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?

#NYCPoetweet

A limerick's hard to complete/In the space of a typical tweet/Haiku, it is true/Are simpler to do/But not a remarkable feat. #NYCpoetweet

— Dr. Goose (@LimericksEcon) April 6, 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.

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.

$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.

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.

JOBS Act

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.

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."

$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.