When not taking part of the metric system is ok

The word is the US might have to adopt IFRS. By mid 2011, the SEC will take the decision. Then 5 years to implement the shift.

There was love at first sight when I saw that some of the US GAAP rules are implemented by statistically looking at their use in the markets.

IFRS allows for immediate recognition of the gain or loss in a sale-leaseback operating lease transaction. They are two transactions; therefore, they "must" be independent. You can recognize a gain because the sale of the asset is completely independent from the lease back even though you never lost the asset.

On the other hand, the musical complexity :) of FASB did statistical analysis in the field and found that the great majority of the companies recorded both transactions at the same time (the sale and the leaseback of the asset). Given that every company has both transactions at the same time, it makes it one. The sale looses its immediate overall economical substance because it is tied to future payments. Therefore, FASB simplifies the world by recognizing it is not a sale and a leaseback of an asset. It is financing. You get a chunk of money, you keep the asset, and you make payment as if it was any other debt. The gain on the sale has to be amortized along the "debt" payments.

It is not just a a matter of implementing someone else's rules. It seems there is a major difference in the approach. The agility will be lost.

I believe in Principles. Some things are wrong. If they are not spoken and written that way, after a few years, people start to get comfortable with the proximity to the limit. But at the same time, principles are also the random punishment machine of the state. Without very clearly specified rules, Principles become the reality show of who is cool at the moment, and the uncool is left without specific rules to know you are safe.

Five or Six years is also the hibernating time for a trip to the land of Pandora. Is it a coincidence, or we are just being prepared for the journey to La La Land?

More numbers

Brown - previous UK Prime Minister (while promoting his book, but still):

"In 10 years, Asia's consumer market will be twice the US's consumer market."

Only 10 years. It is just too fast. This is at the same time that we are expecting the US and Europe to contract, reduce spending and hope for the best. At this rate Asia will be the center and the edge. US and Europe would be tourist attactions. Can those societies handle the wealth and the influence? They have so  far.

The Enlightment of Independence

New research seems to highlight the fact that financial companies with independent boards and directors tend to undermine corporate governance and stock performance even though independence has been seen as the fix for these issues. This happens at the same time of pushing for procedures in the name of the goals.

This always reminds me that the best example of independence is a homeless person. Having no stake in the outcome, an independent board can have their own metrics to follow even when convinced that their goals and the company's objectives are the same. The same fact of their independence makes them unregulated about the results. Independence by itself gives you exactly that, independent results.

In worse cases, independent directors are the magic bullet as independent reporting tools. But relying on a person specifically for his/her decision making is increasing the risk. Corporate governance is a process to be tuned up along the way not directed.

In Spanish we have a saying: The watchful eye of the owner feeds the horse. The agency problem is not fixed by an independent body with no stake that replaces the owner's responsability. It is fixed by a body that is responsible for independently overseeing the already in place corporate governance.

The possible and the impossible one

China's future risks lie in the empowering of the population of these cities. If we see them like a swarm of people buying and selling, and investing capital, the consequences are extraordinary while everyone keeps watching for the macro risks.

However, empowering at this lower level cities is uncertain because implementation of rights occur in societies through courts, contract law, and law enforcement to protect the decision of the legislation and the rights of the individuals all the way to the bottom. People talk about China as an experiment. Nobody has been able to do democracy with a billion people. Even the US had to have the notion of state independence from the Federal government. It was probably the factor that allowed the Union to survive all the ups and down suffering the threat of separation.

Russia always had a more promising future than China. It was the second power in the world. It always had the highest level of engineers, scientists, and resources. Tetris was invented by a Russian for God's Sake! What would we have done without it?

And every time Russia enters the world stage, the local politics override all rights of the population and their "free agents". Sales of Vodka are some of the most profitable for small businesses. Then all the sudden in smaller communities vodka is prohibited to be sold until further notice. Local businesses and stores in shambles in a couple weeks. The details and the consequences of the arrest of oil moguls are just a serious warning to everyone else. What is interesting is that Russia might be after all more isolated and unique culturally plus more economically self-sufficient than China. China does have a party and factions and depends on Europe and the US for technology, education, and China is part of Asia. Russia still has the personification of political power in one person, it has all the brain power it can, and it is part of...itself.

Free societies become commercial powerhouse because nobody knows for sure who is the right person or who has the right idea. The whole idea of a capitalist system is the fact that the market chooses, not political representatives, not judges, not your competitors, and not even your peers. This is why a capitalist society can only flourish with empowerment and without discrimination.

In order for these three hundred cities to spawn indefinite economical growth, there has to be freedom of choosing or as until now, western business that hold more rights to create and lobby than Chinese individuals.

As a note of hope, China has been introducing non-communist party members to the Central Committee. But it seems it is always so easy to revert back. The whole world watches China every elections, every crisis to see who will win in the inside and what actions will be taken. It would be nice to know the point of no return, and these three hundred cities will be for sure the future.

The fix that was

The biggest mistake was allowing the banks to survive untouched. By buying toxic assets, the US government became the primary customer eliminating the need to look for business. Government is a market segment. We made the banking system serve the government by having them sell to it. Getting book value on assets made better sense than risking capital for more complex transactions in the consumer or commercial markets. Now it is too late. We should have taught them to fish again, but we gave them supper.

If they were too big too fail, it doesn't mean they were too big to fail later on. I wonder what would have happened if the lower interest rates would have been given only to smaller banks to take on the giant banks. The big ones didn't lend anyways. At least it could have produced the debacle of the ones meant to fail plus the raising of a new breed simulating competition while diminishing the impact. Talent jumps ship anyways. But the smaller ones don't have the lobby capacity only the regulator's scrutiny. A new breed could make the regulation easier by growing with the new rules. Now we are left with regional and small banks failing while the big ones are sitting on their balance sheet with their new gargantuan ingestion of failed banks who continue to survive inside a bigger umbrella.

Blindness

Presidents everywhere speaking for economists: Selling the package or containment procedure?

The Koreas and the waiting for China's help. S. Korea cancelled its planned exercise on THEIR Island after the N. Koreans "were done" with "theirs." Why? If the leaks show us anything is that is showing the cracks of Western influence in the world. The promise to improve America's standing in the world have left the US having to like everyone else. Iran... and meanwhile Israel is silent. Decades of soft stance have produced nuclear material. I just hope the increased investment in high tech warfare and the massive amount of engineers moving to certain areas have their milestones soon. I offer myself to test. I test for free speech.

The good news China is not trigger happy. Their own stability is more important, but eliminating the containment force of the US is not by any means a detriment to their interests.

Front pages of finance newspapers have politicians and possibly serious underplayed events. It means uncertainty. Finance news will always follow.

The compatibility of the missing science

Isn't this a clear sign that it might be time to change the current metrics used for policy.

If things are not working, it might be time to step back and make sure that what you saw painted on the Monet was a building. The same applies to policy makers. Maybe it is time to take a couple step back and look again to see what data they are following.

The deepest financial crisis. The government over spending which probably has let things roll longer. The head of the budget bureau saying we are tapped. There is not lending happening. US production is overseas. And some of the opinions in the Federal Reserve is that no market works on the current zero percent lending rate. What it really means is that things are not working now or they are about to stop working unless things get a bit harder.

Another study challenged the idea of the US ingenuity and creativity. It mentions how the majority of US force is not engaged on their work compared with previous research.

90% of the engineers and Computer Scientists will be working in Asia in the near future given the rate of foreign workers returning to their countries. This gets compounded with the graduation rate of computer scientists and engineers that graduate in the US which is 14% of the total of computer scientist and engineers that graduate every year in India and China (Even most of US graduates in computer science are foreigners).

We might just be in a transition period. There are new promising fields rising, and they might be the new propulsion engines. But still...

"Cheap dollar won't help US exports because US companies are mainly producing overseas."

There is something totally inverted about that sentence. Decades of economical thought might be rendered useless like a curtain at the end of a show when the lights go out.

Is the US stock market a reflection of the production overseas making us think it is the US industrial power? Has the time arrived when the Dow ends to mean what is supposed to? In a global economy, the meaning of the index of the largest American companies might stop representing the "American" locality leaving us following the wrong metrics.

Is the happiness of TARP being repaid making us think it was a good investment while the funds were generated outside US borders?

Things are changing. What used to work is not working. The characteristics of pre-emergent economies are showing up in the largest economy of all. It is like the IMF lending to Guatemala or Nicaragua to build infrastructure without hope of production or exports in spite of their depreciated currencies (The cigars did get really good. I am still looking for the Nicaraguan Hoja Cubana that disappeared. Maybe someone just had a good batch they had to get ride of at a discount). Anyways, coming back, regressing to the spontaneity of the absurd...

Time to come up with new science or science will be written of us.

The backward compatibility of the wrong and forward and the one that came back

"Cheap dollar won't help US exports because US companies are mainly producing overseas."

Ticks

Conduits are first on the FCC agenda. It is becoming too popular for companies in need of financing to raise capital through government munis. So far, they were targeted by the IRS for the revenue lost. Interest payments are paid by the company, and the government gets fees and projected economic growth.With lower standards for filing, corporations access to capital at lower rates that they would have on their own.

Governments don't carry the liability on the issue, but the munis carry the government's brand. It works for municipalities in good financial standing, but look for the ones who are sliding under the radar, and a good opportunity for speculation arises. 35% of munis in default were conduits.

Another tick:

Credit default swaps. Even though the brains of Long Term Capital Management were crowned the kings of M&A hedging, the credit default swaps are said to be a nicer arena for speculation. When rumors of take over start, prices of the other targets get bidden higher. But depending on the debt involved in the takeover, a higher payout happens in the credit default swaps. Credit default instruments go up in price at a higher payout than the actual stock price without the risk of the stock collapsing right after the take over because debt stays in the books for good.

Speaking of the Devil

China fastest train yet. They didn't import it; they built it.

The China that will be in spite of

There has been somber predictions and dangers from the Chinese growth. Inequality between the country and the city, unrest of farmers, ecological problems, disillusion in the communist party. However, it seems the financial crisis has strengthen the country's belief in its leadership.

Talking about numbers about China is just mind blowing. In 2007, China had already 460 million cell phone users. Maybe it is not that impressive.

But for example, every US phone user pays a tax to subsidy poor income bracket' phone usage. Economical studies have proven that a cell phone to a low level income bracket person is one of the most effective ways to increase its ability to generate economical activity. In the last two years, those subsidies have been put into practice, and poor income bracket's consumers have been getting a free cell phone and service paid by the US government.

If it has been proven by the numbers in the US, just imagine the multiplier effect of 460 million cell phones users in China.

Now, with all the risks and threats of China's growth, there is one figure that is really extraordinary. Its consequences are unimaginable. Avoiding a natural disaster which doesn't seem to stop China like the Earthquake, these figures just show the incredible potential for indefinite growth.

The US has 9 cities with population of over 1 million people. China has 300 cities with populations of over 1 million people counting the migrant workers (200 mill) which I don't think are included in the figures (they are still asking for equal rights, so they are not even counted yet). High speed trains will interconnect these 300 cities in the near future. They go from 1 million to a city like Shanghai with over 18 million.

The possible combinations of 300 cities interconnected with such high populations are unimaginable. It is like a mini Earth. The future products developed to supply this demand, and the mini ecologies of demand, supply, tourism, population movement, and services could easily beat any expectations. The number of permutations of this amount of people interconnected and with economical freedom will render any focus groups in the US meaningless because its consequences are just almost impossible to foresee. This is assuming China's individuals continue to gain economical freedom and "adequate" legal commercial rights.

All these cities have budgets and are landscaping, planning, building and creating services. They just don't have any other choice. There has been a migration of 200 to 300 million people into these cities. If that is not a train of growth, I don't know what it is. They are graduating and creating mini countries onto themselves.

I believe it was Philips which sold around $200 million in city lights in one year. Almost every important architect has been hired to work in one of these cities. It is true that it might be an artificial demand for now fueled by city budgets competing among each other about who has the best city hall, but this has always been the beginning of cities. Five hundred years ago, the church and the plaza identified a city. Then a city was the one that had a post office. Then it is the constant fight for which has the tallest building.

China with its three hundred cities of this magnitude with every major corporation present, 200 million migrant workers, erecting streets, city lights, fire houses, city halls, trade surplus with Europe and the US, political stability, economical freedom supported by their government, and inter-connecting themselves at the speed of a bullet train at the same time of entering the information and Internet age is at least the most clear indication of future economical growth I have ever heard.

So much

So much happening, not enough time to keep up. I am not even talking about looking at the numbers. That is not an option. So much noise: Foreclosures, Russia, Pension funds everywhere with issues - pulling out of stocks, failing, accounting issues; then regulation passed, now implementation of regulation, Cuba, IPad slow but changing a lot of things, app world forming, where is google going?, yahoo, etc.

But of course, the obvious is the constant prediction and the prophesy: IBM with "Strong demand in developing markets." It would be news if they weren't the supply. They had to face the issue of you can't hire the whole world to work for the whole world, so they change the strategy a bit: hire a populous country instead which is half the world.

I even forgot that Benjamin Netanyahu is back in power.

China's new subtle PR is interesting. It is hopeful. Once a country portraits that image, it will have to follow through. I have lived the opposite, but slowly they might be raising their own bar. It is interesting to see young modern nations. It gets childish at times. They speak about protecting their jobs with so much innocence like an enlightenment concept never heard before. Almost like if they repeat it over and over, people will understand. But these are issues western nations have faced every single quarter for at least a century. Sometimes you just have to loose. It is almost like Russian roulette by the primer ministers of any country that matters.

Blogs and their lack of structure. I thought a concrete title will keep it on topic. Let's try that again.

But the main news which has moved to second page is Bernanke: "no all who wander are lost". We hope.

Foreign Exchange - the new economic weapon misfiring

What a mess.

The Feds getting ready to buy tons of debt. This will probably lower long term interest rates. This will weaken the dollar which will strengthen foreign currencies which is the opposite that almost every other foreign government wants because most countries need to export in order to grow.

Then capital is escaping developed countries because interest rates are so low into the developing world expecting higher returns on emerging markets. The higher demand for these currencies continues to pressure these currencies up, and their governments can't do anything. More in trouble are the poorer countries of the Euro zone. They don't even have a currency to work with or by which to do economic plans.

Meanwhile, the countries that don't let their currency to float freely (e.g. China) are the ones winning. Is this a lesson for the rest?

It would be nice to see where all this is going. It is the new riddle. Maybe we should continue waiting for the bursting of the China real state bubble like James Chanos continues to predict like a new Enron: "Once the cranes stop going up like in Miami. Then you know."

An interesting idea came up (I think from the Feds), the world needs to start exporting inwards by creating and supporting their middle classes given US consumers won't be able to continue fueling the world economic growth.

Stress Test

The European stress test. The calming voice of reason.

With any pronouncement from any government about the stability of the financial systems comes the fear of making things worse, so they bring with them their actual area of expertise: PR.

The European stress tests were said to be more stringent than their American counterparts. Everyone applauded and understood everything was fine, really. Next to the bank assets reported in the European test, there was reporting of Gross and Net Debt.

Debt net of collateral and hedges. A company with billions in Debt was able to do some "risk management", and they can omit reporting on some of the b's. They actually pushed this so much that they were not disclosing the government debt in their balance sheets. Debt disappears in the test report. Take it off. Let's call it Net Debt of everything we don't want to disclose.

I am starting to believe the rumor that we have come to the point where financial information is meaningless. Thank God for economists. No wonder most people trading are following charts. It is like everyone knows without knowing that there is no point in reading financial statements. It is better just to find some overall hyper generalized pattern. All these misstatements and advertisements get summed up at some moment in bars moving up and down. Simpler and more effective to follow primitive but certain technologies like star charts, bird's migrations, the moon cycle, and the calendar month than tracking currents, ocean temperature, or global warming.

Over 200 years ago, the Rothschild's knew which government had money and which one didn't. Nowadays, the day trader knows more than the banker.

Sox and the Too Big to Fail

It seems SOX might only apply to bigger companies. No time to explore more right now, but maybe this is where the Too Big to Fail question gets answered. Let's have the big ones do all the paperwork.

The mess would probably come when the smaller ones get bought up. At times, it might not be an acquisition but a siege of procedures.

Two business worlds are to be born: the responsible and the not. Maybe it is better just to extend the term Privately Held Company to smaller public companies. It will have the same effect of allowing no questions or liabilities on the financial statements. Extending the term "Privately Held" would be better than making the statement "public and reputably audited financial information" dubious.

Intel takes over McAfee

It is just too easy to say: I told you so. It is too common. It just doesn't grasp the value of the foreseen Truth. :)

Intel (INTC) buys McAfee - only a mere 7.7 cents on the trillion - making one of its biggest takeovers in history. Intel has a venture capital arm, Intel has bought and sold plenty of businesses. But this one is a huge bite.

Security is the next battle. Too much risk inherent already in the system with no hope of containing it. There is no point in producing the next computing power of the future of the planet if its value can so easily be diminished by lack of predictability.

The last time I went over technology security companies' financials, they were over blowing their revenue around their "shipped boxed software" to retailers. It was a marking of the shipped box as revenue. If not sold, it was written off against some huge bucket account that continued to grow over time until the day it was to be written off as "bad stuff" in the far future. FCC started an investigation a few months later against some of them for other infractions.

I love this move. I just couldn't think of anything more meant to be. It is the vertical integration of what it should be and not of the traditional value chain.

Intel just hasn't serviced the ever changing landscape of final customers. The little bell on the side of the dining table in the master's palace which makes conglomerates rearrange themselves across the world in a matter of weeks.

Anyways. So surprising, and so known ahead of time. This doesn't seem like the traditional move searching for more sales. This is a move to take responsibility for the final product and deliver what it should be. A world neural network feedback loop of never ending learning has just been born. The feedback of the final product will be received and searched by the leader in security and sent back into the wafer line. I don't know if bold describes it, but secured will be.

Historical Stock Prices

A client asked me if I have access to historical stock prices by date. Most historical stock prices are done by symbol. This means, if the company crashed a few years back, you won't find the list of stock prices for the lifetime of the stock because the symbol is not listed anymore.

I never really paid too much attention to this, but analysis on this type of data is flawed because it carries the bias of stock survival. So if you are testing a hypothesis, you can't test against the failed or acquired companies. By default, the hypothesis will tend to be positive because the companies analysed survived without testing against the ones who failed.
any ideas where to get stock prices by date? Even Yahoo is by symbol.

I heard Ameritrade or another one has a way to do backward hypothesis testing. I wonder if they offer all the historical data even if the symbol is not listed anymore.

Got to get my hands on some of these relationships:



Reuters is a great data provider with great API:
https://customers.reuters.com/Home/RMDS.aspx

There is also amazing software by niche players focused on doing backward hypothesis verification.

Analytics changing markets irrationally by very rational decisions

New high prices paid for some office buildings is making people scratch their heads. The difference from a 75% occupancy and a 93% occupancy in buildings in Chicago was from $100 a square foot to $500 a square foot.

It seems that in the never ending search for new investment returns, they are looking at office buildings with high level of quality occupancy as it was a bond in a completely separate light from any other building. Comparing to the current price of bonds and treasuries, it seems to be an appealing investment.

This is an interesting twist. All the sudden, prices in real state have dramatically changed for property that is best to next to best. This causes a whole new array of issues. Level of occupancy or quality of is not a measure openly disclosed unless someone is actually buying. This will make it harder for someone to analyze markets that are not familiar with. This is maybe one of the best opportunities to actually value an intangible like a Brand like a daily index tick.

If it becomes a long term trend, it would be interesting to see "bond" prices decreasing on increasing depending on minor occupancy rates changes.

At the end, in markets with so much bad news across the board, it is just the need (maybe the experiment) of decisions based on more accurate data.

It feels like finally the application of deeper analytics across the board. By refining and re-defining segments, REITs might be looking deeper for correlations. It is an exciting change in an uncertain world from the usual location, location, location.

Automated Trading

This doesn't seem to be just noise. Enough people are joining the cry that something is really changing for good. Automated trading has happened for ages, but it seems it is taking over to the point of moving sectors by momentum.

There are more fail safe regulations being imposed like the Flash Crash Plan which stops trading a stock if the price drops more than 10% in 5 minute. (How do we know if these rules are applied all the time? and whether we can expect them to occur? ) It will be interesting to see if more regulation keeps coming up out of this and who might benefit.

Is there an issue? Ideally fundamentals will still hold. If stock prices or sectors are going up inflated by automated trading, they will come down on the next sector crisis; they will start seeming overpriced at the earnings call. We just need to stay solvable until finding the one paying trade. Stay in game. Cash is a good investment until it all makes sense. At least we know, it is not new. Read somewhere in 87(?), there was same high correlation between stocks and indexes. Nice research paper on guessing what eliminated the correlation. sporadic appearances over time? why only 87, only in severe crisis?

It would take so much effort to have an idea of the specific effects of automated trading that I wonder if it is not better just to follow the herd. Follow our own cattle run: If there is an 80% correlation, and the index is going up, buy more stocks of the index, or hedge the one with less chance to go down with the one with less chance to go up. (Nice easy experiment to do.) Now we get stuck in the "fitness function" of what makes so much chance. Or easy deterministic calculation, take a sample of 100, find the highest "chance" (verryyyyyy probable that it falls above the average). The same the other way, and put them against each other. But then again, Risk Management keeping track of the correlation with the index, and another stop trade in case it moves (every 3 secs?) :) Then we are just left on predicting where the index goes. Easy problem. Maybe I can win the Lexus. is it a Lexus on the "call the close"?

It will be easier to find out which sectors are more pushed by automated trading. Any new data? Health Care, Nano-Technology?


But like any other process, it is the outliers the ones you need to try to control -if there is research to proof that it is diversifiable. If not controllable, mapped and avoided. There are more rules against dropping prices than trading long, etc.

This automated trading is also not a static event, if it comes to the point of continuing the correlation of stocks and indexes, there will be new automated rules to work against this herd behavior. Indexes for example, when feeling lack of liquidity a few weeks ago, saw prices dried up and collapsed. Interesting behavior like investors don't see the same intrinsic value in index prices as in actual stocks when crisis comes uninvited.

If automated trading ends up outrunning the pockets of us mortals, in a global scale, the effect might diminish with the merging of capital markets and increase trading offerings. More complexity, less predictability, if inflated, more inefficiency, and more money to be made.