Ultimi Barbarorum

Apple fails the Cafe Table Test

June 21, 2009 · 15 Comments

So we got the new iPhone. Baruch predicted this February (long before anyone on the sell side opined about it) that the launch of iPhone 3 would spell the likely end of the good times for Apple in the smartphone space. They had run out of ideas, he said:

Apple can up-spec: it could add a better camera, a better processor, boost memory capacity, or fluff the OS somehow. At the same time it would cut the price of the old model. This is what they will probably do this summer.

Well, this is exactly what they did a couple weeks ago. And this weekend we see the debut of the new iPhone 3GS, S for “Super”, or “Speedy”, or maybe just ”Something”. You get faster chips, more memory, a compass, and video recording. This will set you back $200 for 16gig NAND, and $300 for 32 gigs, with the requisite 2 year contract from AT&T. Anything you ever wanted to know about iPhone 3GS you can read here.

Meranwhile the old iPhone gets a price cut, to $99 with 2 year contract in the US, and deeper into free in Europe (where it was already), with a cheaper contract: EUR44 in Germany for example where before I think it was EUR60. Canadians will get still screwed and pay more than anyone else for the same thing; just not quite as much as before.

But here’s the problem, which I hinted at in the link above: the dirty secret of high end handsets is that they are bought as much to impress as they are bought to be functional. Smartphones in 2009 have replaced the stereos of the 1980s as the arena where a certain type of male competition is decided. Early adopter nerd fanboys still imagine that they will become more attractive to the opposite sex with the latest smartphone, and pecking orders in their social circles are partially determined by the changing status of a never-ending flow of constantly higher-specced gadgets. This is why people camp outside Apple stores. They may be dying to finally be able to use cut and paste, hoping their lives will be suddenly fuller, but I submit they are equally keen to be the first in their urban tribe to flash the latest iPhone around in the blessed 2 weeks before anyone else they know can get one.

The problem of the iPhone 3GS is that it fails the cafe table test; can someone tell that you’ve upgraded by looking at it? No. It looks almost exactly the same. Apple is asking you to pay up to $200 extra for minor feature tweaks, when what most people really need to get for that kind of money is a phone that shows to women and men passing by your cafe table, handset ostentatiously displayed, that you are of high status, and possibly worth shagging, or sucking up to.

You laugh? Ask Ed Zander, the man who killed Motorola with the RAZR and its clones. Back in 2005, the RAZR phone was the only one a thinking, style conscious person could possibly buy, at least for a while. It was shocking in its thinness, its style, while retaining the specs of similarly priced, and now suddenly obsolete, thick handsets. They sold 100s of millions of RAZRs, while most mainstream models do well if they rack up 5-20 million units in their lifecycle. Then they made RAZR variants and updates, and cut the price of the RAZR; this didn’t go so well. The unique selling point of the RAZR was its style, the thin thing. The new RAZRs looked more or less like the old RAZRs, had slightly higher specs, but cost $100 to $200 more. There was no point trading up; sales of RAZR remained high, updates like the KRAZR and SCPL never took off. Meantime the competition was catching up; Nokia and Samsung were doing “thin”, but with better specs and pricing. Motorola had to keep cutting price to maintain volumes and scale and cram the channel to keep making its quarters and maintain its stock price, hoping that something would happen to break the vicious circle. But eventually revenues collapsed with ASPs, and sales channels, now stuffed with RAZRs they could no longer sell, swore off Motorola for life. Moto=toasto.

Motorola failed the cafe table test. Now Apple has given up on it as well. I think cost conscious punters are going to buy old iPhone and spurn 3GS. Meantime the opposition are catching up. Android offers at least a similar browsing experience, for cheaper. Samsung’s Omnia HD is a shit smartphone but looks like an iPhone, has touch screen and mega mega pixels on its camera, while the iPhone has only got 3 of them. The Pre has fanboys trembling with anticipation and Palm could sell loads of them if they could actually make any that work. Nokia is still crap at smartphones but is trying, very trying, and has hired a whole bunch of younger Finns to cover the conferences of the earth making noises about social networking. Apps, yes: iPhone has a huge lead. But it’s not even the first innings in that game, and Android has apparently an easier SDK and better developer economics. Eventually every manufacturer is going to carry the key apps that everyone uses, even if Apple may still own the long tail. And more and more of these machines look like iPhones, essentially the same big screen, rounded edges, with a couple of buttons at the bottom.

So Motorola-isation is a clear and present danger for Apple here. This second half of 2009 is going to see the first big battle of well-supported heavyweight smartphones, and I am not sure that Apple has done enough in the 3GS to live up to expectations. They may have lost the ability to surprise. Old 3G iPhone is still better than most of the other machines out there, and at $99 it will sell like hot cakes, but soon it won’t be, and if they can’t migrate users to more expensive units, what are they going to to then? Getting off these operator exclusives could be a start.

→ 15 CommentsCategories: Lens grinding · Stupid Cartesians

We’re all individuals

June 13, 2009 · 7 Comments

Market Folly (HT Abnormal Returns of course) yesterday wrote an interesting post about the benefits for a promotional company management of having a “prominent investor”, a Buffet, a Paulson or some bigtime hedge fund operator to give his imprimateur of approval, viz:

It only takes one stamp, and poof, their image is revamped and a tiny sense of confidence is restored. That’s the power a prominent investor can have on a company’s market image. They can turn heads, begin to sway market sentiment, and start to change the negative perception. . .

Jay, MF’s proprietor, is quite right, of course. Not so long ago one of Baruch’s stocks doubled on the day Warren Buffet took a stake in it, and for no other reason. But it is a regrettable tendency.

Baruch’s professional life is founded on the principle that markets are really not efficient and that inefficiencies persist. One of the way in which they do, I am convinced, is this burning desire people have to follow what they perceive to be ”smart money”. Baruch’s rule is never, ever, ever buy a stock just because someone else has. That doesn’t mean not being aware of who owns what; that’s often key information (and MF is invaluable for that), especially if you know they’re in trouble and their money is being taken away. And Baruch has to admit that after having done the work on a stock and finding Fidelity is following you in on it can give a certain gratifying warmth, and is often worth about 20%

But there are many ways in which following “Smart Money” into stocks in an unexamined way will get your faced ripped off. Here are just a few:

Timeframe: you have no idea how long that investor will be in the stock. He could only be holding out for a 30% gain for instance, and in the lag between when your hero got in and you found out about it, it might have gone up 20%. He may already be on his way out. If it’s gone down, he may have stopped it out already. And then why were you in it again?
Why is he actually in it? What if it is not an alpha position, rather a hedge to offset a short, which is where your hero thinks he’s going to make his real money? What if he has offset it with an option position and is not, in fact, net long at all? Again, the disclosure that some guy has this stock on his books may mean very little. And think hard about why he may have told people he likes it? Pump and dump, baby.
What if your investing guru is not actually that smart? Howard Lindzon doubts that smart money actually exists, and I believe him. Buffett followers took a bath recently; anyone who followed disclosures in the big hedge funds last year lost money with them. By the time an investor has become one of “The Smart”, it’s often a very good time to get off the bus; these things move in cycles, as the Ancients knew well. I had a great year in 2007 and looked like a genius. If you had invested alongside my end 07 disclosed positions in 1H 08 you would not have been so pleased. Plus you ‘d have still been in as I was getting out. Hell, you’d have been buying the stocks I was selling!

Uncritically following other investors is not just intellectually supine, craven and inherently lazy, I think it is responsible for the “crowding” phenomenon which contributed to the collapse of hedge funds in 2008. Walk among their circles in mid 2008 and all you would here about was “Maverick’s big in X” or “Viking loves Visa” and in many cases this was enough for the others to get in too. Now, it’s all about avoiding “hedge fund hotels”, especially on the short side. Tracking others’ investments is downright unfashionable.

Basically, the message is, do your own bloody work, and lots of it. Stock market investing is a deeply deeply subjective game, and pretending it can be objective and labour-free is the path to leveraged explosions. It’s subjectivity is at the core of the whole pricing mechanism. You are smart money, or have the potential to be if you concentrate on what you know and can know with more work. If you can’t do your own work, invest in a fund or do something else with your money, real estate or hell, I don’t know, vintage cars or something.

→ 7 CommentsCategories: Lens grinding · Stupid Cartesians

Spend it quickly.

June 8, 2009 · 10 Comments

Baruch was pondering the apparent excesses of the Chinese stimulus package today, and stumbled on what may be a most interesting hypothesis. Possibly, if he is right, the most important investing insight for the next 10 years.

The Chinese stimulus quite incredibly big; $600 billion is 15% of Chinese GDP. But it is being more than matched by “private investment”; for every dollar spent by the government on a project, 3 are being lent by the banks, either willingly or unwillingly. So unlike the US trillion dollar package, it is hugely leveraged. Did you know they will be spending $146 billion over 3 years on their 3G wireless rollout? Bet you didn’t. That’s a lot of money. But it was a dry, contextless datapoint until today, when Baruch found out what that level of network spend actually means: just 1 of the 3 wireless operators there, China Unicom, will be building 125,000 base stations in year one of the rollout. This might bore you but hear me out. That’s more 3G base stations than all the operators in Western Europe have rolled out in the 9 years since the 3G wireless standard has been in existence.

The majority of phones sold in the past 3 years in Europe have been 3G enabled, and Baruch imagines that 60%-70% of EU wireless subscribers are at least partly on 3G networks. That must be like 150-200 million people, and it isn’t like you get a weak signal over here. OK not all of them are heavy data users but this is changing rapidly. That’s more network capacity than Unicom 3G subscribers could possibly want until like, 2014-15, given the rosiest takeup scenario; true, there may be many more Chinese people than there are Western Europeans, but right now there are precisely zero “proper” 3G subscribers in China, ie those that aren’t on operator sponsored trials. This is future-proofing a network taken to an absurd degree. There is no way that this can possibly make any financial sense, in the way we currently understand capital budgeting.

And it struck Baruch; these guys are in a hurry.

Think about it. China and the US are locked in an embrace I discussed here a couple of months ago. China Inc owns the biggest pool of USD assets outside the US that the world has ever seen. It is their nest egg stored away for a rainy day, the reward of 10-15 years of saving and hardscrabble labour, making widgets and assembling them into finished goods for largely American consumers. For their part, American consumers desperately needed someone to backstop their addiction to buying stuff, someone who would lend them the money. It was vendor financing on a epic scale. And while the US consumer junkies needed their fix, their Chinese “pusher man” formed an economy dedicated to supplying it.

This created a mutual co-dependency, which is sadly no longer viable. The Americans now are desperate to reflate their currency and thereby their economy, while the Chinese are equally keen to diversify out of their dollar assets into something else. The problem, the prisoner’s dilemma, is that in doing so each would hurt the other. The US, on losing its lender of penultimate resort, would see their bond yields balloon, potentially choking off any recovery, whereas if the US successfully inflated their debt away, the Chinese would see their nest egg devalued; they would be the neighbours beggared. The more vulnerable partner in the embrace has to be China, however. Inflation is the time honoured tool of the borrower state to weasel out of paying debts; the temptation is eventually irresistible. The US economy is likely more flexible than the Chinese, and likely to better withstand the shock of the breakup better. Finally, the chinese government fears unrest and revolution more than any US administration; there’s many a precedent of the officials deemed responsible losing more than their jobs when things go wrong.

So the Chinese know they have the weak hand. They have a lot of money right now that may well be worth less, far less, in possibly an undefined period of time. It’s a version of the problem faced by Richard Pryor in Brewster’s Millions, but on a galactic scale. Baruch will call it the “Brewster’s Trillions” dilemma (OK, it only bears a very vague similarity to the movie, but I love the clip). And like Brewster, like any sane person would do, Chinese are going to spend it before it goes away, but unlike Brewster, they hope they’ll end up with at least something of value at the end of it.

That’s why they are investing more than they could conceivably need, for example, on a 3G network which under current plans will be simply the very best in the world, and the most under-utilised — a 6 lane superhighway to every town in a country currently without cars (if you see what I mean). That’s why the previously successful rural subsidy for electronic goods, ostensibly in the name of rural development, is now being duplicated in the big cities where there isn’t any developmental need for it except to goose demand. It’s why the latest plan for renewable energy involved a 2000% increase in the production of solar energy in China from 1-2 gigawatts today, to like, 20 in I forget howevermany number of years (or is it 20 to 200? I don’t remember, but a gigawatt is a lot, I think), a plan that dwarves any other national energy proposal in any other country, on technology that for most people just isn’t efficient enough to justify without subsidy. It isn’t a waste, in their mind; it would be a waste not to use it while they have it, to try and turn it into something worthwhile and lasting.

Money just became very cheap in China; their inflation expectations have clearly skyrocketed and it is about to shift from the global lender of last resort to the global consumer of last resort. And as we all know, its consumer expectations of inflation that matter more than the actual expansion of the money supply in an inflationary environment. Previously a deflationist, Baruch wasn’t sure about where he stood on the inflation-deflation debate, but given all of this he may have just become a radical inflationista.

→ 10 CommentsCategories: Lens grinding · Philosophising · What Would Spinoza Do?

Economist brains

June 1, 2009 · 18 Comments

Taleb spotting! Is late, obviously, Baruch is famously behind the curve on these meme things. HT alert Felix commenter Alan , (Felix is it OK to borrow one of your readers? I don’t know the bloggiquette, and reason if you haven’t put it up yet you won’t at all). An entertaining “fireside” chat between Taleb and that Robert Shiller bloke at the New Yorker gabfest early last month.

It’s entertaining to watch Taleb steal the show with his uncompromising animosity for economists, central bankers and regulators. It’s a reminder why we like him so much. Shiller ends up in the shade a bit; he is relatively more traditionalist, a bit of a trimmer. It is a shame, for if we are going to move to a more redundant, less optimised, global trading system, in a real, concrete way, we probably need more Shillers than we do Talebs. Reforming the system from within, it strikes me, is more likely to make progress than arguments of those determined to be, in bien pensant opinion, “flakes”.

I don’t think Taleb is a flake; he is right in his key point, that we are more and more susceptible to tail events. The next one will likely be much, much worse, as our defences will be lower, our treasure will be spent. Then we may finally have the political will to remove or limit leverage in our system, pace Taleb. The danger is of course that by then it may not matter so much.

As things start to return to “normal”, and equity and debt markets recover, the ability to do anything radical disappears. More importantly, the banks are returning to “profit” (note inverted commas) and the moment for breaking their stranglehold on the US Treasury and financial reform seems to be passing. That said, it may still be possible to do some of the things we need to do; I wouldn’t want the perfect to become the enemy of the good.

Another favourite moment: Taleb’s metaphor for monetary policy as ketchup, and the risk that expansionary policies suddenly gain traction at the wrong moment. Baruch is reminded of the childhood rhyme “when you shake the ketchup bottle, none’ll come; then the lot’ll”

As an extra bonus, here Baruch’s favourite economist joke:

A shipwreck victim washes up on an unknown South Seas island, one with a surprisingly developed economic system, if based on cannibalism. Wandering penniless through the local meat market, he notices the stall selling human brains in many appetizing forms has an interesting pricing scheme; the sign over 3 glistening, bloody buckets of brains reads:

Accountant brains: 15 cowrie shells/kilo

Lawyer brains: 25 shells/kilo

Economist brains: 50 shells/kilo.

“Hey,” says the traveller, “I guess those economist brains must be pretty special. What is it, do they like, taste better?”

“No way dude,” says the brains butcher. “You know how many economists you have to kill to get a kilo of brains?!”

→ 18 CommentsCategories: Fellow Collegiant · Lens grinding

Does Buttonwood persist in error?

May 31, 2009 · 1 Comment

Baruch is getting schtick in the comments for a now mildly embarrassing post he wrote at the high tide of equities in 2007, criticising the Economist’s now not totally un-prescient looking Buttonwood column. Reader John goes so far as to suggest that Baruch now looks like a “jackass”. Reader Anish, finding it hard to avoid exclamation marks, says he hates “rubbing it in” and of course proceeds to do just that.

While there are some fist-bitingly cringeworthy bits, the substantive points Baruch was making at the time, viz perma bears are not normally useful, and that the Economist has an especially dreadful record in giving stockmarket advice, still hold water, I think. I wrote of the

tendency of commentators who are Obviously Clever to be negative about the stockmarket, and how in this they are generally completely wrong, at best, or at worst simply confusing. It’s not as if you can use them as contra-indicators because sometimes, just often enough to keep them in business, the stockmarket actually does go down

(emphasis added post hoc, or is it hic). I would say similar things about perma-bulls, like Larry Kudlow, as well. But readers like Anish and John, no doubt open, trusting, simplistic creatures seeking guidance, only see the track record of the last 18 months. They compare Baruch’s inability to forecast the last downturn to Buttonwood’s annoyingly accurate diagnoses of what was going to happen, and find him wanting. Buttonwood 1, Baruch 0, they think. Well, it’s not unfair. In Baruch’s defence he can only argue that he was a fast follower, and 2 months after bashing Buttonwood joined him in becoming all miserably bearish as well. At least in print.

However, recent Buttonwood columns have made at least two points that are wrongly used in support of a continued bear market. Firstly positive feedback loops in bull markets, Buttonwood claims, can go into reverse in bear markets and prolong them “with devastating effect”, just as they helped sustain the bull. One mechanism is rising tax rates, as government deficits grow. Another is company pension funds going into deficit, forcing companies to top them up, further draining cashflow. It’s not as simple as that actually, as the discount rates used to calculate pension obligations often fall with interest rates, but I will stop here as there is nothing more tedious than calculating pension obligations. We can go with Buttonwood on this one too.

The other mechanism that prolongs bear markets, according to Buttonwood, Citigroup and a study by something called Smithers & Co, is a change in the supply-demand for equity paper; bear markets see the end of many company buy back programmes, and the need to raise equity capital to refinance stressed balance sheets reduces the demand for equity while increasing its supply. Doom follows, naturally enough. There are 3 good reasons for thinking this is totally wrong: Keep reading →

→ 1 CommentCategories: Fellow Collegiant · Lens grinding

Turning Japanese (I really think so)

May 10, 2009 · 3 Comments

Brilliant post by Baruch’s bloggy chum Cassandra last week about the current rally in shares, and not just because it gives me the opportunity to play this video, which I’ve been humming on and off for a while now:

No, the other reason to appreciate Cassandra’s experience is that it descibes so well the torture of the trapped bear, a torture all the worse for being administered to oneself by oneself in an open plan office in front of your colleagues (the only thing actual physical torture has to recommend it as an alternative is it tends to humiliate in private and doesn’t directly damage your finances. If you’re fortunate enough to be tortured by American subcontractors there’s the small chance you may be able to sue your torturer afterwards and possibly end up with more money than you started with, but that is definitely not the case if you’re waterboarding yourself ). Oh, there’s nothing worse in an investing context than being trapped on the wrong side; it is awful.

In the week since reading the post, three things have struck me :

I don’t know where we are in the rebound, but the maddened mob have clearly started turning on the um cassandras who told them to be short, the Roubinis, the Talebs and in fact gurus in general. One can applaud the sentiment about gurus overall, but being cross at people who are generally more right than wrong seems a bit ungracious to say the least. Nevertheless, I would imagine this sort of thing would happen closer to the end of the rally than at the start.
That said, equity rallies in the Japanese bear market of 1990 to well, now, tended to go much much farther than you would think. At least 4 times in the decade after their bubble burst, Japanese stocks, measured by the Nikkei, popped well over 30%. The median rally over that period seems to have measured about 50% from the low to the high. Think about it; we’re up a bit less than 40% last I looked. We could have 20% more to go. 20%! That’s worth getting out of bed for. And definitely something a trapped bear would want to avoid thinking about.
To make things more complicated, however, it is just not true that fundamentals and the current rally are moving in opposite directions; there is some, actually a lot, of improvement in specifically the companies that Baruch follows oh so exhaustingly closely, and by extension the global economy. To be sure, the improvement is relative to extremely low expectations for revenues and earnings that were set amid the very extremely terrible conditions at the end of 2008; on an absolute basis, measured from this time last year, things still look crap. But stock investing is an expectations game, based on where we are going not where we’ve been, and there’s reason enough, trust Baruch here, for lots of his stocks to have rallied significantly on the basis of the quarters they just printed. At least prima facie.

So where does that leave us? Well, the last point seems to be the killer. Stay long, I guess? The only problem with that, of course, is that much of the improvement in fundamentals in Baruch’s technology names at least comes from what is being called “restocking”, the refill of inventory of finished goods in the retail channel and of components in manufacturers warehouses. On the other side of the “Restockers” stand those who I call the “Double Dippers”. They think this will all end in another overstocking of inventory, that just as we did at the end of september last year, at some point in Q2 or Q3 we will all have to cut our estimates again and that means stocks should start tanking, well about now. Which they sort of are.

We still don’t know much about end demand here; is it down 10%, or 30%? We’ll probably only find out after the summer. How much, and at what speed, will consumers delever themselves? How much of a difference will government demand make? To make it extra difficult we also have George Soros’ big idea of “Reflexivity” to deal with, the idea that an otherwise frivolous restocking cycle and associated stockmarket rally could start a virtuous feedback loop that ends in fundamental improvement in the real economy. Sure, it could just be an oversold rally, but fundamentals don’t just sit there, unchanging. Company earnings can get “oversold” too, or at least stretched to the downside and bounce back. Or they might not.

Basically, no-one knows, no matter how hard they pretend to. And if they did they certainly wouldn’t tell us. Posts like Cassandra’s are excellent aide memoires for mistakes others have made in the past, but in general you’re on your own, dear reader, as is Baruch. The only advice he can give you is. . . be the ball.

→ 3 CommentsCategories: Fellow Collegiant · Lens grinding · Philosophising

Swedish Internet traffic stays down

April 29, 2009 · Leave a Comment

It’s not snapping back, and it’s been over a month now. I’m astonished still, especially that none of the analysts covering Cisco and Juniper has picked this up, if only to reassure the punters they don’t have to worry about it. After all, a global pushback by The Man against illegal file sharing is not a serious trend (it’s only a European Union directive). The chart comes courtesy of CNET.

Overall Swedish Internet traffic apparently dropped drastically on April 1 when a new antipiracy law went into effect. The graph represents traffic in gigabits per second through Netnod, the major Swedish node for exchange of traffic between operators.

(Credit: Netnod)

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Crook revisited

April 29, 2009 · Leave a Comment

Crooked Timber (no pun intended harhar) get stuck into Clive Crook as well on the subject of torture, but is I think slightly unfair to the argument he makes. I don’t think Crook is defending waterboarding, or saying it is unimportant. “Waterboarding is shameful,” Crook says, “and one may leave it at that”. We should take him at his word.

No, Crook’s key idea is similar to Tyler Cowen’s, that there are potential costs of investigating torture that we should be aware of, and such are the depths, presumably, to which the US body politic has sunk, actual prosecutions in the US may result in the de facto legalisation of future torture undoing the progress that has been made in ending it. Special allowances must be made. Baruch’s response is: don’t worry, we know. The costs to the republic of inaction are worse, the risk is worth taking. Let’s investigate, if need be prosecute, and do it with open eyes.

Henry at Crooked Timber suggests in the comments to his post that Crook will be responding to his critics on this. Let’s hope so. I am intrigued whether he would still maintain investigations are a bad idea, were it somehow proven that waterboarding is torture and illegal? His argument seems to depend on the waterboarding of prisoners not being a crime. I think this is somewhat shaky ground.

One person who does seem to understand what is at stake is Spinozist Spanish judge Baltasar Garzon, who is going ahead with his own investigation of US torture. As Augusto Pinochet can attest, this guy is no joker. I think we can anoint him a Fellow Collegiant, Bento, don’t you?

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