The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Over the past few years, it has become increasingly difficult to easily distinguish between genuine viral phenomena and astroturfing.

I had my suspicions several years ago, but it reached a head with the “Peter Schiff Was Right” video. Even before he announced he was running for Senator in Connecticut, I strongly suspected the heavily edited video was part of a PR offensive, one orchestrated by a Marketing/Public relations firm, designed to look like a grassroots effort.

What were the hints?

• Lots of emails from total strangers — all of whom had garbage (i.e., Hotmail) email addresses — none were from corporate emails;

• Very similarly worded messages; even where the language was not identical, the syntax was;

• Emails typically Blind Copy (BCC) recipients.

It happened again just last week. Lots of emails about this video regarding the FDIC liquidation of insolvent bank IndyMac, which was sold to bidders and renamed OneWest Bank (See The Indymac Slap in our Face. 02.08.10 http://www.thinkbigworksmall.com/mypage/player/tbws/23117/-4630).

The video was inflammatory, filled with accusations of inside dealings and taxpayer giveaways. The tone and background music is ominous, the math goes by too quickly — the entire thing comes across as if its a giant scam that was uncovered.

I noticed right away that many of the “facts” cited in the video were wrong or at best misleading (no, the FDIC is not funded with taxpayer dollars).

Before I wasted too much time fact checking, I looked at the source of video — a site called “Think Big Work Small.” The header on the page is titled “Video Marketing and Mortgage News Designed for Mortgage and Real Estate Sales.” They sell a product called Database Marketing 2.0. (See nearby graphic).

Hence, the obvious first errors combined with what these folks do for a living screamed AstroTurf to me.

I have no problem with self-promotion (‘though I choose not to use a PR firm). However, getting this many facts wrong as part of a campaign to create viral buzz to sell your product strikes me as cynical and sleazy. It was so inaccurate, it forced the FDIC to issue a statement with specific detailed facts about the OneWest transaction.

Entrepreneurs making money is what capitalism is all about. Its perfectly fine if companies want to buy insolvent firms from the FDIC (a competitive bidding process) and can make a profit on the purchase. And I cheer those folks with the savvy and chutzpah to buy distressed assets in the midst of a panic.

Imagine that, a profit on the purchase of distressed assets at a time when no one else wanted to assume the risk !

But Astroturfing in the middle of an enormous and complex political and economic problem? That strikes me as profiteering hucksters distorting hot button issues for personal gain.

That’s quite a difference from what the buyers of Indy Mac accomplished . . .

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Sources:
Supplemental Facts about the Sale of Indymac F.S.B. to OneWest Bank
FDIC, 2/12/2010
http://www.fdic.gov/news/news/press/2010/onewest_lossshareb.html

FDIC Provides Additional Information on its Loss Share Agreement With OneWest Bank
FDIC, February 12, 2010
http://www.fdic.gov/news/news/press/2010/onewest_lossshare.html

Charges in Web Video Bring Unusual Rebuttal From F.D.I.C.
SEWELL CHAN
NYT, February 14, 2010
http://www.nytimes.com/2010/02/15/business/15fdic.html

How LOL is this:

South Park Studios via Objectless Observations

This chart, from a Reuters’ analysis of pay at the 18 biggest banks by market value, illustrates the massive differences in pay among the CEOs of the world’s top banks. The compensation of the CEOs of the largest U.S. banks towers above what’s paid to banking chiefs in other parts of the world.

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Source: St Louis Fed, Reuters Research

Bloomberg News is out with its latest monthly survey of economists’ forecasts and, according to those polled, the U.S. economy “will grow 3 percent this year and next, more than anticipated a month ago.”

Good news, right?

Well, maybe not. If you go back and look at how the experts have fared when forecasting the pace of growth for any given quarter, let alone for the year ahead, their tea leaf reading skills have left a lot to be desired.

Based on an analysis of Bloomberg monthly surveys published just prior to or at the beginning of each quarter over the course of the past decade, the professional prognosticators as a group have rarely been close to the mark.

Except for the last quarter of 2007, when the economists’ prediction (published in September) came within 5 percent of the reported result, the differences in percentage points between their estimates and the actual readings have been in the double digits — at a minimum.

In fact, on three occasions — the first quarter of 2000, the fourth quarter of 2002, and the third quarter of 2006 — the economists overestimated the pace of quarterly GDP by 1,133 percent, 2,400 percent, and 2,900 percent, respectively.

Aside from the fact that many of the so-called experts still haven’t quite figured out that what the economy has been going through is anything but a garden-variety downturn, their history of poor calls on the near-term outlook suggest their longer-term forecasts should be taken with a grain of salt.

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http://www.financialarmageddon.com/2010/02/grain-of-salt-forecasting.html

This is very cool:

“But in its experimental 911 GT3 R Hybrid test car, Porsche has taken a different tack toward energy conservation for racing. It uses an adaptation of the Kinetic Energy Recovery System (KERS) technology first built into Formula 1 race cars.

Rather than a battery, that system is based on a flywheel, mounted where the passenger seat would normally sit and spinning at speeds up to 40,000 rpm, to capture energy reclaimed from braking.

At the press of a button, the flywheel releases its kinetic energy to power a generator that provides up to eight seconds of electricity to two 60-kilowatt electric motors in the front wheel hubs. The boost serves to maximize exit speed from a corner or to pass another car.”

That’s what I want for Valentines Day !

Video after the jump . . .

Read the rest of this entry »

Between Dire and Disastrous
February 12, 2010
By John Mauldin

A Path-Dependent World
Between Dire and Disastrous
A National Suicide Pact
It’s More than Just Greece
R.I.P., Walt Ratterman
The NBA, Snow, and No Power

The news is somewhat “All Greece, All the Time,” but most of the pieces miss the more critical elements, and in today’s letter we will look at what I think those are, as well as at the important point that Greece is a precursor of a new era of sovereign risk. Plus, we glance at a few rather silly recent comments from economists. It will make for a very interesting discussion.

A few weeks ago I mentioned my friend Sir Walt Ratterman, who was in Haiti at the time of the earthquake. Long-time readers know that every Christmas I ask you to make a donation to Knightsbridge and projects that Walt runs. You have been very generous over the years. Tragically, they have found Walt’s body. For those interested, I will provide a few details about this true hero, toward the conclusion of the letter.

Before we get into the meat of the letter, I want to give you a chance to register for my 6th (where do the years go?!) annual Strategic Investment Conference, cosponsored with my friends at Altegris Investments. The conference will be held April 22-24 and, as always, in La Jolla, California. The speaker lineup is powerful. Already committed are Dr. Gary Shilling, David Rosenberg, Dr. Lacy Hunt, Dr. Niall Ferguson, and George Friedman, as well as your humble analyst. We are talking with several other equally exciting speakers and expect those to firm up shortly.

Look at that lineup. These are the guys who got the calls right over the past few years. They called the housing crisis, the credit bubble, and the recession. And, in my opinion, these are some of the best in the world at giving us ideas about where we are headed.

Comments from those who attend the annual affair generally run along the lines of “This is the best conference we have ever been to.” And each year it seems to get better. This year we are going to focus on “The End Game,” that is, on the paths the various nations are likely to take as they try to solve their various deficit problems, and how that will affect the world and local economies and our investments. We make sure you have access to our speakers and get your questions answered, and you’ll come away with excellent, practical investment ideas.

This conference sells out every year, and you do not want to miss it. There is a physical limit to the space. Every year I have to tell people, including good friends, that there is no more room. Don’t wait to sign up. There is an early-bird discount of $200. And while it pains me to say it, you must be an accredited investor to attend the conference, as there are regulations we must follow in order to offer specific advice and ideas. Click on the link and sign up now.

A Path-Dependent World

Path dependence explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant. In essence, history matters.

With regard to the future, the choices we make determine the paths we will take. As I have been writing for a long time, we have made a series of bad choices, often the easy choices, all over the developed world. We are now entering an era in which our choices are being limited by the nature of the markets. Not only are we in a path-dependent world, but the number of paths from which we may choose are becoming fewer with each passing year.

Our economic future is more and more a product of the political choices we make, and those are increasingly difficult. We have no good choices. We are left with choosing the best of bad options. Some countries, like Greece, are now down to choices that are either dire or disastrous. There is no “easy” button.

Let’s look at how Greece came to its current rather dismal predicament. And we will look at why it may be even worse than many pundits think.

First, we need to go back to the creation of the euro. Most of the Mediterranean countries that are now in trouble were allowed into the union with an exchange rate that overvalued their currencies relative to the northern countries, but especially to Germany. That meant that Greek consumers could buy products and services that previously may have been out of their reach. Plus, with government debt at low rates, the Greek government could borrow more to finance deficit spending, without the threat of higher interest rates. And Greece began to increase its debt with abandon.

Additionally, as it now turns out, Greece basically lied about its finances in order to gain admission to the union. It never complied with the fiscal discipline that was required for entrance.

With the high exchange rate, however, came the consequence of higher labor costs relative to, above all, Germany. While reviewing some economic facts about Greece, I came across the factoid that Greek workers had the second highest level of actual hours worked. But even with that, Greece was running a trade deficit that is currently 12.7% of its GDP.

And with the onset of the current recession, their fiscal deficit went from bad to worse. Their total debt is now E254 billion, and they need to finance another E64 billion this year, E30 billion of it in the next few months.

Bottom line, without some help or a bailout, they simply will not be able to borrow that money. And since a lot of that money is for “rollover” debt, that means a potential for default if they cannot borrow it.

Read the rest of this entry »

Last October, we noted that Dow 10,000 was “a meaningless number, without any impact technically or quantitatively. Its no surprise that the Dow did not hold over 10k for very long. Its been over 26 times, starting in 1999. And hear it is, 10 years later — zero progress. Why anyone — other than tv producers and silly hat manufacturers — cares about D10k is quite simply beyond my comprehension . . .”

The WSJ’s Carl Bialik comes to the same conclusion:

“Arbitrary milestones pervade economics, finance and everyday matters. Some carry more meaning than others: Foreign-exchange markets can rattle national confidence when one country’s paper money threatens to drop below parity with a rival’s, which is a meaningful threshold because it is felt in the portfolios of those swapping currencies. It’s less clear why double-digit inflation and unemployment should carry more political weight than rates just less than 10%, particularly given the controversies about how the numbers are calculated.

The milestones are the result of our brains’ attempts to impose order and assign categories to numbers that vary continuously . . . Further diminishing their importance, milestones often don’t change when underlying conditions do. For example, it’s a lot harder for an album to sell one million copies than before music was sold and swapped online, but that’s still the criterion for platinum status. In baseball, some Hall of Fame voters treat 500 home runs and 300 wins as thresholds for sluggers and pitchers, respectively, even though homers have gotten easier to come by, and wins harder.”

A bit more eloquent than what I wrote, but the same general prinicple.

Hey, these charts look strangely familiar:
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TBP, October 2009

WSJ, February 2010

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Remind me to fire my lazyass copyright attorneys next week!

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Previously:
Dow 10,000, We Hardly Knew Ya! (October 16th, 2009)
http://www.ritholtz.com/blog/2009/10/dow-10000-we-hardly-knew-ya/

Get Those Dow 10,000 Hats Out of Storage (February 5th, 2010)
http://www.ritholtz.com/blog/2010/02/put-those-dow-10000-hats-back-into-storage-for-now/

Source:
Milestone Figures Grab Attention, but Their Impact Is Hazy
CARL BIALIK
WSJ, FEBRUARY 12, 2010
http://online.wsj.com/article/SB10001424052748703382904575059862880464510.html

Stumbling around earching for the infamous John Mayer Playboy interview, I came across this — and I was very surprised!

He is very, very funny:

The WSJ reports today on a study that confirms what everyone has known for years: That many firms manage their earnings, pulling all manner of shenanigans to beat the street.

The way this form of fraud was detected was rather ingenious: The lower than mathematically expected incidences of the digit “4″ in corporate earnings releases. (“X.4″ to be precise) This simple statistical insight was due to an analysis of normal random distribution. “When the authors ran the earnings-per-share numbers down to a 10th of a cent, they found that the number “4″ appeared less often in the 10ths place than any other digit, and significantly less often than would be expected by chance.”

Why?

By finagling the 0.4 to a 0.5, accountants then get to round up to the next higher number. Hence, 12.4 cents is “managed” to 12.5, which then becomes rounded to 13 cents per share.

They dub the effect “quadrophobia” — fear of fours.

Here’s the WSJ:

“A new study provides further evidence suggesting many companies tweak quarterly earnings to meet investor expectations, and the companies that adjust most often are more likely to restate earnings or be charged with accounting violations.

The study, which examined nearly half a million earnings reports over a 27-year period, reached its conclusion by going beyond the standard per-share earnings results that are reported in pennies and analyzing the numbers down to the 10th of a cent.

That deeper look showed that companies tend to nudge their earnings numbers up by a 10th of a cent or two. That lets them round results up to the highest cent. Investors often snap up shares of companies that beat earnings expectations, even by a cent, and, likewise, sell off shares of companies that don’t make their numbers.”

I love the euphemism “meet investor expectations” as opposed to the more colloquial “lie cheat and steal.”

It also points out the need for the SEC to develop a Department of Quantitative Analysis filled with math geeks and computers, doing nothing but sifting through data looking for investor fraud. I’d bet they would get more convictions than the rest of the SEC combined. (If someone in the SEC would call me, I’ll help you set it up).

On an unrelated note: The WSJ yet again takes an academic study that proves Wall Street cheats and liars and runs it on a Saturday. Recall the first Option Repricing article they did that that caused quite a ruckus — a Saturday publication as well. If the historical pattern holds, this article will continue to have legs for the next 2 years, eventually leading to resignations and indictments.

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Previously:
Backdating Options Widespread (July 17th, 2006)
http://www.ritholtz.com/blog/2006/07/backdating-options-widespread/

Widespread Fraud, Option Backdating, Exec Felonies (August 18th, 2009)
http://www.ritholtz.com/blog/2009/08/widespread-fraud-option-backdating-exec-felonies/

Sources:
Quadrophobia: Strategic Rounding of EPS Data
Joseph A. Grundfest and Nadya Malenko
Stanford University, 2009-10-14
http://www.law.stanford.edu/publications/details/4429/

One Click Download

For Some Firms, a Case of ‘Quadrophobia
SCOTT THURM
WSJ, FEBRUARY 12, 2010
http://online.wsj.com/article/SB10001424052748704479704575061481908470618.html