Friday, December 19, 2008

Japanese equity markets are not efficient or real

Japan plans to buy $227 billion in shares to boost market
By Michael Kitchen
8:11 a.m. EST Dec. 18, 2008

NEW YORK (MarketWatch) -- "Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported.

Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported.

The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying. The Liberal Democratic Party had intially considered just 10 trillion in stock purchases, but the size was roughly doubled to 20 trillion yen at the request of its ruling coalition partner, the New Komeito party, the report said."

Questions to ask:
-what price will the government buy at?
-what criteria will the government use to determine purchase prices?
-what proportion of the total float of Japanese stocks is owned by the government?
-what does the phrase "stock market" mean when government entities are participating?
-will this be an opportunity for foreign investors to dump their holdings of Japanese equities?

I don't know the answers to all of these questions, but I think they are worth considering.

Factors driving low oil prices

Once a well is put into production, the marginal cost to pump a barrel is relatively low. The biggest proportion of oil cost is the capital cost; finding it, drilling the well, and linking the well to pipeline network. As long as price per barrel is enough to provide positive contribution margin for a well, the well will be kept in operation. Based on historical trends that breakeven price is quite low.

Thursday, December 18, 2008

Schumpeter and entrepreneurship

"Schumpeter criticized John Maynard Keynes and David Ricardo for the "Ricardian vice." According to Schumpeter, Ricardo and Keynes reasoned in terms of abstract models, where they would freeze all but a few variables. Then they could argue that one caused the other in a simple monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model."

Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism... He argued that capitalism's collapse from within will come about as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure."

ac(a Calculated Risk commenter) on Schumpeter:
"The Wikipedia article doesn't really make it clear whether Schumpeter is advocating socialism or capitalism. The way it's written sounds like he's trying to promote capitalism by hiding it behind a socialistic message.

Of course the problem with the socialist outcome still remains - we haven't figured out how to motivate people to work in a socialist environment. That leads me to believe that a transition from capitalism to socialism with the operating overhead and debt created by a capitalism economy will fail because the socialist economy will not be able to generate the activity to sustain these costs of operation (because people are less motivated to produce). To me this suggests that in order to sustain itself the government will attempt to compensate by yet another transition, this time to a more coercive authoritarian fascist type state."
Intriguing ideas...

Monday, December 08, 2008

Modern portfolio theory discredited

Bystanders to this financial crime were many

By Nassim Nicholas Taleb and Pablo Triana

December 7 2008 19:18

A crime has been committed. Yes, we insist, a crime. There is a victim (the helpless retirees, taxpayers funding losses, perhaps even capitalism and free society). There were plenty of bystanders. And there was a robbery (overcompensated bankers who got fat bonuses hiding risks; overpaid quantitative risk managers selling patently bogus methods).Let us start with the bystander. Almost everyone in risk management knew that quantitative methods – like those used to measure and forecast exposures, value complex derivatives and assign credit ratings – did not work and could provide undue comfort by hiding risks Few people would agree that the illusion of knowledge is a good thing.

Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called “modern finance”. LTCM was just one in hundreds of such episodes.Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis. Listening to us, risk management practitioners would often agree on every point. But they elected to take part in the system and to play bystanders. They tried to explain away their decision to partake in the vast diffusion of responsibility: “Lehman Brothers and Morgan Stanley use the model” or “it is on the CFA exam” or, the most potent argument, “modern finance and portfolio theory got Nobels”. Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article.

Most poignantly, the police itself may have participated in the murder. The regulators were using the same arguments. They, too, were responsible.So how can we displace a fraud? Not by preaching nor by rational argument (believe us, we tried). Not by evidence. Risk methods that failed dramatically in the real world continue to be taught to students in business schools, where professors never lose tenure for the misapplications of those methods. As we are writing these lines, close to 100,000 MBAs are still learning portfolio theory – it is uniformly on the programme for next semester. An airline company would ground the aircraft and investigate after the crash – universities would put more aircraft in the skies, crash after crash. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen.

Bystanders are not harmless. They cause others to be bystanders. So when you see a quantitative “expert”, shout for help, call for his disgrace, make him accountable. Do not let him hide behind the diffusion of responsibility. Ask for the drastic overhaul of business schools (and stop giving funding). Ask for the Nobel prize in economics to be withdrawn from the authors of these theories, as the Nobel’s credibility can be extremely harmful. Boycott professional associations that give certificates in financial analysis that promoted these methods. Remove Value-at-Risk books from the shelves – quickly. Do not be afraid for your reputation. Please act now. Do not just walk by. Remember the scriptures: “Thou shalt not follow a multitude to do evil.”

Friday, December 05, 2008

US bankruptcies in 2008

Bankruptcies of 2008 (as reported by
AIG (insurance)
Aloha Airlines (airline)
American Color Graphics (newspaper)
Ascendia Brands (retail)
ATA (airline)
Bear Stearns (banking)
Bill Heard Enterprises (auto)
Bluepoint RE (insurance)
Blue Water Holdings (auto)
Boscov’s (retail)
Brooke Corporation (insurance)
Buffets Holdings (restaurants)
Ciena Capital (real estate)
Comfort Co. (bedding)
Dynamic Leisure (travel)
Education Resource Institute (insurance)
Empire Land (real estate)
Eos Airlines (airline)
Fashion House Holdings (retail)
Fortunoff (retail)
Friedman’s Jewelers (retail)
Fred Leighton Holdings (retail)
Fremont General (banking)
Frontier Airlines (airline)
Gainey Corporation (trucking)
Gemini Air Cargo (air delivery/freight)
Goody’s (retail)
Greatwide Logistics (trucking)
Greektown Holdings (casino)
Hospital Partners of America (healthcare)
HRP Myrtle Beach Holdings (entertainment)
Indymac (banking)
Integra Hospital Plano, LLC (healthcare)
Integrity Bancshares, Inc. (banking)
JHT Holdings (trucking/transportation)
Laketown Wharf (real estate)
Land Resource, LLC (real estate)
Landsource (real estate)
Legends Gaming (casino)
Lehman Brothers (banking)
Lillian Vernon (retail)
Linens n’ Things (retail)
Luminent Mortgage Capital (banking)
Kimball Hill (real estate)
Landsource Community Development (real estate)
Matrix Development Corporation (real estate)
Mervyn’s (retail)
Mortgages Ltd. (banking)
Motorcoach Industries International (transportation)
MPF Corp. (transportation)
Mrs. Fields Famous Brands (food services)
Pierre Foods (food services)
Pope & Talbot, Inc. (pulp/wood products)
PRC LLC (business services consulting)
Propext (textiles)
Quebecor World (USA), Inc. (office services/printing)
Red Envelope (retail)
Sharper Image (retail)
Silverjet Airlines (airline)
Sirva (moving services)
Skybus (airline)
STA Restaurants - Bennigan’s (restaurants)
Steakhouse Partners (restaurants)
Steve and Barry’s (retail)
Syntax-Brillian - Olevia (electronics)
Taro Properties (real estate)
Tropicana (casinos)
Vail Plaza Development (real estate)
Value City Department Stores (retail)
VeraSun Energy (alternative energy)
Vicorp (restaurants)
Washington Mutual (banking)
WCI (real estate)
Whitehall Jewelers (jewelry)
Wickes Furniture (retail)
Woodside Group (real estate)
WorldSpace, Inc. (satellite broadcasting)
Ziff Davis (media)

Lifted from Bankruptcies Revisited at a blog by Robert Salomon...

Deflation in Japan

The benefit from the negative energy price shock should provide some boost to domestic consumption. On the other hand, the rise of the yen versus the dollar to more realistic levels is no doubt more than offsetting the benefit from the fall in oil prices. At this point, I think the Japanese authorities are unable to do anything meaningful to weaken the yen. Also, the bulk of Japan's exports are in sectors that are bearing the brunt of global slowing. Construction equipment, consumer electronics, autos, and steel based products...all are going to be slow for a while. The day of reckoning for Japan's economic system based on export subsidization has arrived.

Perhaps the BoJ should start selling its stock of Treasuries into the current bubble and use the proceeds to send each citizen a coupon/voucher which would be only valid for spending, and with an expiration date. A national campaign encouraging Japanese to "fix up your home", "eat a restaurant meal", or "buy a new computer" using the vouchers would promote the program. Seriously.