Tuesday, April 29, 2014

In Tomorrow's Market Fed not Supposed to be the Main Story

     This is because it's move tomorrow is expected to be pretty predictable-just cutting back by $10 billion on the bond buying program-aka QE. Instead the big news is expected to be economic data. 

     "Economic reports – GDP and private payroll data - should trump the Federal Reserve's meeting Wednesday, unless there's an unlikely move by the Fed to change its message."

     "The Fed ends a two-day meeting with its 2 p.m. ET statement, and it is expected to announce it will pare back its quantitative easing, bond buying program by another $10 to $45 billion a month."

     "Unfortunately, it should be pretty dull. We think they'll do some straight forward updating of the statement to reflect that some of the economic data has improved since the weather normalized, but that's about it," saidBarclays chief U.S. economist Dean Maki. "We don't think they'll change any of the policy paragraphs or give any new signals on tapering. We think they'll taper the $10 billion as expected."
      This is assuming there is no surprise in what the Fed says. If instead there there is a major surprise then we should expect it's statement to have a big jolt on the market. It seems likely that the Fed itself doesn't want this to be the case. 
       The big market mover is likely to be tomorrow morning at 8:30 when first quarter GDP is released. 
      "But the data the Fed will review during its meeting Wednesday will also interest markets. First quarter GDP is released at 8:30 a.m. ET, and economists expect a super sluggish 1.2 percent rate of growth in the first quarter. ADP also releases its private sector payroll report and expects a 210,000 increase in April payrolls, close to what is expected in the government's Friday jobs report. Employment costs are released at 8:30 a.m. and Chicago PMI is issued at 9:45 a.m."
       Today, I saw Wells Fargo rise back up to just under $49.50 at market close. All I need is a $.30 up move tomorrow morning and I'm in the sweet spot with my 60 calls and will call it a day. Microsoft on the other hand sagged back to $40.50 after topping early at $41.19-I had hoped it could have gotten a little higher. A positive reading tomorrow would set me up ideally though I think these are two pretty good names regardless. 


Noah Smith and Sumner on the 'Neo-Fisherite Revolution'

     Now that's what I'm talking about! I came across these two pieces and wanted to read Sumner and see if I could guess what argument he would employ against different scenarios. 

     Noah argued that he had no good reason not to believe the 'Neo-Fisherite; position.

      "But what I'm saying is, there seems as of yet no obvious reason for me to write off the Neo-Fisherite idea. And - as Cochrane and Williamson have both shown - it's possible to write down models where the idea works. The structural models so far all rely on rather odd and rigid fiscal policy rules, so the microfoundations are still kind of crazy. But I see no reason why those models are substantiallycrazier than any of the more mainstream, monetarist-type (or RBC-type) models. So for now, count me on the side of the Neo-Fisherite rebels, just because I think the idea is neat, and potentially very important, and I want to see where it leads."

      "Because the idea is very important. Everything the Fed does, pretty much, is based on the idea that the longer you hold interest rates at low levels, the "easier"- i.e. the more pro-growth and inflationary - your monetary policy is. The Neo-Fisherite idea doesn't just discount the effectiveness of monetary policy(like RBC models do, or like the MMT people do) - it stands that whole monetary policy universe on its head. If the Neo-Fisherites are right, then not only is the Fed massively confused about what it's doing, but much of the private sector may be reacting in the wrong way to monetary policy shifts."

      The 'Neo-Fisherite idea is that lowering interest rates lowers inflation in the long run-and vice versa, raising them raises inflation. The NFerites get here because they believe that nominal interest rates are the sum of real interest rates and the rate of inflation. They also believe that the Fed can only influence the real interest rate in the short-term-in the long term it will rise again.  As the real rate is necessarily going up in the long term the only way to increase nominal interest rates is to decrease the rate of inflation. 

      Sumner, obviously, is not a fan of this idea. 

       "Noah Smith is making a very subtle error here, but before getting into the details let’s blow the neo-Fisherite model right out of the water.  We can do so with a couple points made in the comment section.  

       "First Nick Rowe:

Here is one very big bit of empirical evidence against the “Neo-Fisherite” theory:
For the last 20 years the Bank of Canada has been targeting 2% inflation. And the average inflation rate over that same 20 years has been almost exactly 2%.
The Bank of Canada has said it has been doing the exact opposite to what Neo-Fisherites would recommend: whenever the BoC fears that inflation will rise above 2% it raises the nominal interest rate, and whenever it fears that inflation will fall below 2% it cuts the nominal interest rate.
If the BoC had been turning the steering wheel the wrong way this last 20 years, there is no way it could have kept the car anywhere near the centre of the road. Unless it was incredibly lucky. Or was lying to us all along.

     One thing Sumner did say that I did anticipate is that Noah and friends are misreading Monetarism by saying it believes that lower interest rates necessarily lead to higher inflation. As I suspected, Sumner accuses Noah here as being a product of Keynesianism

     And now we can see the subtle error that Noah Smith made in the passage quoted at the beginning of the post:

This is exactly the opposite of the “monetarist” conclusion that if the Fed holds R very low for long enough, inflation will trend upward.

     "Reasoning from a price change!!!  If I had a crystal ball, and peered into that ball, and saw that Yellen was going to hold short term rates at zero for the next 10 years, I’d absolutely predict ultra-low inflation, condition on that interest rate forecast.  So no, the monetarist prediction is not that inflation will trend upward.  As Milton Friedman said, the monetarist prediction is that inflation would trend downward."

     "Noah Smith is thinking like a Keynesian.  He’s trying to translate monetarist ideas about monetary policy into a Keynesian (interest rate) language.  He knows that we think easy money is associated with higher inflation, so he assumes we must also think that an extended period of low interest rates is associated with higher inflation.  Not so.  We don’t think low rates imply easy money."

    "Noah Smith and the neo-Fisherites are confusing the situation described by Friedman, with a subtly different case. Suppose a madman is put in change of the Fed who is committed to zero rates over the next 10 years, come hell or high water.  Then I might forecast an upward drift in inflation; indeed I think hyperinflation would be quite possible.  It depends on what else the madman did. But if you simply told me that rates would be low over the next 10 years under Janet Yellen, I’d assume that inflation would be low, and that low inflation is precisely the reason why Yellen held rates down."

    Sumner never gets tired of saying that high interest rates are usually a sign that money has been tight-not that high rates cause money to be tight, this is the difference between him and the NFers.  

    Morgan Warstler takes things in an interesting if rather eccentric direction in the comments section. 

     "“The economy has an equilibrium real, or inflation-adjusted, interest rate.”

      "Here’s the model I want your feedback on: what if the equilibrium real interest rate is negative forever?
And, yes I know this is just a hypothetical (but it is realistic one) idea that we are headed to a world without any credit / debt?"

     "Meaning in the future there are rents and purchases, but basically no one will loan you money to buy a thing to live your life or to start a business."

     "This occurs, is occurring, because software eats the world."

      Now we see that Morgan's technophilia truly knows no bounds-it's going to end debt, which in his mind is a great thing. An economy with no debt at all, public or private?

       In the terms of that NF equation-the nominal rate is the sum of the real interest rate and the inflation rate, though, this would mean that if we do NGDP we would have to have a higher rate of inflation. I know he doesn't want that. 





Monday, April 28, 2014

In Wells Fargo and Microsoft We Have Two Fundamentally Strong Stocks That are Tricky Technically

     My buddy Nanute dropped by to say 'I told you so' on BAC. Like I told him though, he's been a bear for how many years on BAC? So he was bound to be right eventually.

     No doubt, though that I was wrong on BAC now-though was my position unreasonable based on what I knew prior to the latest revelations about it having to reverse itself on the buyback and dividend increase? I don't think so. I agree though now that this something that you want to stay away from-today I see it fell under $15. 

     Still, I'll admit that I still find it intriguing here-surely it can at least get back to $16 again as it was before today if only temporarily? I have to fight the impulse to buy up dirt cheap $16 calls on the theory that it at least will have a dead cat bounce or a little short covering and I could make a quick buck on the bounce. 

      At this point maybe it would make more sense to go short and load up on $14 puts? Yet I'm not sure about this strategy. The problem is that while I now have to admit that the fundamental story of BAC is very poor at present-though it may change in the future-on a purely technical basis going for the call makes some sense as does resisting the put. 

      This is a problem you often run into in playing the market-a stock's fundamental story can be somewhat different than its technical story. I've now loaded up on 'value'-Microsoft and Wells Fargo. On a fundamental basis there is every reason to like both of these stocks-both heat the lining off the ball on earnings, MSFT is now putting the heat on Netflix

       while WFC is clearly best of breed among the financials-with BAC now its designated Sick Man-wresting this designation at least for now from Citi. 

       I have loaded up on calls on both WFC and MSFT. I have 20 May 17 MSFT $41 calls and 60 May 17 WFC $49.50 calls. Still I'm wary, and, the reason is technicals-both these stocks tend to get range bound and consolidate. Neither has very much volatility. In both I am very close to strike price-$.57 cents from WFC, only $.12 cents from MSFT-only $.4 if you count after hours trading. 

       However, there are three weeks till expiration and I don't really care about the strike price per se-I'm just speculating on the value on the options to accrue in value sufficiently for me to 'ring the register.' So if MSFT does hit $41.30 this morning-it hit about that at its peak yesterday prior to me getting in I should probably get out at least going by historical price movements.

        Ditto with WFC-if it can get in the $49.50 range early. This would give me a healthy profit in each. Of course, bot h may be ready to break out-can WFC finally get over $50. Like JNJ did. I bought that at $99 and it got to $101 this morning at which point I was able t ring the register for a 75 percent profit. Or maybe I should play the historical numbers. When MSFT hits $41.30 get out. When it dips back under $40 get back in. With WFC do I get out after it gets to about $49.70 or so and then get back in after it falls beneath $49 again? 

        These are the kind of questions I'll hopefully have some answers for by the time the market opens tomorrow. 

        P.S. The one trouble I have with Nanute's-and for that matter Greg's-bearishness is I suspect it's political rather than based on market analysis. Basically neither of my fellow liberals like the banks and so don't really even want to see them do well. I doubt when you play the market you can always put your money where your politics lies. 

        The fact is that if you put your money in the banks in March, 2009 you'd have had a very good last 5 years. I think Greg is right about playing the currencies-I know there's money to be made there. However, there is money to be made in stocks as well, as commodities, etc. In the market I want to make money-hopefully then I can use it to fund my political agenda but that's another post. 


President Obama's Sanctions on Russia Mean Many Things to Different People

      Today, as expected he announced some new tougher sanctions on some more in Putin's inner circle-business associates, etc, as well as certain companies.

      "The United States expanded its sanctions against Russia on Monday, targeting members of President Vladimir Putin's "inner circle" and technology that could be useful to Russia's military.
President Barack Obama said the "targeted" sanctions are in response to Russia's actions in Ukraine."
     "The United States has taken further action today in response to Russia's continued illegal intervention in Ukraine and provocative acts that undermine Ukraine's democracy and threaten its peace, security, stability, sovereignty, and territorial integrity," the White House said in a statement. Since a meeting in Geneva, Switzerland, on April 17, Russia "has done nothing" to meet its commitments "and in fact has further escalated the crisis," the White House said in a statement.
     "The Department of the Treasury is imposing sanctions on seven Russian government officials, including two members of President Putin's inner circle, who will be subject to an asset freeze and a U.S. visa ban, and 17 companies linked to Putin's inner circle, which will be subject to an asset freeze."
     "In addition, the Department of Commerce has imposed additional restrictions on 13 of those companies by imposing a license requirement with a presumption of denial for the export, re-export or other foreign transfer of U.S.-origin items to the companies."
     "Also, the departments of Commerce and State are tightening their "policy to deny export license applications for any high-technology items that could contribute to Russia's military capabilities. Those Departments also will revoke any existing export licenses that meet these conditions," the White House said.
     "Sergey Ryabkov, Russia's deputy minister for foreign relations, called the sanctions "meaningless, shameful, and disgusting."
     "A senior Ukrainian government official called the new sanctions "a very good step, but we hope it's not the final step. Sector sanctions would be the really painful measure."
      For some it is already a bridge too far-the EU at this point is nervous going this far in fear what it would mean for important economic interests.
     "The European Union also is expected to impose sanctions Monday on about 15 Russian officials who are believed to be undermining democracy and creating chaos in Ukraine, according to Western diplomats."
     "The sanctions will include asset freezes and travel bans.The EU is not expected to impose sanctions on Putin associates in part because the European judiciary system has a much higher bar in terms of applying the law, the diplomats said."
      "Judges are not able to look at intelligence to sign off on the sanctions, they said. One Western diplomat said there was also some division within the EU as to whether sanctions against Putin's cronies should be imposed."
     "Several European countries are also concerned that their economic interests would be greatly affected by such sanctions. Additionally, some countries feel more space should be given to diplomacy before such measures are considered, the diplomat said."
     On the other hand some think they are a 'welcome step' as the 'senior Ukrainian government official' calls it. Then there are those who think Obama's moves today don't go far enough. In this group of course, are Right wing Republicans-the usual suspects, Lindsay Graham, John McCain, et. al. However, some within the White House worry as well.
    For now the White House prefers to work with the EU and not 'go it alone.'
    "Neither the United States nor EU is ready to impose sanctions on Russian industries, like the energy sector, both U.S. officials and Western diplomats said."
     There are two schools of thought on 'going it alone.' One side thinks that we must have unity for sanctions to really work. At present, the President is very much part of this side.
     "During internal deliberations, Jacob J. Lew, the secretary of the Treasury, and other officials have argued for caution, maintaining that, while action is needed, more expansive measures without European support might hurt American business interests without having the desired impact on Russia, according to people informed about the discussion.
Mr. Obama has been particularly intent on not getting too far in front of Europe to avoid giving Mr. Putin a chance to drive a wedge in the international coalition that has condemned the Russian annexation of Crimea and destabilizing actions in eastern Ukraine.
     “The notion that for us to go forward with sectoral sanctions on our own without the Europeans would be the most effective deterrent to Mr. Putin, I think, is factually wrong,” Mr. Obama told reporters in Asia, where he is traveling. “We’re going to be in a stronger position to deter Mr. Putin when he sees that the world is unified.” He added: “For example, say we’re not going to allow certain arms sales to Russia — just to take an example — but every European defense contractor backfills what we do, then it’s not very effective.”
     On the other hand, the other view argues that the EU is waiting for U.S. leadership and would follow us if we go forward.
     "Some officials, however, privately argue that the administration has made coordinating with Europe too high a priority and that effectively deferring to the 28-member European Union is a recipe for inaction. The United States, these officials contend, should move ahead with more decisive action on the theory that Europe wants leadership from Washington and historically joins in eventually."
    “While imposing sanctions together with the E.U. would be nice, the U.S. simply has to lead and not waste more time trying to present a united approach,” said David J. Kramer, president of Freedom House, an advocacy group, and a former Bush administration official, reflecting views expressed inside the government. “It’s easier for us to do so than it is for the Europeans, and they will follow, as long as we lead.”
    True, Kramer is a Bushie, however, this is a view of some in the White House as well. As to the market it has been down since the escalation of the conflict late last week. It started up higher today, on the optimism from all the Pfizer merger talk, however, the air is out of the tires again.
    The trouble is, the market fears this kind of thing more than any other-a threat that is hard to quantify. It's tough to say what the collateral damage could be-the worst case scenario-and this is what increases anxiety. While those who want even tougher sanctions may or may not be right on merits of our own geopolitical interests, it may be very negative in terms of the investors, and perhaps the economy.
     So it is that for some today's sanctions were 'shameful and pointless' as claimed by some Russian officials, just about right, as the President hopes, a 'welcome first step' as hoped by the Ukranian official, or not enough-as argued by some 'hawks' both in and outside the White House.
     Then there is the impact for investors and the economy. This is why it's not always easy to say if a move like this was the right thing or not. The answers are just no so simple.

When You Know it's Gotten Bad for Bank of America

      That moment has to be today when it hit a new nadir for bad news. Lately we've been hearing that 'sometimes bad news is just bad news'-and unfortunately this has been in reference to BAC.

      As opposed to often when bad news has some sliver of a silver lining. You'd like to be able to say-as I've suggested in the past-that there is still the good news that the market now knows the full extent of BAC's losses regarding what it owes the government on its related misconduct and malfeasance from the past. Trouble is that every time it looks like we have our arms around it, more losses and more fines surface.

     Today BAC had the ultimate emarassment-havng to cancel its capital buyback plan and increased dividend. It just doesn't get any worse than this on The Street.

     "Bank of America revised its previously announced regulatory capital ratios downward and suspended its share buyback, the company said Monday."

     "The revision was due to an incorrect adjustment related to its 2009 acquisition of Merrill Lynch.
As a result, the company is making the following adjustments to the previously announced estimated preliminary capital ratios for the first quarter ended March 31, 2014: the estimated Basel 3 Standardized transition common equity tier 1 capital ratio was revised to 11.8 percent, down 5 basis points; the estimated tier 1 capital ratio was revised to 11.9 percent, down 21 basis points; the estimated total capital ratio was revised to 14.8 percent, down 21 basis points; and the estimated tier 1 leverage ratio was revised to 7.4 percent, down 12 basis points," the company said


      A poll question in the above link wonders if the BAC-Merrill Lynch merger is the worst ever. So you know it's gotten bad when you have to take back a dividend increase; for BAC you even more know it's gotten bad when Jim Cramer calls it 'disgraceful'-after all, he's usually pretty understanding when the subject matter is BAC.

      "To announce a dividend increase and then take it back? That's sacrosanct," Cramer said on "Squawk on the Street." "The reason why companies don't like to increase dividends is because they're afraid one day they'll have to cut them."

      "This is a disgrace," Cramer said. "Is the bank too big to run? Do they have any idea what's going on? ... I'm looking at it and I'm saying, 'How could I be so stupid?' They're just hard to understand, these banks. It's too hard."

       Yes, I've finally had my faith in BAC shaken too-in the short run at least. Of course, now it's too late to get out of my options anyway-I had 90 $17 calls that expire this Friday as well as another 50 $17 calls which expire Friday, May 23. It's all academic now as these are all worthless.

       I also have some C $50 calls for May 17 which look much worse for wear-pretty much worthless. However, it's not all Blue Mondays-my 40 calls-$101 call May 17 in Johnson and Johnson hit the sweet spot this morning, breaking $101-enabling me to make a cool $1600 in profit-about 70%. I got out of them the minute they cleared that threshold which is looking like exactly the right spot. You win some you lose some. If you don't understand that you shouldn't be in the market at all-for your own good.

       Of course, I couldn't even take the slightest pause, but jumped right into 40 calls in Wells Fargo (WFC) $49.50 for May 23. Of course, the reason they even have calls at the $.50 cent of this stock is a testimony to it's lack of volatility-exactly what you don't want if you're using the kind of aggressive strategy I'm employing here. Oh well. I have to figure that it will be able to get at least to $49.75 or so a few times in the next 3 weeks-in this case, $50 would be an absolute home run, in fact a grand slam. In any case, with its strong earnings and optimistic outlook it has to be the anti BAC among the banks if there is any.

      Of course, that's not all I did-I also had to do 40 May 17 calls for Caterpillar (CAT) at $110 strike-with it trading around $105, that's a pretty aggressive bet on it being able to hit levels it hasn't yet-so far $105 is its top right now. Maybe it can break out maybe it can't.

     What I do feel confidence in, is my new position in Apple. I bought 10 shares in Apple on Thursday-shares not calls. My reasoning is its announced share buyback and 7 to 1 stock split-scheduled in early June so expect a lot of money coming in for that in the mean time. How much do you want to bet it won't have to reverse itself like BAC?

     P.S. Cramer also points out that BAC didn't come by this reversal itself-it didn't decide not to do the dividend increase and the buyback, it was the Fed that made it do this. My initial reasoning on BAC was partly that it had gotten its dividend increased-while C was denied. How different things look now.

Saturday, April 26, 2014

I Exchange Emails With Katrik Athreya

     I've written about him and his book in the past. I became aware of it via Stephen Williamson-enough to bias me somewhat against it, quiet honestly-and there have been some polemics both for and against it-Williamson for it, David Glasner, Krugman and others against it. 

    I was very pleasantly surprised when I came across Dr. Arthreya's email to me where he expressed gratitude for my positive remarks on his book

    He gave his consent for me to share his email with you. Here is what I initially wrote about regarding him which led to his gracious response:

    "your reaction was gratifying to read. The reason is that I was hoping from the very beginning that more people like you, with an abiding interest in the subject, would want to know what ideas guide us--even if you decide in the end that you are unpersuaded. You hit it exactly right when you saw that the method is not, despite what some repeatedly say, any sort of bludgeon against government (or the poor, the unfortunate, and the otherwise disenfranchised for that matter). This, and its coherence,  are part of why it is not, as you say, "easily vanquished."

     I myself was very gratified by his response. Part of it no doubt is that I remain enough of an economics groupie to be a little star struck. I mean whenever a major economist takes the time to comment on my blog or email me-I've had a couple of others-I get just a little euphoric its true.Just the fact that they read it is just so gratifying for me. I still remember when Nick Rowe first commented on Diary.

     It was Brad Delong however-who has also reached out to me in the past-who by putting that link on his twitter feed helped it blow up like it did. Interestingly, till this day this remains the second most highly read Diary post ever. The most popular ever was my 'Anatomy of Sumner Post' post.

     What comes out clearly from this email is that Athreya is a true educator who wants to inform the public. In the book itself he identifies three types of readers-other economists, newer students to economics, and then the general interested lay public. In his email that gave consent to discuss his email he said this:

     ".Good luck in your evidently serious efforts to see what we are up to!"

     It may seem a small thing but I appreciate his recognizing my serious good faith effort to do this. In my skirmishes with Sumner he has not only at times insulted me personally-'you are just ignorant of economics and need to stop' but not ever recognized that I am just trying to understand the economic and monetary world better. 

    Listen, in all fairness, I don't think Sumner is a terrible guy-he's a very smart guy and certainly has his good points. However, one of them is not an ability to answer skeptical questions without getting a bit huffy and snarky. 

   I have to say that as someone who's a professor-he only teaches undergraduate economics so he's dealing often with young minds-I hope his bedside manner is less prickly there than on his blog or that's a serious flaw as an educator. When you're a teacher you can't belittle people who ask a question-even if it's entirely stupid, even if they're 100% morons-you just don't point that out. LOL.

   Athreya on the other hand seems to have something of the genuine educator in his blood-as does Nick Rowe. Nick is someone who whether you agree or not clearly loves to teach and explain the matter to interested minds. Again, not to wholly knock Sumner as we all have our different talents. 

    As I told Tom Brown, one of my talents, isn't drawing! So there have been a number of responses to Athreya's book. I would say that whether or not you agree with him or not he's very worth reading is your interest is genuine understanding. 


Wednesday, April 23, 2014

Nick Rowe and the Promise of Economics 2.0

     In my previous post on economics I had said that what I want from economics is good policy advice-in so many words this is what I was driving at. Nick though kind of offers a word of caution. 

     "Put it this way: it would be great if an intro economics text gave us the answer to every question we wanted to ask. But that's too much to hope for. In this case, it only gives us some useful tools for thinking about the question and about possible answers. But that makes it worthwhile. To go further, we would need to know more about the bus business."

     It would indeed! However, surely it can tell us something that we can actually use?! Speaking of Mankiw's text, I just came across this gem on the subject of what they call 'monopolistic firms.'

    "Imagine that you were to ask a firm the following question: "Would you like to see another customer come through your door ready to buy from you at your current price"

     Mankiw's answer: "A perfectly competitive firm would answer that it didn't care. Because price exactly equals marginal cost, the profit from an extra unit sold is exactly zero. By contrast, a monopolistically competitive firm is always eager to get another customer. Because its price  exceeds marginal cost, an extra unit sold at the posted price means more profit."

    Mankiw, Principles of Economics, 2nd edition, chapter 17, pg. 383. 

    Who knew I had so much in common with a monopolistic firm? It's this counterintutiveness of economics which is both maddeningly frustrating and totally fascinating-at least for me-at the same time. Sumner always likes to say that common sense plays no part in economics-I usually give him a hard time about that as I suspect he's an elitist who's trying to foist on the public the kind of miserable policies it would never vote for-but could be imposed perhaps via the monetary authorities; but then I'm cynical. 

    The fact that economists often believe counterintutitve things doesn't always make them right to be sure. I think of things like the minimum wage and the Civil Rights ACT as things most economists opposed and was as a public decided the economists were wrong-rightfully so I believe. 

    Still, what I'm interested in is just how much standard econ can be applied to these kinds of issues. In any case, I will go on. I've already got Krugman's textbook and then Paul Samuleson's in Que when I'm done with Mankiw. 

Tomorrow Morning's Market Will be all About Apple

     Apple certainly shook up the market this afternoon after the bell with its earnings beat with a totally unexpected 7 to 1 stock split announced and an increase in dividends. A lot of people love this move. Like Jim Cramer:

     "Apple posted quarterly earnings and revenue that topped estimates Wednesday and announced a 7-for-1 stock split, fueling the stock higher after a temporary halt."

     "The company posted earnings of $11.62 a share, on revenue of $45.6 billion, blowing past estimates for $10.18 a share on $43.53 billion in revenue, according to a consensus estimate from Thomson Reuters."
     "Apple also authorized a 7-for-1 stock split, addressing calls to share more of its cash hoard. While the split will not change the value of Apple's shares (seven shares at $75 each as opposed to one at $525 a share), it could make the company's stock more accessible to individual investors. Shareholders as of June 2 will get six additional shares for each Apple stock they own, and the new split-adjusted trade will take place starting June 9."
     "The board also approved a dividend increase of approximately 8 percent to $3.29 a share. The company additionally said it would boost the overall size of its capital return program to more than $130 billion by the end of 2015, up from its previous $100 billion plan."
     Some people love the move. Like 'activist investor' Carl Icahn expressed in his tweets:
     "Agree completely with 's increased buyback and extremely pleased with results. Believe we’ll also be happy when we see new products."
     "As we said at conference yesterday, we continue to believe remains meaningfully undervalued. Many analysts fail to understand company."
Not everyone was so impressed.
      "It's a company that's trying to please Wall Street," Max Wolff, chief economist and strategist at Citizen VC told CNBC's "Closing Bell." "It didn't used to have to. Now it does. I think it's a huge milestone that they've realized they do and they're throwing meat on that. I don't know how transformative it is."
      "Apple's announcement that it would buyback shares, increase its dividend, and split its stock seven for one sent the tech behemoths's shares higher after hours."
     "But the move does little to staunch fears that the company is losing the innovation game to rivals, Google in particular, said Trip Chowdhry, analyst at Global Equities Research."
      While it's ipad stocks surpised to the downside the iphone numbers were a major surprise to the upside. Jim Cramer is on board 
      "All told, you get these kinds of shareholder friendly initiatives and solid results and "it ignites an otherwise dormant stock. Positive surprises tend to do that," Cramer said.

     UPDATE: Cramer's reaction to Apple.
      As an investor this is notable for two reasons-one because with a 7 to 1 stock split in June, playing this stock becomes a lot more plausible and I'm intrigued myself. Also it's important as these bang out earnings are expected to be a major market mover tomorrow. 
     "It's a shareholder friendly move. I can't deny that, but I think for the long term you want to see companies invest in new products and growth," said Michael O'Rourke, chief market strategist at Jones Trading. "It falls in line with the financial engineering and aspects like that that are driving the tape and I don't think it's healthy." But he said the Apple news should be a positive for the market.

     UPDATE 2.0: I just came across this article at CNBC before the news of course, that wondered if Apple would get ''bruised' after earnings as this is 'what history shows' even if they beat.

      I love it-we get to see which is the road not traveled in real time. Unlike the debates among economists, sometimes you can prove a counterfactual wrong just by looking at what happened. 
     Right now I remain aggressively long in this market-probably too aggressive. I got lots of calls in both C and BAC as well as JNJ-that is Johnson and Johnson. The market has seemed very timid the last few days not wanting to do too much. However, JNJ has climbed over $100 finally-which is big as it took a long time for it to break that ceiling. Meanwhile, the market has seemed to not know what it wants to do with the bank stocks as they've been totally flat the better part of a week. However, BAC and especially C started to break out a little today. I notice that both C and JNJ are up exactly $.28 cents on considerable volume. I don't know whats causing this-normally you assume that the things are unrelated as the catalysts of one usually have little to do with the other. 

    However, if Apple has something to do with this, thank you Apple. I really only need some small moves in these positions to cash out big like I did the C puts a few weeks ago.

   The only way this could be it, is if a general bullish mood became irresistible so that most stocks as stocks rise-with only those who specifically having clearly bad news not joining in the action. In any case, while the bull position hasn't won for me yet-again, I've been a bull starting 4/7 a few weeks back-it's not been because of the bears-there's been no downside at all just that the banks have been stuck in consolidation mode. 

   If tomorrow can be a strong bull day it will be D-day 2.0 for me. 



Tuesday, April 22, 2014

Nick Rowe Drops By and the Promise of Economics

     He kindly dropped by and left some thoughts on my attempt to consider standard economics in relation to the Nice Bus company here in Nassau-on Long Island, Ny. I was pointing out that many think the  trouble with Nice-a private company that took over from the previous Metro Authority-that was kind of a quasi public-private kind of company-is that it's a private company that seeks a profit-since most of the bus lines aren't profitable but serve a public interest. Nick left these thoughts:

    'Chapter 15(?) monopoly, and the part of chapter 11(?) "Public Goods and Common Resources" where it talks about natural monopoly.

    'Assume that fixed costs are large, and marginal costs are small, so the ATC curve slopes downwards, with the MC curve always below the ATC curve.'

    'Draw a downward-sloping demand curve.'

    'The efficient quantity is where the demand curve cuts the MC curve (provided the area under the demand curve exceeds total costs), but this involves the producer making losses.'

     'One solution is price control plus subsidies. (Or maybe price discrimination, like where they sell bus passes, rather than a price per ride). Or public ownership.'

      'See especially the section near the end of chapter 15. The bits on regulation and public ownership.'

    I actually just finished that chapter a few days ago-now I'm in chapter 16 which is about oligopolies. According to Mankiw, oligopolies can be in the public interest provided they aren't successful in doing what would be in their own best interests-colluding with the rest of the oligopolies to achieve a de facto monopoly. 
    As for what Nick wrote-I'm must gratified I actually know what ATC and MC mean-marginal cost, average total cost; LOL. 

   It seems to me that Mankiw might just add up the consumer and producer surplus-in this case the producer would be the bus company-looking at it in this way might well look good according to this analysis. After all, no doubt many passengers would be 'willing' to pay more than the current $2.25 fare-he might even determine that 'total surplus' would be raised if Nassau County stopped leaning on Nice not to raise its prices. 

   Nick further left this comment:

   "Put it this way: it would be great if an intro economics text gave us the answer to every question we wanted to ask. But that's too much to hope for. In this case, it only gives us some useful tools for thinking about the question and about possible answers. But that makes it worthwhile. To go further, we would need to know more about the bus business."

     For me this is the whole promise of economics and what made me get into it around 2011the hope that it might help us with 'questions we want to ask'-particularly questions of public policy. I've always been a political animal but perhaps I got frustrated with a seemingly interminable debate among political opinions with seemingly no referee-ie, no one to help us know why we should consider one person right over the other. 

    Economics seemed in some sense to  be able to offer something like this. I guess maybe my hope for it-to help us come to informed policy decisions-is kind of like Descartes who had hopped back in the early 17th century that there would someday soon be a calculator not just for arithmetic but for morality as well. 

   The trouble with economics is you're never sure if a particular idea of standard econ is legitimate to use in a certain policy discussion or not. It's very possible it seems to me that based on the standard definition of total surplus one could declare a fare hike for Nice as in the public interest-after all, riding the bus is very 'inelastic-so a fare hike will only raise profits which will raise public surplus. 

    In any case, I appreciate Nick's input and I think that this is the kind of analysis we should try to do more of. I guess his recommendation of reading a text book is a good one after all-after this I have Krugman's  to read, and then Samuelson's-I'm not going to run out of reading material any time soon which is how I like it. 
    P.S. I really don't have such a strong opinion on the subject of Nice Bus myself-maybe it would be better to go back to the M TA, but I have to say I remember the MTA era and it was hardly a utopia. I don't think that the drivers are later with them than previous and in fact I think it may be the opposite. 

     It seems to me that the drivers may even overall be more polite-I seem to remember that once Nice was here you slowly saw the old pass time of watching passengers run all the way to the bus and bang on the doors before driving off and declaring its too late die out. I don't see the drive leave people they obviously could have picked up nearly as regularly as I used to. Again-I really am undecided on the question. 

Still a Bull Market? Dennis Cartman Thinks So

     Obviously it's just one man's opinion, still opinions are sometimes notable just based on who has them. When a long time player like Cartman says he is now 'pleasantly long and considering being aggressively long' I think you have to stand up and notice. Particularly as he's often very pessimistic and bearish and was sounding the alarm just a few weeks ago. 

    "I'm back to being pleasantly long," said Gartman Monday, on "Fast Money." "Two-and-a-half weeks ago, I became very scared and went to neutral...No question about that. Last week, I went back to being pleasantly long. I may even get to being aggressively long. The market wants to go higher.".

    "Gartman, publisher of the "Gartman Letter" said on "Fast Money" April 10 that market action on the morning of April 4 scared him out of the market. "I'm not sure what happened, but something happened between 11 and 11:15, that everything turned on a dime," he said at the time.
     "After a good two-week decline, after 50 big handles in the S&P (500), after going down and touching and barely going through and holding the 100-day moving average, you have to understand it's still a bull market," Gartman said.
     That's been my sense too-that the market wants to go higher. Certainly my own portfolio is 'aggressively long' to say the least-two weeks ago my big position was lots of puts in Citi. I made out big on that one-an initial investment of about $1,400 got to over $3,700. Since then though I no longer felt there was much down side.
    Right now I'm long Citi, BAC, and have bought 100 shares of the 'Chinese Twitter'-Weibo. My happiest postion though is Johnson and Johnson-JNJ. I bought 20 more calls in it yesterday-for a total of 40-and now I see JNJ which finally broke $100 yesterday is up $.56 in the premarket. If it opens up big as it is in the premarket I'll be able to get out of it today for another big gain. 
   Let's hope the market gets 'aggressively long' for C and BAC which have just been running in place the last 3 trading sessions. 


Monday, April 21, 2014

I've Listened to Nick Rowe but What Would Standard Economics Have to Say About Nice Bus?

     I have-Nick you can't say I didn't listen-you said those of us who want to criticize mainstream Macro should read a decent textbook so we actually know what it's about.

     Many at the time found this rather off-putting if not condescending, however, over time I decided it perhaps wasn't so unreasonable. To that end I'm currently reading Mankiw's Principles of Economics-it's the 1998 version as it was much more affordable than more recent versions-however, it doesn't look to me that you lose all that much-I was perusing a more recent version on line-that costs over one hundred dollars and most of it is the same.

    I'm also at the same time reading this book that Stephen Williamson recommended-I'm reading this one on Amazon Kindle-I always have a physical book which I read on the bus every day-and a book I read online at Amazon Kindle-'Big Ideas in Macroeconomics' by Kartik Arthreya. David Glasner had a pretty good decent look at it.

     Overall, he was not very impressed. SW later had a response to his response to the book-SW wasn't too impressed with Glasner's being unimpressed with the book.

     He thinks that the fact that criticism of the book amounted to 'another poor blogging performance'-he at least gave Glasner credit for reading the book unlike other critics-you can guess who these usual suspects are?

     Now that I'm reading I do think that Arthreya does a pretty good job of explaining some difficult ideas well. I think that what you do come away with is that you may think that ideas like Pareto optimization or Walrasian Equilibrium are all wrong but it's not so easy to really show how once you get into looking at it in more depth. Much of what he seems to say is that things like PO or WE aren't literally true but they are nevertheless very useful ideas and models and no one could actually get us a better model to work with. One thing that comes through clearly in both Mankiw and Arethya is a belief that free markets is the best way to allocate most goods and services-though neither claim that this is true for everything.

     Yesterday I had a chat with a bus driver on Nice Bus-the Nassau County bus line that was run by the MTA before but has now been taken over by the private company Veolia-which calls the bus company 'Nice Bus' now. The conversation turned here after I asked the bus driver why they don't consider expanding to having three N35s run per hour during the week rather than the current two.

    She explained that this would never happen as they already consider the N35 a money loser for them-I protested that it's pretty busy in the morning but she says that the rest of the day is slow-in fact they were talking about discontinuing the route at one point. This came a shock as without the N35 getting around Baldwin by bus would be more or less impossible and it certainly is a much more used bus than many others. Basically there are only a few lines that really pay-the N4, the N6, the N70-72 line, the N49. Now their agreement with Mangano and Nassau County disallows them to discontinue a route like the N35-but it does kind of give you an idea of the difference between a private company and a quasi public company like the MTA-the MTA is there not to turn a profit first and foremost but to make sure that residents have adequate transportation. Nice just wants a profit.

    To be sure, I don't know that standard theory is necessarily vanquished here-this is what I meant when I said it's not as easy to defeat as some 'heterodox' types think. Mankiw never claims that the government shouldn't do anything-he leaves scope for the government to run certain industries. Public transit might be seen as one of those exceptions to the rule that he and Artheya certainly acknowledge. Mankiw would agree with this in certain industries but perhaps not public transit. He had an argument in the book that costs could come down and services up if the private vans were given the right to do their thing by the authorities.

   Yet I see problems with this approach-if there were private vans picking everyone up, surely the area that the buses go would decrease rather than increase.




Saturday, April 19, 2014

So When Does the GOP Stop Trying to Repeal Obamacare and Start Trying to Save it?'

     I'm not sure and clearly we're not there yet, but the predictions of gloom and doom for the ACA just are just looking embarrassing already. They've been insisting that Obamacare would miss the target of sign ups and then when that was discovered to be not the case they claimed that it's only older people doing that or people who already have insurance. This prediction has also fallen flat.

     For now, they're trying to claim that the numbers are fraudulent but obviously this  crutch can't last forever. What happens when the ACA becomes like Social Security and Mediare-an entitlement that Americans don't want touched? Obviously they'll have to give up repealing it and start 'saving it' like they do for SS and Medicare-Ryan recently released another terrible budget including his plan to destroy Medicare-he claims he merely saves it. Let's hope this is the last Ryan budget we ever have to see.

    Here is Sumner on the ACA:

    "The share of the population that is uninsured has dropped sharply since last summer.  On the other hand the share of Americans lacking health insurance has risen in the 5 and 1/4 years since Obama was elected, from 15.4% to 15.6%.  On the other, other hand 3 or 4 million more Americans will have health insurance by 2014:3.  On the other, other, other hand that’s less than 2 percent of adults.  So the share lacking health insurance will still be almost as high as in the summer of 2008.  Or am I missing something?"

     "Now let’s consider the goal of Obamacare.  If the goal is to eliminate uninsuredness, then it seems to have failed.  But perhaps the goal is to eliminate involuntary uninsuredness.  After all, all of the sad stories we were told before the law was passed tended to focus on people who were unable to get treated for illness, or perhaps were financially devastated by the cost of treatment.  If I’m not mistaken that will no longer occur, as no one can be turned down for having pre-existing conditions.  Or is that assumption false?  If there is no involuntary uninsuredness, can we consider the problem solved?"

     "One objection might be that we need everyone covered, as otherwise the uninsured will tend to overuse emergency room services.  But unless I’m mistaken there are studies showing exactly the opposite, that when given health insurance people tend to use the ER more often.  Is that true?  If so, why do we need to have everyone covered?  Why isn’t it good enough to eliminate involuntary uninsuredness?  Is the fear a “death spiral” that drives the insurance companies out of business?”

     "In my view Obamacare did lots of bad things and two very good things.  The good things were eliminating involuntary uninsuredness and the Cadillac plan tax. I opposed the program, but have an open mind on how it will pan out.  We’ll know much more in 10 years. One key test is whether Congress will avoid “doc fixes” to the Cadillac plan tax."

     So he's on record as not guaranteeing it will fail. My guess is that in 10 years the GOP will be promising to fix Obamacare while accusing Democrats of trying to destroy it. By then they may even look back on fondly at Obama-this seems pretty remote right now but then it seemed remote that they'd ever embrace Clinton even less so his wife yet by 2010 there were in love with her too. 

       The GOP rule is you have to hate curent Democrats especially the one in the White House-in the future you can invoke them to criticize the current Democratic President of that time.