Monday, April 30, 2012

Microsoft Finds Its Nook

Up in Redmond, the wonderful news is
That the e-reader Microsoft chooses
Has growth of a type
That pays more than Skype,
Or that search engine nobody uses.

Microsoft announced a $605 million investment in Barnes & Noble's Nook e-reader business, in a deal that injected new life into the bookseller and may do the same for the software giant in the future. The deal gives $MSFT 17.6% of a new $BKS subsidiary that includes both the e-book division and the company's 641 college bookstores; it also values the subsidiary at $1.7 billion, twice as much as the parent's closing price on Friday. As a result, Barnes & Noble shares surged 52% on the news.

The Nook division will use its new war chest to build out an international expansion to rival that of Amazon's Kindle, the dominant player with 60% of the e-book market vs. Nook's 27%. Microsoft gets access to a fast-growing business to diversify beyond its dominant position in the more mature software business. Windows and Office still make up 85% of the company's revenue. Previous diversification attempts have comprised bigger investments that did not contribute much to the bottom line, including the $8.5 billion purchase of Skype, a Windows phone arrangement with Nokia, and the unsuccessful Bing search engine in partnership with Yahoo.

Bernanke - Assimilated by the Borg?

"My fellow Princetonian, Ben,"
Said Krugman, "A man of great ken,
Said to signal, in crisis,
Inflation of prices,
Would get people spending again."

"But his Fed, in my own objectivity,
Has shown unexpected passivity
To use every tool
That he spoke of in school
To boost economic activity."

"To fight unemployment so brutal,
One should use the whole kit and caboodle,
But the Fed, in its thrall,
Assimilates all,
Against which, resistance is futile."

In a scathing critique entitled "Earth to Ben Bernanke", New York Times columnist and Princeton professor Paul Krugman took the Fed chairman to task for seemingly forsaking the advice that he gave to Japan's central bankers twelve years ago. Then-Professor Bernanke lectured the Japanese on their "Self-Induced Paralysis"; were they to face the "liquidity trap" of a stagnating economy and zero interest rates with sufficient boldness, wrote Bernanke, the Bank of Japan would signal a higher inflation target of, say, 4%. This would likely induce folks to take their yen out of their futons and spend them. A similar lesson would apply to today's Fed, says Krugman, but Chairman Bernanke has not followed the advice of Professor Bernanke. Has Bernanke been cowed by anti-inflation political bullying, he asks, or "assimilated by the Fed Borg and turned into a conventional central banker?"

Thursday, April 26, 2012

Which Recovery Matters Most?

When the market was all of a-tatter,
To revive was a serious matter
In housing and jobs,
With the preference, obvs,
For the former ahead of the latter.

Q: If initial jobless claims fall less than expected, and the EU's economic sentiment indicator falls more than expected, how does the Dow react?
A: It jumps up by 100 points, provided that existing home sales rise more than expected.
The National Association of Realtors said on Thursday that its seasonally adjusted index for pending sales of existing homes jumped 4.1% from the previous month, vs. the 1.3% increase expected by economists. On the strength of this news, and against the headwinds from the US hiring slowdown and the European malaise, the Dow Jones Industrial index rose 114 points, or 0.9%, to reach 13,205. Investors evidently believe that the first sign of a US recovery will be in the housing market, whence all of our financial crisis troubles have come.

Fed's Moving Interest Rate Target

Said the FOMC gals and guys,
In words reassuring and wise:
"Our keeping rates low
Is quite apropos,
But we forecast that interest will rise."

The Fed Open Market Committee ended its latest two-day meeting on Wednesday with no change in policy, as expected. However, Federal Reserve Chairman Ben Bernanke sowed confusion and frustration in the press conference that followed. While he maintained the Fed's intention of holding rates near zero until 2014, Mr. Bernanke found it difficult to square this with the forecasts of seven of his committee members, which call for rate increases up to 2% by that time. These divergent outlooks highlight the difficulty of projecting employment and inflation trends over the next two years.

Wednesday, April 25, 2012

Money, Power & Wall Street - The Limericks

The tale of financial collapse
Is ever-enthralling, perhaps
Because of the way
The reckoning day
Has evaded those gluttonous chaps.

Thus, a crisis with hardly an equal
Has an ending that doesn't quite speak well,
Like a Hollywood thriller
Whose psychopath killer
Escapes to return in the sequel.

On Monday evening it seemed as though the whole of the financial Twittersphere was glued to, and tweeting about, the PBS Frontline documentary "Money, Power & Wall Street". Although we all know the story by heart, it seems that we cannot tear ourselves away; perhaps because, four years later, so little has changed in the financial landscape and no-one has been brought to justice for wrecking the global economy. It's really as if "the killer is still free." Some of the evening's most memorable tweets reflected this foreboding sentiment, from the earnest: To the angry: To the snarky: What's your take on the crisis and the documentary?

Tuesday, April 24, 2012

Die Eine Drei

Of the euro zone countries today,
Only one truly rates triple-A;
We needn't say who,
But, to give you a clue,
They're north of the Appian way.

The answer to whose credit is best in the euro zone is the same as whose cooking is Wurst. Aside from Germany, only three other EU members still enjoy AAA ratings: Finland, Luxembourg and the Netherlands. Most knowledgeable and objective observers agree, however, that it's only a matter of time before the latter three are knocked from the top rating level.

First to go may be the Netherlands, whose minority coalition government resigned on Monday amid an impasse over budget negotiations. Long a fierce advocate of euro fiscal discipline, the Dutch could not agree on how to get their national deficit within the required limit of 3% of GDP, as opposed to the currently projected 4.6%. Discussions broke down after the right-wing Freedom Party, headed by the flamboyant Geerd Wilders, pulled out of talks with the center-right liberal party of Prime Minister Mark Rutte. Ratcheting up the tension, Moody's warned that a "weaker commitment to fiscal discipline" in the Netherlands could put "downward pressure" on the country's triple-A rating. It may soon be einsam at the top for Germany.

Sunday, April 22, 2012

Lulled by Fuld?

Said the Lehman bankruptcy inspector
Of the repo transactions that wrecked 'er:
"The Feds, who were looking
At books that were cooking,
Had fraud, but could never detect 'er."

In a rare attempt to explain the financial crisis to the average American, CBS's 60 Minutes brought "The Case Against Lehman Brothers" on Sunday evening. Steve Kroft interviewed Anton Valukas, the Chicago attorney appointed by the federal bankruptcy court to determine what led to Lehman Brothers' collapse. Mr. Valukas found that "there was enough evidence for a prosecutor to bring a case against top Lehman officials and one of the nation's top accounting firms for misleading government regulators and investors."

One of the most damning pieces of evidence was the letter written by Matthew Lee, the firm's top internal accountant, to senior management. Mr. Lee refused to sign off on Lehman's 2007 fiscal year end balance sheet, citing "possibly unethical and unlawful" conduct in their preparation. The so-called "repo 105" transactions were employed to make Lehman's balance sheet appear $50 billion lighter on reporting dates, and thus mask the extent of its over-leveraging. Mr. Lee was let go for his trouble, and the SEC, which was on the premises while repo 105 trades were occurring, has never brought charges against CEO Richard Fuld or others. Why didn't they catch the fraud? Says attorney Valukas: "They were getting the material. Whether they understood it is another question."

The entire interview is embedded below for your viewing pleasure, outrage and incredulity.

Thursday, April 19, 2012

Student Loan Blues

"Though college, I felt, was a sure thing,
As of now, unless gold I'm unearthing,
To pay off my loan,
I'll have to postpone
My homebuying, wedding and birthing."

An entire generation is blocked from building a life while in the thrall of its towering college debts, writes Sue Shellenbarger in The Wall Street Journal. Student loans, which reached $1 trillion last year according to the Consumer Financial Protection Bureau, may ofter eat up half of a young graduate's income, particularly if they have had to settle for a lower-paying job than they expected. Like the killer who won't die in a horror film, student loans can not only prevent one's qualifying for a home mortgage or car loan, but cannot be extinguished in a bankruptcy.

What can young people do to avoid such an unhappy fate? There are no panaceas, but some sensible suggestions would include:

  • Approaching college with the goal of building valuable, employable skills by which to enable one to pay the loans down faster; 
  • Taking price into account while shopping for schools, with a willingness to consider the lowest priced option;
  • Accepting federal or state loans (preferably subsidized) before private ones.

A Moving Target

Said Monti: "I honestly never knew,
When to balance the books I endeavored too,
How austerity tends
To lower the trends
Of output and government revenue."

Italy announced that it would not meet the 2013 balanced budget pledge that it made as part of the EU fiscal stability pact. It's not that the "technocratic" government of Prime Minister Mario Monti isn't committed to cutbacks; more so that a downwardly revised GDP forecast is undercutting the revenue side of the balance. The Italian economy, which had been forecast to shrink by 0.5% next year, now has a revised GDP growth outlook of -1.2%. Thus, a projected balanced budget has turned into a deficit equal to -0.5% of GDP. Unfortunately, by tightening fiscal policy in a recession, the government is making things worse. However, they are operating under constraints set by the European Union, and thus had no choice in the matter.

Tuesday, April 17, 2012


The enablers of fraudulent crises,
Reluctant to give up their vices,
Periodically line up
For pols who will sign up
To learn what their fiscal advice is.

In a scathing guest post in the Big Picture blog, financial fraud expert Bill Black despairs that so many economic advisors with track records of enabling "green slime" in the banking sector are unrepentantly pushing the same policy prescriptions. "Romney's lead economist urges policies that will cause the next financial crisis" is Mr. Black's headline. He singles out Mitt Romney's lead economic advisor (and George W. Bush's erstwhile lead economic advisor), Greg Mankiw, for special criticism. Prof. Mankiw's latest New York Times column extolls the virtues of governmental competition in the regulatory sphere, when there is ample history to show that such competition devolves to a "race to the bottom" leading to a lax regulatory environment that invites criminality. The most famous example is of course the savings & loan crisis of the 80's.

Full disclosure: Prof. Mankiw and his famous graduate student Jodi Beggs gave Dr. Goose his first big break in economic show business.

One Bond to Ring Them All

A Eurobond's needed because
It's one of the euro zone's flaws
That investment was hot
Where the wanting was not
And decidedly cool where it was.

In his latest blog post on saving the euro zone, Reuters' Felix Salmon gets to the heart of the matter:
The solution to this problem is eurobonds. If all the eurozone countries funded themselves jointly and severally, then the yields on European government debt would be very low, and there would be no fiscal crisis in Spain.
As it is, the combination of a single currency and separate fiscal authorities encourages the flow of of government bond investment in the wrong place at the wrong time, if European stability is the desired outcome. Thus, says Felix, "Fund managers at French and German banks were busily moving funds into Spanish and Greek bonds a number of years ago in search of higher yields, and Spanish and Portuguese fund managers are now buying German and Dutch government bonds for added safety, all without incurring foreign exchange risk." It's as if the United States had no Treasury bonds, and all the public debt issue were at the state and local level. The question is: how long before Europe bows to the inevitable, and decides to go joint and several?

Sunday, April 15, 2012

Secretly Serviced

Secret Servicemen, caught out with whores,
Sent a shock through the diplomat corps.
(It's a precept of theirs
That "foreign affairs
Are more in our purview than yours.")

Members of the US Secret Service assigned to prepare for President Barack Obama's arrival in Cartagena were accused of hosting prostitutes for overnight visits in their hotel rooms. This potentially critical lapse in security cast a pall over the President's arrival at the important Summit of the Americas in Colombia on Friday. However, it did not derail one key accomplishment: the implementation of the new US-Colombian free trade pact.

Friday, April 13, 2012

No More Fed Action?

"The economy's growing respectably,"
Said economists surveyed collectively,
"So a Fed funds regime
At a low-rate extreme
Is an outlook we look upon skeptic'ly."

The Wall Street Journal has reported the results of its latest survey of US economists, and, while not especially pretty, they do not paint an ugly picture either. Writes the Journal's Phil Izzo, "More economists are convinced the Federal Reserve won't take further action to spur growth this year, as the economy appears to be on firmer footing." The "respectable" 2.2% first quarter growth rate is forecast to bump up to an annual 2.7% GDP increase by year end. As a result, 36 of the 51 economists surveyed expect the Fed to refrain from any additional large-scale bond-buying. Interest rates? The consensus is that they've gone about as low as they can go, and the mean forecast for the 
June 2014 Fed funds rate is 1%. Come to think of it, that is a rather mean forecast, but it's better than nothing.

Thursday, April 12, 2012

No Different This Time

"The role of the state, necessarily,
Is to tinker with cycles contrarily,
Like a glorious gadget,"
Said Sir Walter Bagehot,
"Both fiscally and monetarily."

Sir Walter Bagehot (1826 - 1877), the English businessman who became the most influential editor of The Economist, was one of the earliest exponents of the state's use of its monetary, banking and fiscal tools to counteract economic contraction. According to Berkeley economist Brad DeLong, it's no different this time. Channeling Bagehot, Prof. DeLong reminds us that the government can act against market failure in three key ways:

  • It can buy relatively risky and illiquid bonds in exchange for its own safe and liquid liabilities: that is called expansionary monetary policy. 
  •  It can take risk onto its balance sheet by guaranteeing the liabilities of private banks: that is called expansionary banking policy. 
  •  It can make investments in bridges, in the human capital of twelve-year-olds, and in social welfare and pay for them by issuing its own relatively safe and liquid debt: that is called expansionary fiscal policy.
As an aside, could Sir Walter possibly take the prize for the most non-phonetic name of a major economist?

Wednesday, April 11, 2012


The New York City Mayor's office is observing National Poetry Month with its third annual "Poetweet" Twitter poetry contest. Dr. Goose invites fellow New Yorkers to join him in this poetic celebration; click on the foregoing link for details. I am thrilled to say that, as of this moment, the limerick contest entry shown above has been retweeted 84 times, a record for @limericksecon.

Tuesday, April 10, 2012

Reversal of Fortune, Part I

Said an equity trader named Corso:
"After last week, I certainly swore so
That the Dow was at pains
To give up its gains,
But this week it looks even more so."

The Dow Jones Industrial Average suffered its worst one-day drop for the year to date on Tuesday, falling 213.66 points, or 1.7%, to 12715.93. On the heels of a disappointing, holiday-shortened previous week, that made for a 4% decline over five trading days. After celebrating its best quarter in a decade, it's as if the market paused for reflection, looked around and didn't like what it saw. The Fed seemed to hint last week that no further stimulus would be forthcoming, and the European debt crisis heated up again on Tuesday, with rising Italian and Spanish bond rates reflecting renewed risk fears. Perhaps the rudest shock of all came from China, where we learned that sales of Caterpillar plunged 50% in March, casting doubt on both the company's prospects and the Chinese growth outlook.

Monday, April 9, 2012

$1 Billion Instagram

There once was a fellow named Kevin who
Built a cool photo app with no revenue;
Along came a new friend,
Who said to him: "You, friend,
Will soon have more cash than you ever knew."

Just when you thought that the social media investing world couldn't get any frothier, Facebook has whipped the market up into stiff peaks with its $1 billion buyout of a startup with no revenue. Instagram, started in October 2010 by Stanford graduates Kevin Systrom and Mike Krieger, is an iPhone app that lets users add cool, retro visual effects to their photos and share them with friends. Apple declared this free photo tool their 2011 iPhone App of the Year.

Though Instagram lacks for a top line, much less a bottom one, it has captured 30 million users in its 18-month history, as well as much of the buzz in mobile photo-sharing. This was seen as a threat by Facebook, which was somewhat slow to develop its own mobile apps, even though half of its users access Facebook on the go. With this rich acquisition, Zuckerberg & co. have taken a potentially formidable competitor in house and retained a dominant position in photo-sharing, one of the main drivers of social networking usage.

Sunday, April 8, 2012

Non-Farm Payroll Holiday

When unfortunate news is disclosed
On a day that the market is closed,
Investors are hopin'
That, at the next open,
It's better than firstly supposed.

The US stock market was closed for Good Friday, as were European exchanges, and thus could not react to the surprisingly weak employment data that came out on that day. The Bureau of Labor Statistics announced at 8:30 AM last Friday that non-farm payrolls increased by 120,000, much less than the 200,000+ increases in the previous three months, and definitely below expectations. Unable to trade on the news, market professionals thus had all of a three-day weekend to mull it over, a weekend punctuated by Easter and Passover celebrations. Is it possible that festive gatherings with family afforded the trading community a new perspective? We'll find out on Monday at 9:30 AM on Wall Street.

Wednesday, April 4, 2012


When streamlining stock regulation
With the goal of employment creation,
The access to mammon
May jumpstart the scammin'
By persons of low reputation.

Washington has descended to the point where, if you see bipartisan agreement on any economic issue, you have to suspect the worst. Such is the case with the so-called JOBS Act (Jumpstart Our Business Startups). In her Bloomberg column, Susan Antilla writes: "Though the JOBS Act was packaged as a plan to streamline rules to help small companies crank out jobs, even its cheerleaders have come up with scant evidence the law will boost employment much, if at all. In an election year when pragmatic politicians are laboring to come off as allies of deep-pocketed business donors, the JOBS Act is a slapdash attempt at securities-law deregulation, plain and simple."

Remember the ZZZZ Best carpet-cleaning company, one of the most notorious investment frauds of the '80's? One of the perpetrators of that fraud says: “I wish legislators would consult with people like me before they write something like this. I could tell them, ‘I know what your intent was with this wording, but we can get around it so easily, it cracks me up.”’ Mark Morze, a self-described reformed scammer who now lectures on how to guard against people like himself, gives his expert opinion that the JOBS Act has real potential for abuse.

Hat tip to Jordan Terry a.k.a. @The_Analyst.

Apple Share Price Analysis

A thousand per share may have sounded
Pretty wild, but it's rather well-grounded
In intense devotees
And a billion Chinese,
Whose potential to buy is unbounded.

Stock analysts at two different firms have recently published $1,000 per share valuations for $AAPL, estimating the company's market cap at $1 trillion. Is this just a stunt, or is it supported by solid analysis? Marketplace's Heidi Moore spoke to both analysts, who actually sounded like reasonable people. Brian White of Topeka Capital Markets explained it this way: "They’re creating a digital grid: The Apple digital grid. Do you want to be on Apple’s digital grid that’s a Ferrari, or someone else’s digital grid that’s a scooter?" Shareholder Oliver Pursche agrees with the notion that Apple has given birth to an entire ecosystem, and adds: "They sold more iPads in 2011 than babies were born in the United States." Both men take note of the company's potential for explosive growth in China, where the gains from expanding consumption may soon outweigh those of efficient production.

Monday, April 2, 2012

Groupon's Risky Business

Said a source who implored not to quote 'im:
"Selling coupons? There's risk to promote 'em.
If one's merchants one pre-funds,
But buyers want refunds,
Well then, they've got one by the scrotum."

Groupon (NASDAQ: GRPN), the discount coupon provider that went public in a social media frenzy last November, recently shocked investors with the disclosure that its fourth-quarter results had to be restated downward. Reuters financial commentator/blogger Felix Salmon explains: "In the US, Groupon sells a bunch of deals for a given merchant, gets lots of revenue as a result, keeps roughly half that revenue for itself, and then passes on the other half to the merchant in question." This policy engenders significant risk because of the company's unconditional refund policy. Says Salmon: "That policy is good business for Groupon: it gives people a lot of confidence to buy a Groupon for merchants who might otherwise seem a bit sketchy. But it also creates dangers, because if Groupon does a deal with a sketchy merchant, then Groupon can be on the hook for a lot of refunds." It turns out also that Groupon's customers tend to demand refunds on big-ticket items more frequently, and the company did not plan for this when it began selling pricier products and services.

All this has led to the downward revision of 4th quarter net income by $22.6 million. Groupon had to make an embarrassing SEC filing, and the shares were down 17% on Friday. Says accounting expert Francine McKenna: "They just need to get their act together."

Sunday, April 1, 2012

$2.50 Gasoline?

An economist, questioned on her view
Of the tools in the President's purview
To cheapen our gas,
Responded: "Alas,
Cheaper gas isn't what would best serve you."

"If to prices in Europe we liken it,
We should surely impose a tax hike in it,
For unless it is dear,
We're too cavalier
For pooling or busing or bikin' it."

"The high price of gasoline" has loomed as a political theme this year, as sharply rising fuel prices have coincided with the US Presidential primaries. And yet, most economists agree that the problem with American gasoline prices is that they are too low, and encourage an excessive level of consumption. Noted behavioral economist Richard Thaler, in a New York Times op-ed piece entitled "Why Gas Prices Are Out of Any President’s Control," argues for higher gasoline taxes and points out that Greg Mankiw, advisor to Mitt Romney (and former advisor to George W. Bush), is among the prominent advocates of this policy. A gradual hike in gas taxes would give drivers the right incentives and help to reduce the federal budget deficit. However, in a political season in which one Presidential candidate - with a straight face - claims that his policies could bring about $2.50-a-gallon gas, no other candidate, whether incumbent or challenger, can safely endorse a sensible gasoline tax policy.

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