How Important Are the Numbers?
Posted by Eddy Elfenbein on June 18th, 2020 at 10:33 am

Here’s an interesting study:

The deteriorating usefulness of financial report information and how to reverse it

Abstract

There is a wide-spread and growing dissatisfaction with the relevance and usefulness of financial report information, particularly among investors and corporate executives. The dissatisfaction is corroborated by extensive research which consistently documents a growing gap between capital market indicators and financial information, more so for reported earnings. The reported earnings of most firms no longer reflect enterprise performance. I trace the deterioration of the usefulness of financial information to: (1) the abandonment by accounting standard-setters of the traditional income statement (matching) model in favour of a balance sheet (asset valuation) model, and (2) standard-setters’ failure to adjust asset recognition rules to the fundamental shift in corporate value-creating resources from tangible to intangible assets. I conclude this paper with change proposals to restore the usefulness of financial information to investors.

Morning News: June 18, 2020
Posted by Eddy Elfenbein on June 18th, 2020 at 7:04 am

Europe Takes Steps to Block Chinese Bargain Hunters

U.S. Ranked Worst for Workers’ Rights Among Major Economies

What It Takes to Reopen a Small Business Right Now

Got Change? There’s A Coin Shortage Because Of Coronavirus Stopping The Flow Of Physical Currency

‘Banking While Black’: How Cashing a Check Can Be a Minefield

EU In Advanced Talks With Johnson & Johnson On COVID-19 Vaccine Deal

Automakers Rev Up U.S. Assembly Lines, Wary Of Outside Risks To Workers

JD.com Shares Rise 3.5% In The E-Commerce Giant’s $3.87 Billion Hong Kong Debut

The Electric Car Battery Boom Has Screeched to a Halt, For Now

Michael Batnick: Animal Spirits: The Opposite of a Falling Knife

Ben Carlson: When Should You Sell Your Stocks?

Jeff Carter: Risk and COVID 19

Jeff Miller: Weighing the Week(s) Ahead: Can Investors Depend on the Rebound Trend?

Howard Lindzon: The Pressure Of Large Numbers and Some Acquisition Predictions

Joshua Brown: Bankrupt Equities, The Most Volatile Year Ever And The Luckiest Day Traders, Who Is The House? & Driving, Not Flying

Be sure to follow me on Twitter.

Quiet Day So Far
Posted by Eddy Elfenbein on June 17th, 2020 at 11:38 am

The stock market is down a bit today, but not by much. Texas said it saw a one-day jump in hospital admissions of 11%. That’s the largest increase this month and it’s helping to still fears of a second wave.

We also learned this morning that housing starts rose by 4.3% last month. I was pleased to see that building permits rose by 14.4%. Those are good signs.

Morning News: June 17, 2020
Posted by Eddy Elfenbein on June 17th, 2020 at 7:03 am

Saudi Aramco Completes $69 Billion SABIC Stake Deal, Extends Schedule

The I.P.O. Comes Roaring Back in the Pandemic

May Flowers: Where the U.S. Retail Blooms Are And Are Not

Hertz’s Crazy Idea Will Cost Speculators Millions

The Rich Cut Their Spending. That Has Hurt All the Workers Who Count on It.

Trump Administration’s Nominee for Development Bank Chief Breaks With Protocol

Trillions in Stimulus Go Unchecked With Watchdogs Kept Toothless

Apple’s Dominance Is Finally Under Threat

Former Bumble Bee C.E.O. Is Sentenced in Tuna Price-Fixing Scheme

PG&E Pleads Guilty to 84 Counts of Manslaughter in Camp Fire Case

Nick Maggiulli: Why So Many People Are Getting into the Stock Market

Ben Carlson: How Will Private Equity Work in 401ks?

Roger Nusbaum: The Panic Has Subsided For Now

Howard Lindzon: The Gap Year

Joshua Brown: Feelings Drive Short-Term Prices & One Fifth of Investors Sold All Their Stocks

Be sure to follow me on Twitter.

Market Jumps on Strong Retail Sales Report
Posted by Eddy Elfenbein on June 16th, 2020 at 11:07 am

The market is having a nice morning thanks to a good retail sales report. The government said that retail sales rose 17.7% in May. Economists had been expecting a gain of “only” 7.7%.

You don’t often see a retail sales report beat expectations by 10%.

There were also reports on the benefits of dexamethasone. Apparently, the drug was shown to reduce Covid-19 deaths by one third.

From the BBC, “Had the drug had been used to treat patients in the UK from the start of the pandemic, up to 5,000 lives could have been saved, researchers say.”

At one point, the S&P 500 was up close to 3% but it’s pared those gains. The index is currently up just under 1%.

Morning News: June 16, 2020
Posted by Eddy Elfenbein on June 16th, 2020 at 7:02 am

U.S. Slumps to 10th Spot in World Competitiveness Rankings

U.S. Expected to Report Record Rise In Monthly Retail Sales

As Meat Plants Stayed Open to Feed Americans, Exports to China Surged

The Fed Says It Is Going To Start Buying Individual Corporate Bonds

Trump Team Weighs $1 Trillion for Infrastructure to Spur Economy

To Gain Public’s Trust, Should Members of Congress Stop Trading Stock?

An LGBT Landmark

Coronavirus Economy Especially Harsh for Transgender People

Apple Just Got Hit With 2 EU Antitrust Probes Into the App Store and Apple Pay

Chesapeake Energy To File For Bankruptcy As Soon As This Week

The Spectacular 955% Surge of a Debt-Ridden Shipbuilder’s Stock

Has Pandemic Snacking Lured Us Back to Big Food and Bad Habits?

Most Coronavirus Tests Cost About $100. Why Did One Cost $2,315?

Top Business Schools That May Best Prepare Grads for a Covid-19 World

Howard Lindzon: Momentum Monday – Stonks Go Down

Be sure to follow me on Twitter.

A Bad Omen in China
Posted by Eddy Elfenbein on June 15th, 2020 at 11:05 am

The stock market is down again today. This could be our fourth drop in the last five sessions. Things seemed to have turned since the Fed meeting last week. Of course, that comes after more than two months of solid wins for the bulls.

The S&P 500 is below its 200-day moving average and the 50-day isn’t far away.

Not much economic news this morning. The New York Fed’s Empire State Manufacturing Survey said that business activity in New York State steadied in June. That’s a hopeful sign.

Bloomberg has an interesting article noting that the fragile nature of the Chinese economic recovery points to how difficult it may be for the entire world economy to recover.

A string of top-tier data all showed that China’s factory output, consumer spending and investment continued to improve in May, but there are few signs of a broad based rebound needed to spur a V-shaped recovery.

The worry for the global economy is that if China’s apparent success in containing the coronavirus can’t stoke confidence and a quick return to normal activity, then where can. Those concerns will be compounded by news of an outbreak of virus cases in Beijing that has raised fears of a resurgence of the pandemic.

“China’s experience so far suggests that it will be a hard road back for the global economy,” said Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings, who notes that confidence among Chinese consumers and privately-owned firms remains low. “We still expect a rebound in the second half, but expectations for a surge in pent-up demand may be disappointed.”

Morning News: June 15, 2020
Posted by Eddy Elfenbein on June 15th, 2020 at 7:04 am

Mexico’s Oil Hedge To Be Pricier, But Government Likely Doing It Anyway

BP Cuts Up To $17.5 Billion From Assets’ Value With Bleaker Oil Outlook

China’s Slow Recovery Points to Hard Road Back for Global Economy

Break the China Habit? Lobsters, Lights and Toilets Show How Hard It Is

Don’t Cheer Too Soon. Keep an Eye on the Core Jobless Rate.

Goldman Says Mom-and-Pop’s Stock Picks Are Trouncing Wall Street

Morgan Stanley Economists Double Down on V-Shape Global Recovery

Trading Sportsbooks for Brokerages, Bored Bettors Wager on Stocks

Nissan Email Trail Casts New Light on Takedown of Carlos Ghosn

Michael Batnick: Animal Spirits: Investing in Private Real Estate With FundRise & Who’s Driving the Stock Market?

Ben Carlson: Is This The Most Volatile Year Ever? & Why the Market is So Confused Right Now

Roger Nusbaum: A Closer Look At Long/Short Strategies

Jeff Miller: Weighing the Week(s) Ahead: Can Investors Depend on the Rebound Trend?

Howard Lindzon: A Few Days Of Fintech With Friends

Joshua Brown: Listen to Jeremy Grantham Explain the Slow Death of Value Investing Better Than Anyone, Unheard Of & Frank Partnoy on the Hidden Systemic Risk Of Leveraged Loans

Be sure to follow me on Twitter.

Making My Own Dice Baseball Game
Posted by Eddy Elfenbein on June 13th, 2020 at 4:26 pm

The idea of creating simulation baseball games based on playing dice is an old one. There are some versions that date from the 19th century. There are many different versions currently on the market. The basic idea is that the outcome of every plate appearance is determined by a roll of dice.

I wanted to try my hand and devise my own version.

My goal was two-fold. I wanted to create a dice baseball game that’s reasonably accurate to real baseball but also easy to play.

There are games on the market that are mind-numbingly complex, and in my opinion, not very fun. YouTube has some videos of people playing these games, and you’d think it’s someone doing their taxes. I didn’t want that.

My first goal was to use the “craps” version of dice. By that, I mean you simply throw two dice and add the results together. Just like craps. Other games are based on certain dice combinations. For example, a 1 and a 4 means this or a 2 and a 5 means that. That’s another thing I didn’t want.

I wanted something easy. Roll dice and boom, see the play. No charts or forms. Nothing to look up and no extra dice.

I also wanted a higher number to mean a better the result. That makes the game simple and intuitive.

With that being said, here’s my version. This is the outcome for each roll of the dice.

Now for some explanation. The Sac Fly is only in play when there’s a runner on third with less than two outs. The other runners do not advance. If no one’s on third, then it’s a regular deep fly.

The GDP is only a double play when there’s a man on first with less than two outs. The other runners advance. If no one’s on first, then it’s a regular ground out and the other runners do not advance.

With the regular single, the runners on base advance one base. With the single-plus, runners on base advance two bases. With a double, runners on base advance two bases.

You may have noticed a few quirks in my version. For example, there are no triples. Sorry, but they’re just too rare in modern baseball.

I also didn’t have any sac bunts. Those don’t happen very often in real baseball and when they do, it’s usually the pitcher in the batter’s box. There are also no errors, and I didn’t include stolen bases. If you want to add them, knock yourself out.

Now for some basic stats. Rolling two six-sided dice gives you 36 different outcomes. Here are the probabilities for each roll:

Using that, we can see that my rules produce an OBA of 0.361 (or 13/36), a batting average of 0.303 (or 10/33) and a slugging percentage of 0.455 (or 15/33). The OPS comes to 0.816. That’s higher than the average in real baseball but I wanted to make my game a little offensive heavy.

Those numbers aren’t exactly right because we still need to adjust for Sac Flies. Under baseball’s rules, a SF counts as a plate appearance but not an at bat.

How do we calculate the expected number of Sac Flies? Thankfully, my nephew knows some computer programming and we ran a simulated 1,000,000 innings. Based on that, a SF comes along once in every 113 plate appearances. That boosts our batting average to 0.306. On-base stays the same, but slugging percentage rises to 0.460. The OPS increases to 0.821.

We found that my rules produce an average of 5.07 runs per nine innings. That’s about 8% higher than the average of the last 30 years. As a general rule, my version gets more people on base but doesn’t move them across the basepaths as much.

If you’re curious, the odds of a pitcher throwing a no-hitter are one in every 17,109 while a perfect game would be one in 179,273. Since 1876, there have been about 232,000 games played.

Extra

A few years ago, “The Riddler” at FiveThirtyEight once ran a contest on devising a dice baseball game. Here’s the winning submission.

Here’s a variant I came up with that’s a little closer to actual baseball. Personally, I don’t like the erratic jumble of results.

You can get more accurate by getting more complicated, but I think my version is best combination of simplicity and accuracy.

Baseball Solitaire
Posted by Eddy Elfenbein on June 13th, 2020 at 10:13 am

Since it’s a weekend in June and we don’t have baseball, I thought I’d share with you a game I invented when I was a kid. It’s a simulation baseball game that uses a regular deck of playing cards.

It’s a lot of fun and the rules are easy. Each card represents a plate appearance.

Here’s the breakdown.

Some explanation. The plus on 1B+ and 2B+ means that baserunners take an extra base (ie, a seven of hearts will score a guy on second, but a five of hearts does not).

The GDP is a normal out, but a double play is there’s a guy on first with less than two outs. Same for the SF. It’s a sac fly if there’s a man on third with less than two outs.

The other baserunners don’t advance on a SF, but they do in a GDP. I don’t know why I keep the latter rule, but it seems more fun that way.

Like I said, it’s simple and a lot of fun, especially once you internalize the system. Feel free to adjust the rules as you see fit.

Some technical stuff.

The game doesn’t perfectly match a baseball, but it’s reasonably close (hey, I was a kid). BA is .271, OBA is .327, SLG is .438 and OPS is .764 That’s not bad for such a simple game. Technically, the batting average is a little higher since sac flies don’t count as much at bat do as plate appearances. My guess is with the adjustment, it’s about .273, so not much of a difference.

I estimate that runs per nine innings is about 4.1 or 4.2. That’s just a guess. That’s about 0.5 lower than the OPS would imply. I assume that no errors or SB account for the difference, but I’m not sure.

I reshuffle after every three innings. That means about half the deck is used.

When I was a kid, I played this for hours and hours. I’ve recreated dozens of World Series and all-star games. I’ve managed my own teams and conducted trades. Have I run through an entire 162-game season and kept the stats? Um…no comment.

I’ve played some truly amazing games with wild comebacks. It’s all based on playing cards and my imagination.

If you’re missing baseball this year, give my baseball solitaire a shot. Warning: You might become an addict.