Think Twice Finance

The Dow: 10,500 by the End of July?

For better or worse, dear reader, I am not going to abandon 30 years of hard experience and 60 years of research by the best scholars the discipline of Finance has to offer and make a forecast. I believe, and the evidence supports that unless you are looking at longer or shorter time-frames than one month, and smaller changes in price than 800 points on the Dow, the best forecast of tomorrow’s stock price is today’s. Somewhat paradoxically, though, everybody knows that today’s forecast is a lousy forecast of tomorrow’s price.

On the other hand, we economists do know something useful about price volatility. To wit, in a market like this one, where the price is doing the latin boogaloo, it is going to continue to fluctuate in the near future (the next few months or so at least.) So the chances are good that we’ll be dancing in the streets or weeping in the back pew by the end of July.

So let us review. Most likely nothing will happen. But this most likely single event isn’t very likely. It is more likely that among the myriad of possible good things can happen and the myriad of possible bad things that can happen, whichever, some of them will happen.

This brings us to my point. If I were not myself, a man steeped in hard experience and financial wisdom, I would forecast a major decline in the market here. 10,500 seems wildly irrational to me, but possibly even a little conservative to that other guy. Call him Not Myself.

Not Myself asks, “What can happen in the intervening month?” He comes up with following list:

• We capture Osama Ben Laden.
• Osama Ben Laden Blows Up the European Commission Headquarters.
• The Iraqis ask “What could we have been thinking?” and become the 51st state.
• The price of gasoline falls to $50 (which is still too high.)
• The price of gasoline rises to $200.
• Congress Passes “important new legislation.” It doesn’t work. (Some of these possibilities are more likely than others.)
• Half the homeowners of the world let their mortgages default and buy each other’s foreclosed homes. (see “Cyprus Problem” in Google.)

Of course, the list is a little partial and tentative. And I myself am not sure whether any one of these things would be good or bad for the market. However Not Myself just plunges on. He thinks that that bad stuff is going to happen, even if it’s not the stuff listed above. He even thinks the market has been levitating for at least six months. So Not Myself says “Dow at 10,500 by the end of July.”

But don’t ask me, for I am steeped in experience and study the experts in Finance, so I Myself have no bloody idea.

Posted in I Myself wimp out, Not Myself Opines, Markets Matter | No Comments »

Budwiser Fights for Its Life: When It’s Not All About the Money.

How I love it when family companies defend themselves in takeover battles! The sheer deliciousness of a struggle between family, tradition, big slow horses, and pride of place generally, and a group of folks who just want to make money is almost as good as a female wrestling tag team match. Didn’t you just love the News Corp vs. Wall Street Journal thing? And how about the acquisitions of Chelsea and Man United?

News, sport teams and OhMyGod, now they’re after a sacred beer! And it’s a bunch of Belgians! Where is Belgium anyhow? Isn’t that where they make that UnAmerican Money - the EuroThingy place? This will throw a spanner into our plans to rename Missouri – The “Show Me” State. We were going to call it Budweiser – The “Chug Me” State. And St. Louis could be Busch City. Now that’s a cool city name. The Belgian idea of a cool city name is Antwerp. There obviously will be no reasoning with these people.

The Budweiser people are pulling out all the stops. They have gotten rid of the Mexican guy on the Board of Directors. (Possible conflict of interest – which means they are thinking of buying or selling a 50% interest in the company that makes Corona Beer.) Good. It’s a sissy beer anyhow. Hard to imagine Mexicans making Corona Beer. I mean, Tequila and Corona? Would The Outlaw Jose Wales drink Corona? Of course not! He would drink Dos Equis, the beer of “The Most Interesting Man in the World,” who doles out advice like “It’s never too early to start beefing up your obituary.” Now that’s a proper Mexican beer! But I digress.

And the Buddites are floating plans to sell Buscharama, the place where you go to have fun with the family if you’re a Bud guy. It didn’t make money, it seems. And they are going to cut costs. All this in case some of the Bud stockholders bought the stock to make money with it, obviously the angle the Belgians are working on. Those Belgians bear watching – they got the European Union headquarters to locate there – making them the only Europeans that will ever benefit financially from the European Union. Or maybe only bureaucrats will live in a city named Antwerp.

In any event, my money is on the guys from InBev prevailing. They have more money, and baby, like it or not, after the foam dies away it really is All About the Money. Let’s try to get them to change the company name to Clydesdale, Inc. Maybe they could change the name of Antwerp while they are at it. How about Global City? Believe me, this can all be worked out for the better if they just hire one of the Three American Spin Doctors to name stuff after the deal.

Posted in Corona, The Outlaw Josey Wales, Dos Equis, InBev, Budweiser, Family Firms | No Comments »

The Rating Agencies: Buried in the Sand to the Neck as The Tide Creeps In.

God, but I’m good. Know how to tell? Just read the title of the May 24^th post. OK, I’ll cite it myself – “The Rating Agencies: Are They Doomed?” Now we learn that the SEC is giving serious thought to cutting off the agencies’ government-mandated monopoly status. (WSJ, June 24, 2008.)

A month ago the rating agencies were taking beaucoup de heat, but to suggest they were doomed was considered the muttering of a lunatic. I was that lunatic.

What they were going to be, in the common view, is more transparent. That is, far from removing their regulation-based monopoly, the agencies were to continue to divide the righteous from the damned, but they would have to explain their decision. My quarrel with that approach a month ago was that divulging the decision factors in advance would render their decisions completely predictable – hence, alas, irrelevant to investors.

Like the Wizard of Oz, they would become less formidable when it is disclosed that there is just some guy pulling some strings that makes the decrees.

So, to be honest, I envisaged some sort of slow decline into obscurity and bureaucratization for the Rating Agencies. But taking away their monopoly isn’t like that at all. It’s more like Alexander the Great cutting the Gordian Knot. The market will state right now that rating agencies have no magic formula and allow the competitive gates to be thrown open to other ratings providers. Everyone and his brother will be able to rate bonds.

The result of that is highly predictable. There will be hundreds of rating agencies. Their predictive success will determine their importance as rating agencies. They will have good years and bad years. And the marginal value of a single agencies’ prediction to the investment community? About the same as the fee a mutual fund manager who discloses his holdings in advance could charge. 0.

There is an old rule of finance that determines this outcome. If you have no skin in the game, write a book. If you have your own money at risk, we’ll read it.

Posted in Rating Agencies, Markets and Regulation | No Comments »

The Puget Sound Energy Bid: “Macquarie Group, Let Me Introduce You to The Public Council Section of the Attorney General’s Office of the State of Washington.”

Macquarie Group is trying to do a thing that it has done with notable success over the past few decades. Buy a corporation that provides a service essential to the Commonweal through thick and thin, leverage it, and then sell it off to investors. Macquarie has been successful doing this for many, many reasons that other investment bankers don’t get. I am too much of an admirer of Macquarie to explain the part that I understand. I oppose financial transparency in the current popular form because I don’t want to see the few truly creative investment banks being stripped of their profits.

They have been opposed in this effort by The Public Council Section of the Attorney General’s Office of the State of Washington.” The reason: “Customers appear to get little or nothing in return for the added risk [of Macquarie’s added debt.]”

I’ve got a solution. Nobody has suggested it because Macquarie is too polite (or street smart) and the PCSAGASW is too disinterested in the actual welfare of Washington consumers to think of it. The solution: Give the proceeds of the sale to the taxpayers.

Posted in Polticial Decisions Affecting Banking, When Regulation Goes Wrong | No Comments »