This Guy is Crazy

Did you hear that?  Zero domestic attacks under Bush?  Did Rudi forget his campaign slogan?

Terminator: The Rise of the Conglomerate

I like it when Asian people say Asian sounding words. It just sounds awesome. Is this racist? In the words of Jerry Seinfeld, "if you like something, how can it be racist?".

                                                                              My officemate at work is Korean (South, not North). I'm in awe of him when he says words like "Samsung" or "Sakura of Japan", the latter being a sushi restaurant we both like to order from when we have to work late into the night.

I've been thinking about two asian companies recently: Samsung and Sony. I don't know what word accurately depicts the penetration these two companies have had on ordinary Americans, so I'll use the word conglomorate. I don't like to use that word because it conjures up notions of airlines growing pigs and jet engine manufacturers getting involved in television sitcoms (ahem, Jeffrey Immelt,) but I'll use it nonetheless. Samsung and Sony aren't really conglomerates in that sense, they are conglomerates in the sense that they produce all kinds of consumer electronics.

Samsung and Sony labels can be seen on everything inside a home, from televisions to laptops to video game consoles. In that sense, Sony is the larger conglomerate of the two, in that it produces computers (Sony Viaos) and video game consoles (Playstations and PSPs). Sony is on the decline, however. It is no longer the preeminent consumer elecotronics company, and unless it changes its business strategy quickly, it will be remembered as the late 20th century's RCA. Samsung, on the other hand, is clearly growing. It produces DRAM chips that go into computers, and its sucess in producing televisions is unrivaled. Samsung could (and should!) start making computers. Sony should start making better televisions.

Each company wants to own my home. Samsung want me to have Samsung televisions that are hooked up to Samsung speakers that can also play music from my Samsung MP3 player. That's awesome. That's what they should want. That's capitalism and commerce at its best.

In today's digital age, a consumer wants everything he has to speak to everything else he has. I want to bring up hulu on my laptop and watch the show on my plasma television. I want my MP3 player to be used as a remote control for iTunes which plays off my stereo system that is also hooked up to my television. So why don't these companies start selling everything like that. At Best Buy recently, I saw HP was selling a package for $1200 which included a desktop, laptop, and netbook.

Why doesn't Sony start selling a huge package for $3000 that includes a laptop, MP3 player, speakers, and a Playstation. Each product should seamlessly and wirelessly connect with each other. That is, they should do exactly what I want them to do (and wrote above)! How awesome would that be! The major issue would be that people who are buying a new television may not need new speakers or a new laptop, so they may not want the whole package. But people moving into new apartments or students moving to college could definitely use this. And some people are going to need to replace their laptop and television at the same time (people such as me)! They can make it so you can just buy one or two major components and then you can buy add-ons later on. That is, sell the television and laptop together and let someone buy the MP3 and digital camera player later. It'll keep the consumer loyal to the company's products because they already and exclusively and wirelessly sync with other products from that same brand.

This is such a great idea! It gives these two huge players a competitive advantage against other CE companies simply without doing anything. Why aren't people doing this!? Sony, this can save you!

Ben's of the World

I can recall four Ben's in my entire life. 

Ben Wallenberg was one of my best friends when I lived in Chicago for eight years.  We did everything together; we built a fort in his backyard that may still be standing, we went sledding at the skatidum which may still be open, and I sort of taught him to ride a bike without training wheels.  His next door neighbor was my next door neighbor's next door neighbor.  We went to each other's houses all the time and played with things like Playmobil and the SpeedRacer.  He was awesome.  I miss him but can't find him on facebook.     

Ben Franklin forged the Great Compromise and was, at least in part, responsible for the Constitution of the United States.  My 8th grade American History teacher called him the "Father of the United States," not because of the immense role he played in the founding of our country but because of the number of women he slept with. 

Ben Graham was Warren Buffet's mentor.  He's the father of value investing, and while I don't agree with all of his principals, he made a killing in the stock market and so has Warren Buffet.  I'm glad that Class B stock in Berkshire is going to be split, since individual investors with limited incomes such as myself will be able to find the absolute price (that is, ignoring PE ratio) non-insane.

Finally, there is Ben Shalom Bernanke.  I've recently begun reading a book by David Wessel (a reporter for the WSJ) called In Fed We Trust.  The book's great; while I wish it went into more depth about the AIG's and Lehman's of the world, it does an incredible job explaining the role of the Federal Reserve during the monetary crisis. 

Before I read the book, I thought Ben Bernake was handling the "Great Panic" well.  Having read about 75% of it, I think Bernanke is a sage...a man we will look back upon 50 years from now and point and say "it was he who saved us from another Great Depression."  This is why...

I.  Criticism

A.  The Greenspan Years

Much of the criticism surrounding Bernanke is a result of his complicity in keeping interest rates too low for too long during the Greenspan years.  Bernanke is unquestionably guilty of that - he did advocate for maintaining low rates for too long during Greenspan's tenure as Chairman of the Federal Reserve.  Bernanke should have been more outspoken, and for his failure to object, we should judge him.  At the same time, we must remember that before Greenspan left the Fed, he was treated as a God among men.  No one on the Federal Reserve or even outside of it questioned his decisions; he was a Jamie Dimon to JPM, not a Fritz Henderson to GM.  Still, deference and loyalty must be thrown out the door when you're talking about economics, and Bernanke should have realized the nature of the problem and acted accordingly. 

B.  The Bernanke Years

Bernanke not only was complicit in the cause of the Great Panic though, he failed to nip it in the bud during the first year he spent as Chairman of the Federal Reserve.  Since its founding in 1913, the Federal Reserve's mandate has been to protect the American economy through stable monetary policy and regulation.  The Federal Reserve has never sought to prevent bubbles from forming; the Federal Reserve has only sought to clean up the mess.  For instance, during the tech bubble of 2001-2002, the Fed role wasn't to ensure that tech companies did not become overvalued; rather, the Fed was charged with cleaning up the mess afterward. 

Why is that?  Why does the Fed wait for a bubble to pop and clean up the mess rather than prevent the mess in the first place?

First, the Fed doesn't really have the tools to do that.  It can't raise interest rates to curb economic growth in the technology sector without raising interest rates and curbing economic growth in the transportation sector, a sector that may be undervalued.  "Its like trying to put a tack in the wall with a sledgehammer;" you'll drive the tack in but at the cost of destroying the wall. 

Second, the Fed can't always predict when something is a bubble and when something is just really good.  Amazon a bubble in 2001?  Well, its worth more now then it was then.  The role of the Federal Reserve isn't to judge the value of companies in the marketplace; that is role of the investor and shareholder. 

During the Great Panic, this thinking prevailed.  Bernanke didn't deflate the bubble because he didn't think it was his role, and he sought to clean up the mess after the bubble popped.  The recession, however, changed the role of the Federal Reserve.  Ben Bernanke unquestionably called audibles at the line, threw hail mary's, and fumbled the ball in trying to contain the mess.  At some point though, he realized he had to get in front of the crisis, and to that extent, the role of the fed was no longer janatorial (after the fact) more scotchguardial (before the fact).  Bernanke realized that he couldn't wait for the bubble to pop and its ramifications to take effect; he had to act prevent those ramifications in the first place.  He can be condemned for not realizing so many homeowners would be underwater and that banks, private equity funds, hedge funds, pension funds, and insurance companies had so many loans on their books (bank's hadn't just securitized and sold mortgages it turned out; they held many on their books).  But when he did realize it, he stepped up to the plate.

II.  Praise   

Its insane for me to think I could briefly describe everything the Federal Reserve and Treasury Department did to contain the Great Panic.  Since I've been writing for about an hour, I'll just mention them quickly.

1.  Open the discount window to non-commercial (non-Fed regulated banks)

2.  Extend the maturity of loans from the discount window

3.  Reduce the premium charged at the discount window as compared to the fed funds rate

4.  Marry Bear Stearns to JPMorgan

5.  Save AIG

6.  Marry the Bull to Bank of America

7.  TAF

8. TARP

9. TALF

The list goes on.  Perhaps the most important thing he did though, was never show any fighting or dissent with the Treasury Department.  If we had Treasury saying we should buy mortgages from banks and the Fed saying we should invest capital into banks in order to stem the crisis, there would have been even more panic.  At every stage, at every level of the game though, Bernanke and Hank Paulson showed a united front.  Bernanke didn't always agree with what Paulson was thinking and Bernanke sometimes got his way, but if Paulson was on the news saying X, Bernanke never said Y.  He stood behind Paulson and showed Wall Street that the government was united in fighting the credit crisis.  

Bernanke is awesome.  He'll sail through confirmation hearings and remain as Chairman of the Fed, but he shouldn't have to go through the grilling that Senators are going to give him for a crisis they still don't understand. 

Shut up, don't advise, just consent.

Turning the Tide...

I know I've been neglecting my duties and not updating this blog recently, but with final exams and graduation looming, I wasn't able to focus on the markets or, really, on anything else.  I wish I could promise that was changing - that I'll be posting regularly - but I can't.  With the bar exam coming up in a few weeks, I  imagine that most of my time will be devoted to a meaningful and fulfilling task.  Still, I wanted to provide my thoughts on the state of the financial system before they became stale.  

The market is overpriced.  Seriously overpriced.  How did we make a recovery so fast?  I literally started studying for exams, and saw the market increase 800 points.  What's changed?  What should I do in the future? 

What's changed?  The public-private investment plan (PPIP) is coming out at some point. The plan is insane and tantamount to welfare for the rich.  That's not to say I think the plan won't work; I just wish I was rich enough to get the free money that PPIP gives you.  (In case you're not fresh on the details, the PPIP program planned on promoting private purchases of residential and possibly commerical mortgage backed securities by provding government-backed loans to private parties who would then purchase the MBS' from banks)  Still, the plan has been cutback recently in terms of funding to purchase securitized loans, and I've heard rumors that the plan was going to be eliminated entirely in terms of whole loans.  This can't be it!  It's not this easy!  We can't have turned the tide from the rims of a recession, the greatest since World War II, to a bull market so fast.

But haven't we?  The stock market is nearly back up to where it began in 2009.  Treasury bonds are offering greater yields as inventors are less risk-averse and more willing to spend money in corporate and private securities.  Apple is selling at $140 a share, and I've actually made money on my investment in a FAS, a leveraged, bullish, financial ETF.

What else has changed? I'm not really sure.  Consumer confidence is up a bit, and I'm sure there are some other positive indicators out there.  But what about all these structured derivaties?  What about all the securitiziation?  That hasn't changed.  People are still losing jobs, and homes are sitll being foreclosed upon, brining home values down even further and incentizing homeowners to just leave their homes and let them be foreclosed.  The stress tests the Obama administration conducted seemed scary - Citi bank could lose a $100 billion in the next two years on top of what it has already written down.  So where's all this positive news coming from?  No idea.

What should you do in the future?  Short stocks.  I think they're overvalued, especially the financials.  I'm going to sell FAS within the next few weeks, and probably buy FAZ, a bearish, financial deriviative.  I'm also thinking about buying some puts in Goldman and Apple.  Apple is getting Steve Jobs back, which can't hurt the firm.  It looks as though day-to-day managment will be in the hands of Tim Cook, but Jobs will at least improve morale at the firm.  Additionally, Apple seems set to release a new version of the iPhone and possibly drop prices even more.  All these things are good things, but I intend on shorting Apple.  Here's why:  Any new iPhone won't be as compelling as the last iPhone.  3G speed was really important on something that was arguably a laptop in your pocket, but video on my iPhone won't be.  Nor will additional hard drive, or faster processing, or copy and paste.  If Apple puts an incredible camera on the phone (5 MP, 3x optical zoom), that may compel some to change from their 3G to the new model, but absent that, people are happy with the 3G and won't rush to switch to a new phone (in a recession, especially).  Additionally, the 3G phone allowed you to take advantage of rebates and corporate plans which discounted the monthly price of the phone, while the original iPhone did not.  Thus, there was a financial incentive to switch to the new phone.  Steve Jobs may be back, but Apple's going to need some new products to sell.  The new iPhone shuffle doesn't look that great either.  Finally, a lower price will encourage some to switch to the iPhone, but most users who were willing to pay $100 were also willing to pay $200 for the device.

Time is my enemy, so I am going to stop writing.  But I'm bullish on Wal-Mart for basically the exact same reasons that I'm bearish on the market - if the recession continues, Wal-Mart will benefit. 

Here's to hoping my next post isn't too far away...

The End Of The Last Dot Com Juggernaut

I used to love eBay. It used to be fantastic. I cleared out my garage of lots of crap selling things on eBay. I sold neon lights, used video games, used clothes, coffee machines...anything you can think of. Sometimes people didn't pay, but I never got discouraged. I didn't just sell things on eBay though; I also bought alot of things. I bought used cell phones, used video games, and even grab boxes. What's a grab box you ask?  You must not have lots of time on your hands.  A grab box is just a bunch of random crap someone puts in a box and sells on eBay; the items in the box aren't related to each other but the seller doesn't want to list each item separately. I'd buy the grab box, inventory its contents, and then sell the items separately to make a tiny (and I mean tiny) profit. I arbitraged eBay auctions.  Come to think of it, after fees, there's good a possibility I lost money.

That was a long time ago though. eBay was good then.  It was made up of people selling things they had laying around their homes; it was a huge garage sale and you could get decent goods at decent prices.  Certaintly, there were occasions where people didn't pay for items they purchased or refused to ship items they sold, but overall, the system worked and everyone really liked it.  Now, eBay is a pain in the ass to use.  Most items are incredibly overpriced and overbought!  What person in his right mind is willing to bid $25.32 for a $25 best buy gift card?  More than that, eBay is now dominated by powersellers.  It's no longer the world's largest garage sale but rather, the world's largest mall of crap.  If you've ever been to Istanbul, its like the grand bazaar but you don't get to actually see the goods.

I still like eBay when I need to buy a few things:  tickets to baseball and basketball games...electronic cords that I need to replace...used books.