• A Demon of Our Own Design
    Posted by on September 4th, 2007 at 3:27 pm

    51KKQhPbwnL.jpg
    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
    Posted by on 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
    Posted by on 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.

  • Buy List Update
    Posted by on August 30th, 2007 at 5:06 pm

    Now that 2007 is nearly two-thirds over, let’s have a look at how our Buy List is doing.
    So far, the 20 stocks on the Buy List are down 2.95% (not including dividends) while the S&P 500 is up 2.78%. The Buy List has been 8.7% less than volatile than the S&P 500.
    Here’s how the Buy List has performed:
    image519.png

  • Dell’s Earnings
    Posted by on August 30th, 2007 at 4:36 pm

    Dell (DELL) just reported surprisingly good earnings of 32 cents a share.

    Dell, like competitors Hewlett-Packard and Apple, profited from lower costs for computer components amid a supply glut. But profit was reduced by payments to its former CEO and 400 employees for stock options that could not be exercised during the company’s internal audit, which found that executives adjusted accounts to meet financial targets.

    The big problem is that these aren’t official results. Dell hasn’t filed with the SEC for over a year. Here are the numbers, but bear in mind that they’ll be changed.

    Quarter…..Sales….Oper. Income…..EPS
    1-97………$2,588………$198………..$0.0675
    2-97………$2,814………$296………..$0.0725
    3-97………$3,188………$346………..$0.085
    4-97………$3,737………$397………..$0.10
    1-98………$3,920………$429………..$0.11
    2-98………$4,331………$483………..$0.12
    3-98………$4,818………$539………..$0.14
    4-98………$5,173………$595………..$0.15
    1-99………$5,537………$600………..$0.16
    2-99………$6,142………$694………..$0.19
    3-99………$6,784………$650………..$0.18
    4-99………$6,801………$513………..$0.16
    1-00………$7,280………$625………..$0.19
    2-00………$7,670………$736………..$0.22
    3-00………$8,264………$818………..$0.25
    4-00………$8,674………$589………..$0.18
    1-01………$8,028………$588………..$0.17
    2-01………$7,611………$545………..$0.16
    3-01………$7,468………$544………..$0.16
    4-01………$8,061………$594………..$0.17
    1-02………$8,066………$590………..$0.17
    2-02………$8,459………$677………..$0.19
    3-02………$9,144………$758………..$0.21
    4-02………$9,735………$809………..$0.23
    1-03………$9,532………$811………..$0.23
    2-03………$9,778………$840………..$0.24
    3-03………$10,622…….$912………..$0.26
    4-03………$11,512…….$981………..$0.29
    1-04………$11,540…….$966………..$0.28
    2-04………$11,706…….$1,006……..$0.31
    3-04………$12,502…….$1,089……..$0.33
    4-04………$13,457…….$1,187……..$0.37
    1-05………$13,386…….$1,174……..$0.37
    2-05………$13,428…….$1,173……..$0.38
    3-05………$13,911…….$944………..$0.39
    4-05………$15,183…….$1,246……..$0.43
    1-06………$14,216…….$949………..$0.33
    2-06………$14,094…….$605………..$0.22
    3-06………$14,383…….$824………..$0.30
    4-06………$14,402…….$801………..$0.30
    1-07………$14,622…….$947………..$0.34
    2-07………$14,771…….$896………..$0.32

  • The Bin Laden Trade
    Posted by on August 30th, 2007 at 9:32 am

    Steven Smith and Aaron Task at TheStreet report on unusual options trades:

    The first area of focus is that open interest on September 700 S&P puts is 116,000 contracts, an unusually high number for such a low-probability trade. A put is a defensive bet that gives the holder the right to sell a security at a specified price, in this case more than 50% below the S&P 500’s current level of 1463 as of Wednesday’s close.
    For comparison’s sake, according to the Option Clearing Corp., the open interest in the July 700 strike some three weeks prior to expiration on July 20 was 790 calls and 7,300 puts, and the August 700 strike showed 1,250 calls and 14,800 puts prior to Aug. 17 expiration.
    And the volume completely outstrips anything seen last September, when the S&P was around 1300, some 20% below current levels. In September 2006, the 700 strike had 600 calls and 7,500 puts, and no strike below 1000 had open interest surpassing 42,000 contracts, and that was the 900 puts.
    The bulk of the September SPX trades in question have been put on since June 1. Similar bets have also been placed on the DJ Eurostoxx 50 index, which won’t pay off unless the index tumbles nearly 25% to 2800, or below, by expiration on the third Friday of September.

  • GDP Revised Higher
    Posted by on August 30th, 2007 at 9:18 am

    Second-quarter GDP growth was revised higher this morning from 3.38% to 3.96%. The WSJ runs through some of the numbers.

    Trade gave the economy a bigger push than first estimated — because U.S. exports were revised up, rising by a rate of 7.6% instead of the originally reported 6.4%. Imports fell 3.2%; originally, the decrease was seen at 2.6%.
    The revised data showed trade added 1.42 percentage points to GDP in the second quarter. Originally, trade was seen contributing just 1.18 percentage points to GDP.
    Businesses elevated spending more than previously thought. Outlays rose by 11.1% in April through June; originally, spending was estimated rising 8.1%. Business spending climbed 2.1% in the first quarter. Second-quarter investment in structures by business surged by 27.7%. Equipment and software increased 4.3%.
    Consumer spending advanced by 1.4%, up from a previously reported 1.3% increase but below the first quarter’s 3.7% climb. Consumer spending accounts for about 70% of economic activity. It contributed 1.03 percentage points to GDP in the second quarter; the original estimate was a contribution of 0.89 percentage point.
    Durable-goods purchases increased 1.7% in April through June, above the previously reported 1.6% increase but below an 8.8% climb in the first quarter. Durable goods are expensive items designed to last at least three years, such as refrigerators.
    Second-quarter nondurables spending fell by 0.3%. Services spending went 2.3% higher.
    Residential fixed investment, which includes spending on housing, tumbled by 11.6% in the second quarter, a drop bigger than the previously reported 9.3% plunge. Housing fell 16.3% in the first quarter.

  • Hump Day Redux
    Posted by on August 30th, 2007 at 9:16 am

    Yesterday was the 14th time in the last 19 Wednesdays that the S&P has rallied.
    The numbers here are truly remarkable. The market is up for 35 of the last 50 Wednesdays. That’s better a better winning percentage than both the Red Sox and Yankees.
    Going back to September 28, 2005–that’s an even 100 Wednesdays, the S&P rose 68 times including a run of 13 straight in early 2006. Combined, the other four days of the week are slightly negative.

  • It felt like `Apocalypse Now,
    Posted by on August 30th, 2007 at 8:46 am

    The latest problem with the Hamptons–a surge in helicopter traffic:

    “It felt like ‘Apocalypse Now,'” East Hampton resident Kathi Goldman said at a recent public hearing, describing choppers over her house in the northwest woods. Goldman, a retired science teacher at Grace H. Dodge High School in the Bronx, said choppers were so noisy on July 3 that she fled to her apartment on Manhattan’s Upper West Side.

  • How Much Would You Pay?
    Posted by on August 29th, 2007 at 11:03 am

    Let’s say some kids in your neighborhood have a lemonade stand. You’re impressed by their entrepreneurial spirit so you order a glass and ask them how business is going.
    “Great! We sold $20 worth of lemonade.”
    “Wow! That’s really good. How much profit did you make?”
    “Well, our costs were $17 so we made a $3 profit.”
    You come back in a year (let’s suspend reality for a bit) and you want to see how the biz is going.
    “We had a great year! We sold $55 worth of lemonade and our cost was just $35, so we made $20.”
    This impresses you a lot. After a lengthy discussion of just-in-time inventory, first-mover advantage and Nassim Taleb’s latest, you decide to make the kids an offer for the lemonade stand.
    How much would you pay? Say, $400?
    Remember, it’s growing fast. How about $700? Maybe $1,000??
    Well, it turns out, the kids have hired Goldman and they inform you that the price of the stand is $3,500 and not one penny less.
    That’s about the current valuation for Baidu.com.