When Will They Ever Learn? II

“The Big Picture” blogger and Fusion IQ CEO Barry Ritholtz looks back at the events of 2008 and makes the case for the true legacy of the financial collapse and ask, "Did Anyone Learn From the Financial Crisis?"

How Bad Is It to Get Kicked Out of the Dow?

The Dow Jones Industrial Average is just that: an average.  It is not a stock price index.  Yet it is the oldest stock market indicator in use today and as the flagship indicator of Dow Jones (Wall Street Journal, Barron's, Market Watch, etc.) it gets far more notoriety than any of the stock price indices.  When the Dow changes, it is big news.

The powers that be are kicking Alcoa ($14-15), Hewlett-Packert (c.$22), and Bank of America (c. $8) out and adding Goldman Sachs ($165), Nike ($66) and Visa ($184).  The stock prices in parentheses tell the story.  The Dow is implicitly weighted by stock price.  Companies with low stock prices have little effect on the Average, while companies with higher prices have a bigger impact.  It has nothing to do with their market capitalization, sales, or assets.


Look at the evictees and the newcomers' betas: Alcoa (1.89), Hewlett-Packert (1.64), and Bank of America (2.07) Goldman Sachs (1.85), Nike (.61) and Visa (.45). The changes appear to reduce the Dow's systematic risk.

MoneyBeat's Paul Vigna interviews David Blitzer, managing director and chairman of the Index Committee S&P Dow Jones Indices, to get the scoop:

Is Koch overpaying for Molex?

Yesterday's (9/9) Wall Street Journal proclaimed that Koch Industries (a "conglomerate known for unglamorous industries") is buying Molex.  Koch, privately held, is one of Wichita's largest employers and one of the two largest privately held U.S. companies.  Cargill is the other.

The current Merger and Acquisition market is pricey, if not frothy.  According to the Journal, Koch is paying 38.50 a share or $7.2 billion.  Given the scanty numbers in the article, that seems rich: about twice sales, thirty times earnings, and 1.78 times enterprise value.

Nevertheless, Koch only buys companies when it thinks its Market Based Management philosophy can produce positive results.  It has found that it has a core competence in managing process business.  Still this is an industry with powerful customers including Apple (14% of Molex's revenues) and the automotive industry.  They do not roll over for suppliers.

James Haggerty and Bob Tita report in the Wall Street Journal, "Molex, based in Lisle, Ill., makes products including connectors, sockets, antennas and switches used in cars, computers, cellphones and factory equipment, among other things."

MOLEX is traded on the NASDAQ. You can find their SEC filings online.

Cheap Or Dear?

Cheap or dear? That is the question: Whether it is nobler for the pocketbook to buy stocks or sell them! Aye, there's the rub.  

The FT's John Authers squares Robert Shiller off against Jeremy Siegel in a debate over whether stocks are over priced or under priced.

I met Robert Shiller when he was first attacking the Efficient Market Hypothesis, a dogma that commanded stronger belief among finance professors than the Real Presence did from Catholics at the time.  He showed statistically that if stocks represent the present value of future earnings and/or dividends, stock prices are much too volatile to be correctly valued.  Later he took the profession on using the Cyclically Adjusted Price Earnings Ratio as his lance.  You can link to his data online.

Market strategists and the like have tried to use it to guage when the market as a whole is too dear or too cheap.  Shiller's measure is signalling stock prices are too rich in Great Britain and the U.S.  

Jeremy Siegel, like Shiller a student of long data trends, argues against this conclusion and, specifically, that "The ratio’s pessimistic predictions are based on biased data."  The problem with any P/E ratio is measuring the denominator.  Earnings reflect accounting and even adjusted for inflation, as Shiller does, may not be the proper measure.  Earnings are affected by companies' use of leverage and the growth in earnings is affected by firms dividend payout practices.  Faster earnings growth should be associated with higher valuations.

One factor neither seems to address is my observation that the business cycle is now a ten year cycle in the image of the nineteenth century British trade cycle.  This is a departure from the immediate postwar cycle which was a five year inventory cycle.

As an investor, you still have to choose whether to buy and hold or make timly entries into and out of the market:  "The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings."

Koreans Demonstrate a Wireless Electric Bus Route

World's First Wireless electric buses started running this week in the southeastern South Korean city of Gumi.  The fifteen mile route has charging facilities built into the road allowing for less battery power and weight in the bus.  But, it requires infrastructure!

The WSJ's Jeyup Kwaak tells Jake Lee how this wireless-charging system works in this short video:




All this raises a number of questions.

If this get used, who pays for the power?  Will the vehicles' owners pay?  If the technology is installed to meter the power usage, will it also be used to charge for road usage? London installed a system for metering road usage many years ago, but there has never been the political will to use it.  London does have a congestion charge in the city center.

What is the cost of installing the hardware in the road and what does this imply for road repair?

Finally, what type of loads will this put on the power system?  In our anti-nuclear age, will we have enough base load power?

The Emergency Meeting

The Economist reports Luiz Inácio Lula da Silva's hand picked successor, Brazilian President Dilma Roussef, has seen her popularity drop in half "after the eruption of nationwide protests involving more than 1m people."  The people are upset over corruption.

In response she "has put forward a five-point plan focused on political reform and investment in long-neglected public services. On July 2nd she sent a list of proposals to the Senate. She wants a consultative referendum on the public financing of campaigns, the abolition of secret ballots in parliament, an overhaul of rules that govern political alliances and a new electoral system (the current one uses an open-list, proportional-representation model for the lower house)"

Our correspondent on the scene, Friends University student Lucas Bariani Machado, tells us from Brazil that some may be skeptical.  He provided us with the YouTube spoof (in Portuguese with English subtitles) below: enjoy!

REUNIÃO DE EMERGÊNCIA

Update:

Lucas offers this video as a 5 minute explanation of "why we are into these protests that you've been aware of lately." 

An "Ordinary Man" to Build a 180 Mile Canal Across Nicaragua. We Will See.

When the United States was deciding how to cut the passage from the east to the west it considered two alternatives: Nicaragua and Panama.  Thanks to fortuitous events and the opportunism of Panamanian patriots, it chose Panama.  The idea of a canal through Nicaragua is being revived by a Chinese businessman.

John Paul Rathbone wrote in the Financial Times that Nicaragua's "congress voted to give Wang Jing the go ahead to build a new canal in its country.  On June 13th, Daniel Ortega left-wing Sandinista government gave HKND, the newly-registered group [a] 50-year concession' to study the feasibility and build a canal."   So HKND is a special vehicle for this $40 billion project.  Furthermore "HKND is working on the feasibility study for the giant project with McKinsey as well as China Railway Construction, a large state-owned group."

Nicaragua is ruled by the left wind Sandinistas under Daniel Ortega.   Mr. Wang is a good friends of President Ortega's son.

And who is Wang Jing? Rathbone described Mr. Wang as a "40-year-old businessman...who also heads Beijing Xinwei, a midsized telecoms company."  The FT's Kathrin Hill interviewed this self described "very ordinary Chinese citizen" for its "Beyond the BRICs" blog. Hille tells us, "he lives with his mother, his younger brother and his daughter in Beijing."


Hille talks with Wang in this video about his plans and asks whether his US$40bn project is a front for the Chinese government's ambitions to extend its influence in the US's backyard:


This is a project not without risks.  Rathbone warns, "[a]lthough global trade is growing, the Panama Canal is nearing the end of a $5bn expansion plan to double its capacity, while global warming means melting ice packs in the Arctic could make a northern route a viable alternative to crossing the central American isthmus by canal."

Why Wichita and Kansas Are Places to Move Your Business to or Start Your Business.

John Stears writes in the Wichita Business Journal that "Wichita businessman Wink Hartman hopes [he can[ elicit warm and fuzzy feelings about living in Wichita and Kansas — and catch the eye of job creators."  He has produced a pair of ads highlighting the type of people who make up our local economy and its culture of growth.  Spending his own money for production and airing the ads,  Stearns characterizes Hartman's campaign as "one man’s economic-development cause."




Meanwhile the American Legislative Council has boosted Kansas' economic outlook based on improved policies.  Kansas jumped 15 rankings in the ALRC's ratings of the fifty states' prospects: "Rich States, Poor States."

The Battle of Airline Business Models: Southwest Is On A Rocky Mountain High

There are three main approaches to running an airline: those of international, full service trunk carriers, low cost, reasonably priced, user friendly carriers, and no frills, charge for every thing carriers. All three business models are competing head to head in the Denver market.  Southwest had long shunned Denver.  But the Wall Street Journal's Middle Seat columnist Scott McCartney tells how Southwest bit the bullet in 2006.  In Denver, it competes directly with the other two business models represented by United and Frontier.


Which business model will out?  Scott McCartney writes the whole airline industry are are follwing the battle of Denver which is a fascinating microcosm of the industry. By one measure, Southwest has moved ahead: