Bubble-ologist extraordinaire

Cassandra was given the gift of prophecy, but was also cursed so that no one would believe her. Robert Rodriguez, in June, 2007:

HOUSING

... after many years of an excessively easy monetary Fed policy, a bubble of massive proportions has been created in the housing market.

FIXED INCOME MARKET

...As loan underwriting standards deteriorated, more potential home buyers were then able to qualify for a loan. We are seeing the initial effects of this erosion in underwriting standards by the collapse in the prices of sub-prime mortgage securities

EQUITY MARKET

...do not realize the extent of the risks they may be taking.

CURRENT STRATEGY

FPA Capital Fund has over 40% allocated to cash (short-term investment securities) and our largest sector investment is in energy. Preservation of capital is paramount to us in this risky investment environment.

SUMMARY

We see most investment sectors as providing little in the way of a margin of safety. The potential risks that we see do not appear to be well considered in the valuations within these sectors.

iPhone price elasticity=-2

Cheaper iPhones are being introduced by Apple:

Citing a firm survey of consumers, Morgan Stanley analyst Kathryn Huberty said that a $50 price cut could increase demand by 50 per cent and a $100 cut by 100 per cent.

For a $199 iPhone, this would imply a price elasticity of demand of about -2.  If so, a price cut would increases profit if the actual margin, (P-MC)/P, greater than the inverse elasticity, 50%.  Remember,

MR>MC  if (P-MC)>1/|e|

in which case you should sell more, which you do by reducing price. 

It's the incentives, stupid

As someone who teaches students to anticipate self interested behavior, why am I always suprised and disappointed when I run into it?

QUESTION: The U.S. government does a reasonably good job of regulating things like the safety of airplanes and foods. Why, then, does it do such a lousy job of regulating the financial system?

ANSWER: "Capture." For those not up on regulatory theory, this refers to the notion that regulators become captive of the industries they regulate. Noting that Fannie Mae and Freddie Mac spent $100 million on campaign contributions over the last 10 years,

Who's your daddy?

Courtesy of Don Marron.

If you cut the categories finely enough...

Everyone is a winner:

COED OVER 96 YEARS OF COMBINED AGE
Winner=Fantastic Froebs (173 place overall in a time of 1:05:26)

Cleaner Cars Increase Pollution?

Henry Hazlitt's one lesson of economics is to consider the unintended / unforeseen consequences of a particular policy: "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy."

Could it be that the administration's proposed automotive fuel efficiency standards and tailpipe standards for C02 emissions (which are projected to raise the price of new cars by around $1,300, on average) might have the unintended effect of increasing pollution?

In today's automobile fleet, the majority of the pollution comes from the oldest, dirtiest cars. In fact, the dirtiest 10% of the cars account for more than 50% of smog and carbon monoxide. The dirtiest one-third of the fleet accounts for more than 80% of the pollution.. . . if you raise the price of new cars, people will buy fewer of them or, at a minimum, put off the purchase for a year or so while they drive the old clunker for a few thousand more miles. And fewer new cars means more pollution, which can cause significant health problems. Yet environmentalists and the press have ignored this issue, so as not to inject a note of complexity or doubt into the chorus of glee that greeted the president's attack on greenhouse-gas emissions.

Note: perhaps we would just be looking at a short-term spike in pollution while people put off the purchase of a new car. Eventually, those old clunkers have to die. So maybe the long-term impact is not as dire as the author implies.

Why?

It seems doubtful that taxpayers will ever get the $60B back they have spent on the UAW (and GM). There has got to be a higher purpose, but what? The answer to the bailout question.

It cannot be to preserve GM jobs, because the US Treasury has signaled GM must slim to get the cash. ... Plans call for laying off another 18,000 U.S. workers by the end of 2010.

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganization under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given auto makers money to do this. Besides, the Treasury has said it has no interest in ... telling the industry what cars to make.

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60 billion than to buy GM?

What about patronage?

Analyzing Corporate Risk with the Wisdom of Crowds

Jesper Andersen and Toby Segaran think there's a better way to assess corporate credit risk

Their project, Freerisk.org, provides a platform for investors, academics, and armchair analysts to rate companies by crowdsourcing. The site amasses data from SEC filings (in XBRL format) to which anyone may add unstructured info (like footnotes) often buried in financial documents. Users can then run those numbers through standard algorithms, such as the Altman Z-Score analysis and the Piotroski method, and publish the results on the site. But here's the really geeky part: The project's open API lets users design their own risk-crunching models. The founders hope that these new tools will not only assess the health of a company but also identify the market conditions that could mean trouble for it (like the housing crisis that doomed AIG).

Savings rate up

The higher savings rate will repair household balance sheets, but will reduce consumption. Since one person's consumption is another person's income, (the "multiplier"), this will reduce the effectiveness of stimulus.

Int'l financial crisis slides

The story can be told a lot of different ways, but here it is told to a group of M&A attorneys