posted by Eddy Elfenbein on June 27th, 2008 at 11:40 am

Vikram Pandit writes in today’s WSJ:

In recent dysfunctional markets, we have seen different accounting standards applied that were based on an institution’s form and regulatory jurisdiction. Accounting based on a mark-to-model has been severely tested by unobservable inputs intended to estimate the market. This has fed into difficult, far-reaching decisions that impacted capital and other factors as one misinformed trade set off a chain of similar trades. This raises an important question: Are there alternative accounting approaches we should apply, particularly in dysfunctional markets?

Deconstructing the Dow
Posted by Eddy Elfenbein on June 27th, 2008 at 7:13 am

Here’s you scary stat for the day. GM’s book value is -$72.50 per share. Going by the Dow’s current divisor, that means GM’s is worth nearly -600 Dow points.
Let’s be honest, the Dow Jones Industrial Average (^DJI) is a lousy index. It’s a price-weighted index of just 30 stocks. Combined, the 30 stocks are worth $3.7 trillion, which is less than one-third the value of the cap-weighted S&P 500 (^GSPC). I know the Dow is 112 years old, and it was great in its day, but the time has come for the old boy to retire.
Caterpillar (CAT), for example, is a $74 stock, which makes it the fourth most heavily weighted stock in the Dow. Yet, it’s $45 billion market value ranks 25th — and CAT is hardly the worst offender. That title belongs to what was once called General Motors (GM). If you’re not familiar with GM, it’s a health care benefits management firm that sells cars for a loss as a side venture.
GM’s price weighting is just 0.81% of the index, but it’s market value is a puny 0.18%. That means that GM has over 4.5 times weighting than it should have. Would anyone miss this is it were gone? I doubt it. Barry says replace it with Cisco (CSCO). That’s not bad, but I’d prefer UPS (UPS).
Here’s a listing of all the Dow stocks and their Share Weight, which is how much each stock makes up in the DJIA, along with each stock’s Market Cap Weight, which would be how much each stock would be worth if the Dow were weighted by market value.
Symbol……………..Share Weight……Market Cap Weight
AA…………………….2.51%…………………0.78%
AIG……………………2.00%…………………1.91%
AXP……………………2.76%…………………1.23%
BA…………………….4.85%…………………1.40%
BAC…………………..1.76%…………………3.01%
C……………………….1.26%…………………2.53%
CAT…………………….5.28%……………….1.24%
CVX…………………….6.92%………………..5.49%
DD……………………..3.04%………………..1.05%
DIS…………………….2.24%…………………1.64%
GE…………………….1.89%…………………7.20%
GM…………………….0.81%…………………0.18%
HD……………………..1.75%…………………1.14%
HPQ……………………3.18%…………………3.00%
IBM…………………….8.61%…………………4.53%
INTC……………………1.53%…………………3.10%
JNJ……………………..4.57%…………………4.93%
JPM…………………….2.58%…………………3.39%
KO………………………3.78%…………………3.37%
MCD…………………….4.01%…………………1.74%
MMM……………………4.99%…………………1.35%
MRK…………………….2.57%…………………2.12%
MSFT…………………..1.97%…………………7.04%
PFE…………………….1.22%…………………3.16%
PG………………………4.43%…………………5.18%
T…………………………2.38%…………………5.42%
UTX……………………..4.46%…………………1.66%
VZ……………………….2.44%…………………2.66%
WMT…………………….4.04%………………..6.11%
XOM……………………..6.14%……………….12.44%
General Electric (GE) is the stock that’s punished the most. The Dow weighs it about one-fourth of what it should be.
And don’t get me started on the Nasdaq!

Bed Bath & Beyond Earns 30 Cents a Share
Posted by Eddy Elfenbein on June 27th, 2008 at 12:13 am

Yesterday, Bed Bath & Beyond (BBBY) reported first-quarter earnings of 30 cents a share, three cents better than Street estimates.
The first quarter (March, April and May) tends to be the company’s slowest quarter. Since I’ve defended this stock for years, you probably won’t be surprised to hear me say that I’m pleased with these results. Sales rose by 6.1%, and sales-per-share rose by 13.9%.
The big thing that hurt the company was declining profit margins. For the 11th straight quarter, year-over-year net margins declined. That really takes a bite out of a company’s bottomline. Compared with the first quarter three years ago, BBBY’s sales are up 32.5%. Yet net income is down by over 22%. That’s what happens when your margins nearly fall in half.
On the conference call, BBBY expects Q2 EPS of 43 to 48 cents compared with 55 cents last year.
Here are the earnings results going back a few years:

The Constitution Stirs
Posted by Eddy Elfenbein on June 26th, 2008 at 5:17 pm

Finally.
I live right by one of the largest police stations in DC, yet there was an armed robbery directly across the street a few days ago.
For the record, until today, all handguns were banned in DC. Shotguns and rifles are allowed. You just have to keep them unloaded and disassembled.

The Dow is Now Down for the Millennium
Posted by Eddy Elfenbein on June 26th, 2008 at 3:47 pm

The Dow closed at 11,453.42 which means the index is now in the red for the millennium. The Dow closed December 31, 1999 at 11,497.12.
Of course, that doesn’t include dividends. Over the last 8.5 years, dividends have added about 19.5% to the Dow’s total return.
All 30 stocks were down today. In percentage terms, today was the third worst day for the Dow in the last five years. The 3.13% sell-off from three weeks ago was slightly worse. Today was the 10th 300+ point sell-off in the last twelve months.
The Dow is now at its lowest close since 9/11/2006. The S&P 500 wasn’t down as much, and it’s still holding above its closing low from March 10 and March 17.
For the millennium, the S&P 500 is off 12.7%.
Here’s something you don’t see every day. On the NYSE, decliners led advancers by 11-to-2. But advancing volume and declining volume were roughly equal.

GM Hits a 34-Year Low
Posted by Eddy Elfenbein on June 26th, 2008 at 10:15 am

Goldman cuts General Motors (GM) to Sell. The stock is down over 11% today.

Update: Make that a 53-year low.

First-Quarter GDP Revised Higher
Posted by Eddy Elfenbein on June 26th, 2008 at 9:45 am

The government slightly raised its estimate of first-quarter GDP growth from 0.9% to 1.0%.

The figure was initially reported in April at an anemic 0.6 percent, fueling concerns that the U.S. economy may be slipping into recession. However, those concerns have subsided as fresh data showed healthier growth, particularly in consumer spending and exports.
Consumer spending, which accounts for more than two-thirds of national economic activity, rose at a 1.1 percent rate in the quarter, slightly ahead of the preliminary estimate of 1 percent last month. Despite that upward revision, consumer spending posted its smallest gain since the second quarter of 2001, which was during the last recession.

This the sixth time in the last eight quarters that GDP has come in below the long-term trend of 3%.